Define margin of safety, What is Contribution Margin

 Ans: Margin of Safety:Margin of safety represents the strength of the business. It enables 1 business to know what is the exact amount it has gained or lost and whether they are ova or below the break even point.

Margin of safety = (current output - breakeven output)

Margin of safety% = (current output - breakeven output)/current output x 100

0. What is Contribution Margin (CM)? Ans.:

Contribution Margin:

 Units

 

.The Unit Contribution Margin (CM) is the quantity of unit sales price (P) minus the quantity of unit variable cost (V ) is of interest in its own right, it is the marginal profit per unit, or alternatively the portion of each sale that contributes to Fixed Costs. The Break-Even Point can alternatively be computed as the point where Contribution equals Fixed Costs. Thus the break-even point can be more simply computed as the point where Total Contribution = Total Fixed Cost.

Total Contribution = Total Fixed Costs

Unit Cotttributiou x Number of Units = Total Fixed Costs

Total Fixed Costs

Number of Units =       Unit  Contribution

In currency units (sales proceeds) to reach break-even, one can use the above calculation and multiply by Price, or equivalently use the Contribution Margin Ratio (Unit Contribution Margin over Price) to compute it as:

                                                                      Fixed Costs /

Break-even(in Sales}                                       C/P

R=C,

Where R is revenue generated,

C is cost incurred i.e. Fixed costs + Variable Costs or Q * P(Price per unit) = TFC + Q VC(Price per unit), Q * P - Q * VC = TFC, Q * (P - VC) = TFC, or, Break Even Analysis Q = TFC/c/s ratio=Break Even