{"id":420,"date":"2018-04-17T21:27:12","date_gmt":"2018-04-17T21:27:12","guid":{"rendered":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/?post_type=chapter&#038;p=420"},"modified":"2024-04-29T16:54:57","modified_gmt":"2024-04-29T16:54:57","slug":"margin-of-safety","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/chapter\/margin-of-safety\/","title":{"raw":"Margin of Safety","rendered":"Margin of Safety"},"content":{"raw":"<div class=\"textbox learning-objectives\">\r\n<h3>Learning Outcomes<\/h3>\r\n<ul>\r\n \t<li>Compute the margin of safety<\/li>\r\n<\/ul>\r\n<\/div>\r\nThe margin of safety is the difference between actual sales and the break even point. Now that we have calculated break even points, and also done some target profit analysis, let\u2019s discuss the importance of the margin of safety. This amount tells us how much sales can drop before we show a loss. A higher margin of safety is good, as it leaves room for cost increases, downturns in the economy or changes in the competitive landscape.\r\n\r\n<iframe src=\"\/\/plugin.3playmedia.com\/show?mf=4306763&amp;p3sdk_version=1.10.1&amp;p=20361&amp;pt=375&amp;video_id=2590vZ4YP5I&amp;video_target=tpm-plugin-416dboui-2590vZ4YP5I\" width=\"800px\" height=\"450px\" frameborder=\"0\" marginwidth=\"0px\" marginheight=\"0px\"><\/iframe>\r\n\r\nIf you remember back to our example with our friends at Monte Corporation and the widgets, when a new competitor came into the market, it created a crisis!\r\n\r\nThe formula used to calculate the margin of safety\r\n\r\n[latex]\\text{Margin of safety}=\\text{actual (or budgeted) sales}-\\text{sales required to break even}[\/latex]\r\n\r\nWe can take this formula one step further to figure the margin of safety percentage\r\n\r\n[latex]\\text{Margin of safety percentage}=\\dfrac{\\text{Margin of safety in dollars}}{\\text{total actual (or budgeted) sales in dollars}}[\/latex]\r\n\r\nNow let\u2019s look at an example:\r\n\r\nLet\u2019s go back to our kayaks. Remember our basic information:\r\n<div>\r\n<table>\r\n<tbody>\r\n<tr>\r\n<td>Price per kayak<\/td>\r\n<td>$500<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>variable costs per kayak<\/td>\r\n<td>$225<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Contribution margin per kayak<\/td>\r\n<td>$275<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Fixed costs\/month<\/td>\r\n<td>$7,700<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<\/div>\r\nAlso, remember, Minnesota Kayak Company needs to sell 28 kayaks at $500 each to break even. So in this example, $14,000 in sales is their break even point.\r\n\r\nLet\u2019s assume their current sales of kayaks is 50 kayaks per month at $500 each, so $25,000. Using the formulas above, what is their margin of safety?\r\n\r\n[latex]\\$25,000-\\$14,000=\\$11,000[\/latex] is their margin of safety.\r\n\r\nWhat is their margin of safety percentage?\r\n\r\n[latex]\\dfrac{\\$11,000}{\\$25,000}=44\\%[\/latex] is their margin of safety percentage.\r\n\r\nWe can check our calculations, by multiplying the margin of safety percentage of 44% by actual sales of $25,000 and we end up with $11,000.\r\n\r\nSo the margin of sales percentage tells us that Minnesota Kayak Company can sell 44% fewer dollars worth of kayaks and still break even. The higher the margin of safety percentage, the better!\r\n<div class=\"textbox tryit\">\r\n<h3>Practice Questions<\/h3>\r\nhttps:\/\/assess.lumenlearning.com\/practice\/594d7f2f-473c-4b16-92f4-e6e3dcd1e5eb\r\n<\/div>","rendered":"<div class=\"textbox learning-objectives\">\n<h3>Learning Outcomes<\/h3>\n<ul>\n<li>Compute the margin of safety<\/li>\n<\/ul>\n<\/div>\n<p>The margin of safety is the difference between actual sales and the break even point. Now that we have calculated break even points, and also done some target profit analysis, let\u2019s discuss the importance of the margin of safety. This amount tells us how much sales can drop before we show a loss. A higher margin of safety is good, as it leaves room for cost increases, downturns in the economy or changes in the competitive landscape.<\/p>\n<p><iframe loading=\"lazy\" src=\"\/\/plugin.3playmedia.com\/show?mf=4306763&amp;p3sdk_version=1.10.1&amp;p=20361&amp;pt=375&amp;video_id=2590vZ4YP5I&amp;video_target=tpm-plugin-416dboui-2590vZ4YP5I\" width=\"800px\" height=\"450px\" frameborder=\"0\" marginwidth=\"0px\" marginheight=\"0px\"><\/iframe><\/p>\n<p>If you remember back to our example with our friends at Monte Corporation and the widgets, when a new competitor came into the market, it created a crisis!<\/p>\n<p>The formula used to calculate the margin of safety<\/p>\n<p>[latex]\\text{Margin of safety}=\\text{actual (or budgeted) sales}-\\text{sales required to break even}[\/latex]<\/p>\n<p>We can take this formula one step further to figure the margin of safety percentage<\/p>\n<p>[latex]\\text{Margin of safety percentage}=\\dfrac{\\text{Margin of safety in dollars}}{\\text{total actual (or budgeted) sales in dollars}}[\/latex]<\/p>\n<p>Now let\u2019s look at an example:<\/p>\n<p>Let\u2019s go back to our kayaks. Remember our basic information:<\/p>\n<div>\n<table>\n<tbody>\n<tr>\n<td>Price per kayak<\/td>\n<td>$500<\/td>\n<\/tr>\n<tr>\n<td>variable costs per kayak<\/td>\n<td>$225<\/td>\n<\/tr>\n<tr>\n<td>Contribution margin per kayak<\/td>\n<td>$275<\/td>\n<\/tr>\n<tr>\n<td>Fixed costs\/month<\/td>\n<td>$7,700<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n<p>Also, remember, Minnesota Kayak Company needs to sell 28 kayaks at $500 each to break even. So in this example, $14,000 in sales is their break even point.