Managerial Accounting “1”

Week 4

Cont. Cost-Volume-Profit Analysis

4) The Margin of safety (MOS)

The margin of safety is a financial ratio that measures the number of sales that exceed the
break-even point, In other words, it is the difference between actual sales and the break-even
point. The margin of safety is expressed in units and percentage as follows;

𝑀𝑂𝑆 / 𝑢𝑛𝑖𝑡𝑠 = 𝐴𝑐𝑡𝑢𝑎𝑙 𝑆𝑎𝑙𝑒𝑠 − 𝐵𝐸𝑃/𝑢𝑛𝑖𝑡𝑠

𝐴𝑐𝑡𝑢𝑎𝑙 𝑆𝑎𝑙𝑒𝑠 − 𝐵𝐸𝑃/𝑢𝑛𝑖𝑡𝑠 𝑀𝑂𝑆/𝑢𝑛𝑖𝑡𝑠
𝑀𝑂𝑆% = 𝐴𝑐𝑡𝑢𝑎𝑙 𝑆𝑎𝑙𝑒𝑠
* 100 OR = 𝐴𝑐𝑡𝑢𝑎𝑙 𝑠𝑎𝑙𝑒𝑠
* 100

Example 1
XYZ company, a single product company, provides you the following data for the Month of
June 2015
● Sales: 3,500 units
● Selling price per unit: $20
● Contribution margin per unit: $12
● Fixed cost: $15,000
Required: Calculate the Margin of safety for XYZ company in units & Percentage

Solution
Step (1) calculate the Break-Even Point:
𝐹𝑖𝑥𝑒𝑑 𝑐𝑜𝑠𝑡 15,000
𝐵𝐸𝑃/𝑈𝑛𝑖𝑡𝑠 = 𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑚𝑎𝑟𝑔𝑖𝑛
= 12
= 1, 250 𝑢𝑛𝑖𝑡𝑠

Step (2) calculate the margin of safety in units:

𝑀𝑂𝑆 𝑖𝑛 𝑢𝑛𝑖𝑡𝑠 = 𝐴𝑐𝑡𝑢𝑎𝑙 𝑠𝑎𝑙𝑒𝑠 − 𝐵𝐸𝑃 / 𝑢𝑛𝑖𝑡𝑠 = 3, 500 − 1, 250 = 2, 250 𝑢𝑛𝑖𝑡𝑠

Step (3) calculate the margin of safety in percentage:

𝑀𝑂𝑆 𝑖𝑛 𝑢𝑛𝑖𝑡𝑠 2,250
𝑀𝑂𝑆% = 𝐴𝑐𝑡𝑢𝑎𝑙 𝑆𝑎𝑙𝑒𝑠
* 100 = 3,500
* 100 = 64. 286%
Example 2
XYZ company produces & sells only one product which is product X
The following data is given:
● Selling price = $ 50 ● Insurance = $ 20,000
● Raw material cost per unit = $ 10 ● Fixed cost = $ 100,000
● Direct labor cost per unit = $ 6 ● Sales commissions = $ 4

Required: Calculate
A. Break-even point in units & dollars
B. Contribution margin per unit
C. The Number of units that will achieve T.Profit equals $90,000
D. The increase in sales that will achieve T.profit equals $ 90,000
E. According to require Num (c) calculate the MOS in units & Percentage

Solution
Vc = 10 + 6 + 4 = 20 $ / unit
Fc = 100,000 + 20,000 = $ 120,000
𝐹𝐶 120,000
A) 𝐵𝐸𝑃 𝑖𝑛 𝑢𝑛𝑖𝑡𝑠 = 𝑆.𝑃𝑟𝑖𝑐𝑒 − 𝑉𝐶
= 50 − 20
= 4, 000 𝑢𝑛𝑖𝑡𝑠
𝐵𝐸𝑃 𝑖𝑛 𝑑𝑜𝑙𝑙𝑎𝑟𝑠 = 𝐵𝐸𝑃 /𝑢𝑛𝑖𝑡𝑠 * 𝑆. 𝑃𝑟𝑖𝑐𝑒 = 4, 000 * 50 = $200, 000

