Importance of Margin of Safety:
The size of margin of safety is a very important indicator of the soundness of a business. It shows how much sales may decrease before the firm will suffer a loss. If the size of margin of safety is high, chances of incurring loss by the business will be remote but if it is low, a small reduction in sales may lead to loss. The common cause of lower margin of safety is higher fixed costs. In such a businesses a high level of activity is required. A low margin of safety is a matter of concern and so the following steps may be taken to improve an unsatisfactory margin of safety:
- Increase the selling price
- Reduce the fixed or variable costs or the both.
- Increase the volume of output by utilizing the unutilized production capacity.
- Stop production of unprofitable products and concentrate on only the profitable products.
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