ECONOMICS

Detailed explanation-1: -The margin of safety is the amount sales can fall before the break-even point (BEP) is reached and the business makes no profit. This calculation also tells a business how many sales it has made over its BEP.

Detailed explanation-2: -To calculate the break-even point in units use the formula: Break-Even point (units) = Fixed Costs ÷ (Sales price per unit – Variable costs per unit) or in sales dollars using the formula: Break-Even point (sales dollars) = Fixed Costs ÷ Contribution Margin.

Detailed explanation-3: -Margin of safety is calculated as a percentage by subtracting the breakeven point from the current sales level and dividing by the current sales level. It can also be expressed in number of units or dollar amount.

Detailed explanation-4: -How to calculate a break-even point based on units: Divide fixed costs by the revenue per unit minus the variable cost per unit. The fixed costs are those that do not change no matter how many units are sold.