Margin of Safety Flashcards

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What is the margin of safety in business?

It is the extra sales above break-even. It shows how many units sales can fall by before a loss.

Margin of safety (units) = actual or forecast sales in units – break-even output in units.

Margin of safety (%) = (margin of safety in units / actual sales in units) x 100.

Multiply the margin of safety in units by the selling price per unit.

It is the horizontal gap on the x-axis between actual output and break-even output.

Sales could fall by a lot before a loss happens. Risk is lower.

Actual sales equal break-even sales. The business makes no profit and no loss.

Actual sales are below break-even sales. The business is making a loss.

Break-even output rises, so the margin of safety falls.

Break-even output falls, so the margin of safety rises (if units sold stay the same).

1,200 – 950 = 250 units.

Margin of safety = 250 units. 250 / 1,200 x 100 = 20.8% (about 21%).