Margin of Safety Ratio (MOSR)

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Definition: Margin of Safety Ratio (MOSR)

Margin of safety is the extent over which the budgeted or actual sales exceed the break-even sales. In break-even analysis, it can be simply put as the difference between actual sales and break-even sales.

It denotes the extent to which the sales can drop before a company starts incurring losses. Also, the higher the margin of safety is, the lower is the risk of sales breaking even and higher is the profit.

 

MOS=budgeted sales/actual sales – break-even sales

 

MOS ratio= (Budgeted sales/actual sales – break-even sales ) / Budgeted sales

 

For e.g., a company ABC has sales of 400 units at Rs.25 and the break-even sales is Rs.5000.

Then, the margin of safety is 400*25-5000=5000 in terms of rupees. As a percentage of sales, MOS is 50%. Hence, reduction in sales by 50% will result in break-even and going further will lead to loss.


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