<\/p>\n<p>Let\u2019s assume their current sales of kayaks is 50 kayaks per month at $500 each, so $25,000. Using the formulas above, what is their margin of safety?<\/p>\n<p>[latex]\\$25,000-\\$14,000=\\$11,000[\/latex] is their margin of safety.<\/p>\n<p>What is their margin of safety percentage?<\/p>\n<p>[latex]\\dfrac{\\$11,000}{\\$25,000}=44\\%[\/latex] is their margin of safety percentage.<\/p>\n<p>We can check our calculations, by multiplying the margin of safety percentage of 44% by actual sales of $25,000 and we end up with $11,000.<\/p>\n<p>So the margin of sales percentage tells us that Minnesota Kayak Company can sell 44% fewer dollars worth of kayaks and still break even. The higher the margin of safety percentage, the better!<\/p>\n<div class=\"textbox tryit\">\n<h3>Practice Questions<\/h3>\n<p>\t<iframe id=\"assessment_practice_594d7f2f-473c-4b16-92f4-e6e3dcd1e5eb\" class=\"resizable\" src=\"https:\/\/assess.lumenlearning.com\/practice\/594d7f2f-473c-4b16-92f4-e6e3dcd1e5eb?iframe_resize_id=assessment_practice_id_594d7f2f-473c-4b16-92f4-e6e3dcd1e5eb\" frameborder=\"0\" style=\"border:none;width:100%;height:100%;min-height:300px;\"><br \/>\n\t<\/iframe>\n<\/div>\n\n\t\t\t <section class=\"citations-section\" role=\"contentinfo\">\n\t\t\t <h3>Candela Citations<\/h3>\n\t\t\t\t\t <div>\n\t\t\t\t\t\t <div id=\"citation-list-420\">\n\t\t\t\t\t\t\t <div class=\"licensing\"><div class=\"license-attribution-dropdown-subheading\">CC licensed content, Original<\/div><ul class=\"citation-list\"><li>Margin of Safety. <strong>Authored by<\/strong>: Freedom Learning Group. <strong>Provided by<\/strong>: Lumen Learning. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/licenses\/by\/4.0\/\">CC BY: Attribution<\/a><\/em><\/li><\/ul><div class=\"license-attribution-dropdown-subheading\">All rights reserved content<\/div><ul class=\"citation-list\"><li>What is the Margin of Safety. <strong>Authored by<\/strong>: Notepirate. <strong>Located at<\/strong>: <a target=\"_blank\" href=\"https:\/\/youtu.be\/2590vZ4YP5I\">https:\/\/youtu.be\/2590vZ4YP5I<\/a>. <strong>License<\/strong>: <em>All Rights Reserved<\/em>. <strong>License Terms<\/strong>: Standard YouTube License<\/li><\/ul><\/div>\n\t\t\t\t\t\t <\/div>\n\t\t\t\t\t <\/div>\n\t\t\t <\/section>","protected":false},"author":62559,"menu_order":17,"template":"","meta":{"_candela_citation":"[{\"type\":\"original\",\"description\":\"Margin of Safety\",\"author\":\"Freedom Learning Group\",\"organization\":\"Lumen Learning\",\"url\":\"\",\"project\":\"\",\"license\":\"cc-by\",\"license_terms\":\"\"},{\"type\":\"copyrighted_video\",\"description\":\"What is the Margin of Safety\",\"author\":\"Notepirate\",\"organization\":\"\",\"url\":\"https:\/\/youtu.be\/2590vZ4YP5I\",\"project\":\"\",\"license\":\"arr\",\"license_terms\":\"Standard YouTube License\"}]","CANDELA_OUTCOMES_GUID":"804bd01d-fd31-4314-8765-6285348d6423, e3e11be8-de3c-4f6d-8f9a-b4bd64371f09","pb_show_title":"on","pb_short_title":"","pb_subtitle":"","pb_authors":[],"pb_section_license":""},"chapter-type":[],"contributor":[],"license":[],"class_list":["post-420","chapter","type-chapter","status-publish","hentry"],"part":107,"_links":{"self":[{"href":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/wp-json\/pressbooks\/v2\/chapters\/420","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/wp-json\/pressbooks\/v2\/chapters"}],"about":[{"href":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/wp-json\/wp\/v2\/types\/chapter"}],"author":[{"embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/wp-json\/wp\/v2\/users\/62559"}],"version-history":[{"count":13,"href":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/wp-json\/pressbooks\/v2\/chapters\/420\/revisions"}],"predecessor-version":[{"id":4095,"href":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/wp-json\/pressbooks\/v2\/chapters\/420\/revisions\/4095"}],"part":[{"href":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/wp-json\/pressbooks\/v2\/parts\/107"}],"metadata":[{"href":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/wp-json\/pressbooks\/v2\/chapters\/420\/metadata\/"}],"wp:attachment":[{"href":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/wp-json\/wp\/v2\/media?parent=420"}],"wp:term":[{"taxonomy":"chapter-type","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/wp-json\/pressbooks\/v2\/chapter-type?post=420"},{"taxonomy":"contributor","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/wp-json\/wp\/v2\/contributor?post=420"},{"taxonomy":"license","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/wp-json\/wp\/v2\/license?post=420"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}