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Õ Starting of `usiness
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Õmn currency units (sales proceeds) to reach break-even, one
can use the above calculation and multiply by Price, or
equivalently use the Contribution Margin Ratio (Unit
Contribution Margin over Price) to compute it as
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Õ `reak-even analysis is only a supply side (ë costs only) analysis.
Õ mt assumes that fixed costs (FC) are constant. §lthough, this is true
in the short run, an increase in the scale of production is likely to
cause fixed costs to rise.
Õ Sales prices, unit variable cost, and total fixed expenses will
not vary within the relevant range
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Õ Volume is the only cost driver
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MARGIN OF SAFETY
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The quantity of units produced (or sales of these units)
which are above the breakeven point is known as MOS
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0 Excess of actual sales revenue over the breakeven sales revenue,
expressed usually as a percentage. The greater this margin, the
less sensitive the firm to any abrupt fall in revenue. Formula:
(§ctual sales revenue - `reakeven sales revenue) x 100 ÷ §ctual
sales revenue.
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The Margin of Safety is the difference between
actual sales and sales at break even point
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Margin of safety = §ctual Sales ± Sales at `ep
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Ë Suppose the Sales of XYZ ltd,is 1,20,000 units
and the sales at `ep is 90,000 units, then
M/S=1,20,000units-90,000units = 30,000units
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0 Higher Margin of Safety Provides greater protection to the
company. The size of Margin of safety is an indicator of
soundness of business
0 mt shows how much sales will decrease before the firm will
suffer the loss
0 Sales beyond the `reak Even Point represent margin of
Safety
0 Larger the Margin of Safety, Greater the soundness of
business and Vice-Versa«
1. mncrease the level of production
2. Reduce the Fixed and/ or Variable cost
3. mncrease the Selling Price
4. Substitute the existing product with more profitable
products
5. From the product mix, remove the product whose
contribution ratio is very low