Margin Of Safety

Question 1

Definition of Margin of Safety

Answer 1

The amount of sales your business could lost and still break-even
(Value/Volume of sales you are losing)

Question 2

Formula to calculate margin of safety

Answer 2

Total sales - break even sales

Question 3

What are the break even points?

Answer 3

1. The point on the graph where profit is the highest
2. The level of sales at which revenue equals costs
3. The point where the variable cost line crosses the fixed cost line
4. The point where the total cost and total revenue line crosses

Question 4

What is the area of loss?

Answer 4

1. The gap between the TC and TR lines to the right of the break even point
2. The gap between the TC and TR lines to the left of the break even point
3. The bigger the gap, the larger the loss made
4. The gap between the lines show how much money is lost at each level of sales

Question 5

What is the are of profit?

Answer 5

1. The gap between the TC and TR lines to the right of the break even point
2. The gap between the lines shows how much profit is made at each level of sales
3. The gap between the TC and TR lines to the left of the break even point
4. The bigger the gap, the larger the profit made

Question 6

What is the margin of safety?

Answer 6

1. The gap between the variable cost and fixed cost lines
2. The difference between current sales and the break even point
3. Shows how much sales can fall before you make a loss

Question 7

Name two strengths of breakeven analysis

Answer 7

1. Helps management & finance providers understand better the viability and risk of a business or business idea
2. Focuses on what output is needed before a business reaches profitability

Question 8

Name two limitations of breakeven analysis

Answer 8

1. Most businesses sell more than one product
2. Unrealistic assumptions- products are not sold at the same price at different levels of output; fixed costs do vary when output changes