Margin of Safety

The margin of safety shows how much sales can fall before a company reaches its break-even point.

It helps managers measure the cushion that protects the business from losses.

Adam, a finance manager at Softonic Beverages, has calculated that the break-even point for the new product is two thousand units, or one million dollars in sales revenue.

He expects actual sales of two thousand five hundred units, which equals one million two hundred and fifty thousand dollars.

The margin of safety in units is the difference between expected sales and break-even sales.

By subtracting two thousand from two thousand five hundred, Adam finds the margin of safety is five hundred units.

In terms of value, it is the difference between the expected sales revenue and break-even sales revenue.

By subtracting one million from one million two hundred and fifty thousand, the margin of safety is two hundred and fifty thousand dollars.

A higher margin of safety gives managers more confidence because sales can decline further before the business reaches break-even.