MARGIN OF SAFETY

The margin of safety can be defined as the difference between the expected level of sale
and the breakeven sales. The larger the margin of safety , the higher are the chances of
making profits. In the above example if the forecast sale is 1,700 units per month, the
margin of safety can be calculated as follows,
Margin of safety = Projected sales – Breakeven sales
= 1,700 units – 1,000 units
= 700 units or 41 % of sales.
The Margin of Safety can also be calculated by identifying the difference between the
projected sales and breakeven sales in units multiplied by the contribution per unit. This is
possible because, at the breakeven point all the fixed costs are recovered and any further
contribution goes into the making of profits.