GK
ACCOUNTING
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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Which one of the following is correct about margin of safety ratio?
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Contribution / sales value
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Contribution / Sales of BEP
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Capital employ / Net worth
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Operating profit / contribution
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Explanation:
Detailed explanation-1: -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. Here’s What We’ll Cover: What Is the Break-Even Point?
Detailed explanation-2: -The margin of safety is a financial ratio that measures the amount of sales that have exceeded the break-even point. This financial ratio indicates the actual profit of the company once it pays for all fixed and variable costs. You might wonder why it is known as the safety margin ratio.
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