B) 𝐶𝑀 / 𝑢𝑛𝑖𝑡 = 𝑆𝑒𝑙𝑙𝑖𝑛𝑔 𝑝𝑟𝑖𝑐𝑒 − 𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝑐𝑜𝑠𝑡 = 50 − 20 = 30 $/𝑢𝑛𝑖𝑡

C) 𝑇ℎ𝑒 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑢𝑛𝑖𝑡𝑠 𝑡ℎ𝑎𝑡 𝑤𝑖𝑙𝑙 𝑎𝑐ℎ𝑖𝑒𝑣𝑒 $90, 000 𝑇. 𝑃𝑟𝑜𝑓𝑖𝑡

𝐹𝐶 + 𝑇.𝑝𝑟𝑜𝑓𝑖𝑡 120,000 + 90,000
= 𝐶𝑀
= 30
= 7, 000 𝑢𝑛𝑖𝑡𝑠

D) The increase in sales that will achieve $90,000 T.Profit

𝑇.𝑃𝑟𝑜𝑓𝑖𝑡 90,000
= 𝐶𝑀
= 30
= 3000 𝑢𝑛𝑖𝑡𝑠

E) 𝑀𝑂𝑆 𝑖𝑛 𝑢𝑛𝑖𝑡𝑠 = 𝐴𝑐𝑡𝑢𝑎𝑙 𝑠𝑎𝑙𝑒𝑠 − 𝐵𝐸𝑃 𝑖𝑛 𝑢𝑛𝑖𝑡𝑠 = 7, 000 − 4, 000 = 3, 000 𝑢𝑛𝑖𝑡𝑠
𝑀𝑂𝑆 𝑖𝑛 𝑢𝑛𝑖𝑡𝑠 3,000
MOS % = 𝐴𝑐𝑡𝑢𝑎𝑙 𝑠𝑎𝑙𝑒𝑠
* 100 = 7,000
* 100 = 42. 857%
Example 3
Zootsuit Inc. makes travel bags that sell for $56 each. For the coming year, management
expects fixed costs to total $320,000 and variable costs to be $40 per unit.

Required: calculate

1. Break-even point in units & dollars

2. Contribution margin per unit
3. the margin of safety in units and percentage assuming actual sales are 30,000 units
4. The number of units and sales dollars required to achieve the $ 410,00 Target profit

Solution
𝐹𝐶 320,000
1) 𝐵𝐸𝑃 𝑖𝑛 𝑢𝑛𝑖𝑡𝑠 = 𝑆.𝑃𝑟𝑖𝑐𝑒 − 𝑉𝐶
= 56 − 40
= 20, 000 𝑢𝑛𝑖𝑡𝑠

𝐵𝐸𝑃 𝑖𝑛 𝑑𝑜𝑙𝑙𝑎𝑟𝑠 = 𝐵𝐸𝑃/𝑢𝑛𝑖𝑡 * 𝑝𝑟𝑖𝑐𝑒 = 20, 000 * 56 = $1, 120, 000

2) CM/unit = Selling price - variable cost = 56 - 40 = 16 $/unit

3) MOS / units = Actual Sales - BEP /unit = 30,000 - 20,000 = 10,000 units
𝑀𝑂𝑆 /𝑢𝑛𝑖𝑡𝑠 10,000
𝑀𝑂𝑆 % = 𝐴𝑐𝑡𝑢𝑎𝑙 𝑆𝑎𝑙𝑒𝑠
* 100 = 30,000
* 100 = 33. 33%

4) The number of units to achieve $410,00 Target Profit

𝐹𝐶 + 𝑇𝑎𝑟𝑔𝑒𝑡 𝑃𝑟𝑜𝑓𝑖𝑡 320,000 + 410,000
= 𝑆.𝑃𝑟𝑖𝑐𝑒 − 𝑉𝐶
= 56 − 40
= 45, 625 𝑢𝑛𝑖𝑡𝑠

Num of sales in dollars = num of units * S.Price = 45,625* 56 = $2,555,000