Question 4 (b)
Margin of safety and angle of incidence
3 marks
- Time to write
- About 6 minutes
Question
Question 4 (b) · 3 marksWhat is meant by the Margin of Safety and the Angle of Incidence?
Reworded from the university paper; the task is the same. The original paper belongs to the University of Delhi. See DU's question bank.
Before you write
Read off the question and its marks
Read from the question
- What isThe meaning first, then the main points.
Write it in this order
- 1 Margin of safety 1½ marks 3 min
- 2 Angle of incidence 1½ marks 3 min
Short on time? Trim steps 1 and 2 evenly rather than skip one: each is capped at its own marks.
Try it first. About 6 minutes for 3 marks. Write it out, then open the solution.
Solution
Hover or tap a marked figure, like 72,000, to see how it is made and where else it appears.
The margin of safety is the excess of actual (or budgeted) sales over break-even sales. It shows how far sales can fall before the business begins to make a loss.
1One early customer at the juice stall—the cost pan still outweighs the coins.
Loss areaThe area below it to the left is the loss area
2A steady line now: the pans hang level, every cost just covered.
Break-even pointThe point where the sales line cuts the total cost line is the break-even point
3The crowd keeps coming—everything past that balance point is the safe margin, and profit.
Margin of safetyThe distance between actual sales and the break-even point is the margin of safety
- Margin of safety = Actual sales − Break-even sales; or Profit ÷ P/V ratio.
- Margin of safety ratio = Margin of safety ÷ Actual sales × 100.
Example: if sales are ₹10,00,000 and break-even sales ₹6,00,000, the margin of safety is ₹4,00,000, or 40% of sales. A large margin of safety indicates a sound position; a small one means that a modest fall in sales would cause a loss. It can be improved by raising selling price, lowering variable or fixed costs, increasing sales, or changing to a more profitable sales mix.
On a break-even chart, the angle of incidence is the angle at which the total sales line cuts the total cost line at the break-even point. The wider it is, the faster profit builds up with each extra unit sold beyond break-even.
- A large angle means profit rises quickly once break-even is passed: each rupee of sales carries a large contribution, that is, a high P/V ratio.
- A small angle means profit grows slowly with sales, even if fixed costs are covered.
Read together, a large angle of incidence and a large margin of safety indicate a very favourable profit position.
Where the 3 marks sit
| # | Component | Marks |
|---|---|---|
| 1 | Margin of safety | 1.5 |
| 2 | Angle of incidence | 1.5 |
| Total | 3 |
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