Margin of Safety

Margin of Safety - break-even sales or 6.7($50,000 ...

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Margin of Safety The  margin of safety  is a tool to help management understand how far sales could  change before the company would have a net loss. It is computed by subtracting break- even sales from budgeted or forecasted sales. To state the margin of safety as a  percent, the difference is divided by budgeted sales. If the Three M's, Inc., has budgeted  sales of $800,000, its margin of safety is $50,000 ($800,000 budgeted sales – $750,000 
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Unformatted text preview: break-even sales) or 6.7% ($50,000 ÷ $750,000), a rather low margin of safety. If, however, its budgeted sales are $900,000, its margin of safety is $150,000 ($900,000 budgeted sales – $750,000 break-even sales) or 20% ($150,000 ÷ $750,000). The competition, economy, and assumptions in the sales budget must be reviewed by management to assess whether 20% is a comfortable margin of safety....
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This note was uploaded on 11/16/2011 for the course ACCT 2310 taught by Professor Staff during the Spring '09 term at Texas State.

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