Answer to Question #225190 in Accounting for sindly

Question

Explain briefly the term “break-even point” and “margin of safety” respectively.

Answer 1

The Break-even point refers to the production level at which the total costs of production is equal to the total revenues for a particular product. The Break-even point is determined by dividing the total fixed costs associated with production with the contribution margin per unit.

The margin of safety refers to the difference between the Break-even point and the actual sales made. Any revenue that is over and above the Break-even point is considered a margin of safety once all the fixed and variable costs have been accounted for. The bigger the margin, the lower the risk of insolvency.

It is calculated by subtracting break even Sales with the actual sales.