Question

 

XYZ is a company that has a cleaning services business. His estimated revenue, variable expenses and fixed expenses are as follows -

Revenue  $100 per hour

Variable expense  $50 per hour

Fixed expense $5000 per month

XYZ performed 150 hour per month. 

Calculate Margin of Safety 

Answer 1

For calculating Margin of Safety we first calculate Break Even Point. 

Calculation of Break Even Point in Units

Formula

Fixed Expense / Contribution Margin

$5000/($100 - $50)

$5000 / $50

$100 Units

 

Calculation of Break-Even Point in Dollars 

Formula 

Break Even Point in units * Revenue or sales per hour

100 units * $100

$10000 

 

Calculation of Margin of Safety 

Formula 

Actual revenue or sales - Break Even Point in dollars 

($100*150 hour) - $10000

$15000 - $10000

$5000

 

Hence Margin of Safety is $5000

Margin of safety is $5000