The formula to calculate the margin of safety accounting
There is a specific formula that is devised in order to calculate the margin of safety accounting. For this reason, first of all, you will have to subtract the current sales level from the breakeven point. In the second, you will have to divide it with current sales level. At last, you will have to multiply it with 100. Anyhow, the mathematically form to calculate the margin of safety accounting is given below;
The margin of safety accounting = (Current Sales Level – Breakdown Point) / Current Sales Level X 100
Applications of the margin of safety accounting
There are two major applications of calculating the margin of safety accounting. The major applications to calculate the margin of safety accounting are given below;
1) Budgeting
The margin of safety accounting is helpful for the businessmen to get an idea about the budgeting and break-even analysis. Its reason is that the margin of safety accounting provides an idea about the gap between the estimated output level or sale level and the level by which the sale of a company is decreased. With the help of this estimation, it is easy for the businessmen to save their business from the risk of unprofitability. If there is a low margin of safety accounting, then you can decrease the expenses of a company in order to increase their sales level.
2) Investing
This margin of safety accounting also provides an idea about the investing to the businessmen. Its reason is that by calculating the margin of safety accounting, the investors can get an idea about the intrinsic value of a stock and the value of its prevailing market. After getting an idea about these things, it will be easy for the investors to get an idea whether a particular company is feasible for the investment or not.
Importance of margin of safety accounting
No doubt, there are a lot of benefits to the margin of safety accounting for a businessman. These benefits are explained below;
1) With the help of margin of safety accounting, one can easily increase the selling prices of his/her company’s products or services.
2) It also provides a chance to the businessmen to reduce the fixed or variable prices of their products or services.
3) A businessman can easily increase the volume of output of his/her company.
4) It is also easy for the businessmen to save their company from unprofitability.
There is a specific formula that is devised in order to calculate the margin of safety accounting. For this reason, first of all, you will have to subtract the current sales level from the breakeven point. In the second, you will have to divide it with current sales level. At last, you will have to multiply it with 100. Anyhow, the mathematically form to calculate the margin of safety accounting is given below;
The margin of safety accounting = (Current Sales Level – Breakdown Point) / Current Sales Level X 100
Applications of the margin of safety accounting
There are two major applications of calculating the margin of safety accounting. The major applications to calculate the margin of safety accounting are given below;
1) Budgeting
The margin of safety accounting is helpful for the businessmen to get an idea about the budgeting and break-even analysis. Its reason is that the margin of safety accounting provides an idea about the gap between the estimated output level or sale level and the level by which the sale of a company is decreased. With the help of this estimation, it is easy for the businessmen to save their business from the risk of unprofitability. If there is a low margin of safety accounting, then you can decrease the expenses of a company in order to increase their sales level.
2) Investing
This margin of safety accounting also provides an idea about the investing to the businessmen. Its reason is that by calculating the margin of safety accounting, the investors can get an idea about the intrinsic value of a stock and the value of its prevailing market. After getting an idea about these things, it will be easy for the investors to get an idea whether a particular company is feasible for the investment or not.
Importance of margin of safety accounting
No doubt, there are a lot of benefits to the margin of safety accounting for a businessman. These benefits are explained below;
1) With the help of margin of safety accounting, one can easily increase the selling prices of his/her company’s products or services.
2) It also provides a chance to the businessmen to reduce the fixed or variable prices of their products or services.
3) A businessman can easily increase the volume of output of his/her company.
4) It is also easy for the businessmen to save their company from unprofitability.
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