How To Calculate Margin Of Safety

How To Calculate Margin Of Safety Video

How To Calculate Margin Of Safety Video Transcript

the company produces single product with
sales for 20 per unit variable cost is
15 per unit and fix it overhead for the
other 630,000 required calculate sales
value needed to earn a profit of ten
percent on sales calculate sales price
per unit to bring BB down to 120
thousand units calculate margin of
safety sales if profitez 60,000 so you
are given the selling price per unit we
are given the variable cost you are
given the fixed arrowheads and you are
asked to calculate the sales value if it
is going to give you ten percent profit
on sales now how to start with we don't

know what is the profit amount there are
no sales amount we have some limited
information let's get started question 1
we know that from sales if we did that
the variable cost and fix it cost will
you get profit right so sales minus
variable cost minus fix it cost will
give you profit you don't know what is
sales but you know what they're selling
price per unit but we don't know how
many units are sold so let us assume the
number of units that were sold or X if
that is the case then finding sales and
variable cost is going to be simple
because we know selling price per unit

is 20 variable cost per unit is 15 then
we can say it has 20 x that is sales
minus 15 x which is variable cost minus
630,000 which is fix it cost should be
equal to 2 weeks what is this 2x it is
profit which is nothing but ten percent
of sales sales is 20x ten percent we
have 2x so now what should I do let me
bring the two eggs from the left hand
side sorry right hand side to left hand
side so 20x minus 15x minus 2x and I'm
shifting the six thirty thousand to
right hand side so it is 20x minus 17x
we get 3x is equal to six hundred and
thirty thousand and so we get x is equal

to six hundred and thirty thousand
divided by three and we get x is equal
to two hundred and ten thousand but our
question is finding the sales so what we
should do
we should multiply this 210,000 with
selling price per unit we know sales is
equal to 20 X so substitute x 20 x
210,000 we get sales is equal to 4.2
million that is 42 lakhs okay so that's
about question 1 then we have question
to where we have to calculate the sales
price per unit to bring bep down to
120,000 events so when your BP is 120
thousand units what should be the sales

price per unit that's what you should
find so question 2 I'll put it here we
are given that BP is equal to 120
thousand units now this is basically
expressed in units right so with this
units if you multiply contribution per
unit then dot a mode will exactly dally
with fixed cost so there is no profit no
loss I'll put it here this bep units x
contribution per unit will be equal to
fix it cost or if i say this BP into
contention minus fixer cost is equal to
zero there is no profit no loss now BP
units we have how much VP units are
120,000 is it possible to find the

contribution per unit we don't know
contribution per unit but we know what
does fix it cost right we know what is
fixed cost what is the amount it is
630,000 now what I will do I shift this
120,000 to the right hand side so what
happens here contribution per unit
contribution per unit is equal to six
hundred and thirty thousand divided by
this 120,000 so we get contribution is
equal to 5.2
five now this is contribution per unit
how many units we are selling we are
selling 120,000 units okay but what is
our question you have to find out what

is the selling price at this level if
this is the contribution with this
contribution let us add variable cost so
we'll get to know what is the sales
price per unit so we will see sales
price per unit is equal to variable cost
per unit plus contribution per unit okay
so it is what is the variable cost per
unit we have with us 15 it's already in
the question and now you also have the
contribution per unit which is 5.25 so
you can have 20.25 as sales per unit
okay sales price per unit this is answer
to question 2 then we have to calculate
margin of safety sales if profit is
60,000 so let's more question 3 we have
to calculate margin of safety silks for
one thing we have to understand what is
margin of safety cells that is from
total sales if we subtract break-even
sales then the difference is margin of
safety cells right it means this margin
of safety sales will not have any fixed
costs because break-even sales takes
care of all the fixed costs so on this
margin of safety I will put it as MOS on
this margin of safety sales if we apply
PV ratio okay that basically gives
contribution and that contribution is
nothing but profit why because all the
fixed costs were already recovered by
breaking sales right now we are asked to
calculate margin of safety cells which
we do not know we are trying to find
but finding pv ratio is simple for us
because we know the contribution per
unit which is 20 selling price minus 15
variable cost so 20-15 5 divided by that
is the contribution / selling price per
unit which is 20 okay and this is going
to be equal to profit and what is the
profit information you have any question
60,000 so we can say margin of safety
sales is equal to 60,000 / what happens
to this 5 x 25 x 20 is point two five
light so that comes to the denominator
here which is point two five so we get
margin of safety sales as something like
this let me put it over here it is
240,000 so 240,000 sales will give
profit of 60,000