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What is the Difference Between Breakeven Point and Margin of Safety?
Break Even Point: A point of business activity where there is “no profit, no loss” for an enterprise. At this point business revenue exactly equals the total costs; or at this point loss ends and profit begins to accumulate.
Arithmetically, Revenue – Total of all types of costs =0 (No Profit, No Loss)
Margin of Safety: The extent to which the revenue can drop before reaching the breakeven point.
Arithmetically, Margin of Safety = Actual / Budgeted Revenue – Breakeven Revenue
In simple word, actual revenue earned above the breakeven point revenue is the margin of safety. If a company has earned a lower level of actual revenue, slight variations in the business circumstances can bring that company below the breakeven point i.e. in loss position. Vice versa, if margin of safety is more, the normal business cycle fluctuations cannot drop the sales of the company below breakeven point and thus company remains in a profitable position.
No profit, no loss is at the break even point.
Margin of Safety = Actual Revenue – Breakeven Revenue
Break even point refers to the sales volume, or amount of sales revenue, at which fixed and variable cost total exactly equals to revenue.
And margin of safety is a measure of risk, decides to what extent a company can tolerate a sales drop. Its the surplus amount of sales over break even point, and usually expressed as percentage.
Difference between breakeven point and margin of safety is a necessary knowledge to have as Breakeven Point (BEP) and Margin of Safety (MOS) are two concepts that carry a significant importance in decision making under cost accounting. Both of these concepts deal with costs, sales volumes, selling prices and number of production units and generate imperative information to for the management to decide upon the level of production, selling prices of the items produced. Breakeven point is the sales volume at which the business organization does not earn any profit. Correspondingly, margin of safety is the degree at which the actual sales exceed the breakeven sales, that is usually calculated as a ratio.
Breakeven point is the point at which there is no profit and no loss while margin of safety (protection margin) is the difference between the intrinsic price of a inventory and its marketplace fee. Some other definition: In spoil even analysis (accounting), margin of protection is how tons output or sales level can fall before a commercial enterprise reaches its breakeven point.
Fixed Costs+ Variable costs = Net Sales
Budgeted Sales – Breakeven Sales = Margin of Safety
Breakeven point (BEP) is the level of sales where total of fixed and variable cost equals total revenues. In other words, breakeven point is a level where the company neither makes profit nor loss.
Margin of safety (MoS) is a difference between actual/budgeted sales and level of breakeven sales
Breakeven point means the amount of sales that covers entire fixed and variable cost. Sales lower than the BEP will result in losses, while, the sales above the BEP will generate profit after considering all the costs.
Margin of Safety is the margin between the actual/budgeted sales and break even point. It denotes the level of safety that company enjoys before incurring losses (i.e. falling below the break even level).
breakeven point is a level where the company neither makes profit nor loss.
A margin of safety (MoS) is a difference between actual sales and level of breakeven sales.
