Margin of Safety

System
System Posts: 100,534 🤖 Admin 🤖
edited June 18 in AAT student discussion
Can anyone plz confirm the formula for margin of safety?<BR>Osborne says (expected sales - break even sales) / expected sales<BR>BPP says the same thing.<BR><BR>But in one of the AAT simulations the suggested answers with our Tutor says<BR>(expected sales - break even sales) / break even sales<BR><BR>Even searching on the internet says the same thing.<BR><BR>Plz advise<BR>Thanking you

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  • System
    System Posts: 100,534 🤖 Admin 🤖
    Margin of Safety

    We were taught Expected Units (Less BEP Units) divided by Expected Units at our college.
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Margin of Safety

    As units Bugetted Sales Units less Breakeven Units<BR><BR>As percentage: Budgeted Sales Units less Breakeven Units/Budgeted Sales<BR><BR>As revenue: Budgeted sales revenue less breakeven sales revenue
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Margin of Safety

    Your margin of safety is the difference between the break even point and the expected output.<BR><BR>I think the confusion is whether it needs to be expressed as a percentage of the break even, or a percentage of the expected output.<BR>Whichever they the percentage to be expressed by, use that as the dividing factor.<BR><BR>e.g If break even value is 2000 units<BR> and expected output is 2500 units<BR><BR>Margin of safety = 2500 - 2000 = 500 units<BR><BR>As a percentage of the expected output = 500/2500 = 20%<BR><BR>As a percentage of the break even = 500/2000 = 25%<BR><BR>Hope that helps!
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Margin of Safety

    Thank you all for ur response. <BR>The confusion was indeed of taking % of break even or expected sales.<BR>thanks for ur advise. i shall read the question carefully. <BR>If at all the question just says calculate margin of safety as % (without saying % of what). <BR>shuld both be calculated ?
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Margin of Safety

    Current output less break even divided by current output will give the percentage
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Margin of Safety

    It should be the % that sales can fall from the expected level before it reaches the break even level<BR><BR>So your tutor who saw the error in a recent AAT skills test saw precisely that. The correct way to find the % is<BR> difference divided by expected sales<BR><BR>The other way would be wrong (despite appearing in the answers supplied to tutors!!)

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