Margin of safety is the amount of sales that exceed the break-even point or simply the amount of sales a company can lose before it actually starts to lose money or stops making a profit.
A drop in sales greater than margin of safety will cause net loss for the period.
The higher the margin of safety, the more the company can withstand fluctuations in sales.
Formula to calculate margin of safety.
Budgeted sales may be used instead of actual sales to measure the degree of risk of budgeted figures.
Example:
In a certain month the break sales were $ 50,000, the actual sales value was $ 75,000. Determine the margin of safety.
Therefore, the margin of safety is $ 25,000.
