Margin of Saftey

What is Margin of safety

Margin of safety is difference between the budget unit and break even. This difference may be  expressed in term of unit, revenue or percentage of budgeted figure.

What is formula of Margin of Safety

Formula =      i) Budgeted (units) – Break even (unit)

                = ii )  Budgeted (Revenue) – Break Even (Revenue)

Purpose of calculating the margin of Safety

The main purpose of calculating the margin of safety is to determine the risk factor. In simple term margin of safety tell what margin you have before the profit fall down at a level of break even a situation and that margin can be express either in terms of unit, revenue or as percentage of budgeted .

Example of Margin Safety

Sale Price = 20

Variable Cost = 16

Fixed Cost = 40,000

Budgeted unit are 25,000

What is Margin of Safety in terms of unit and percentage?

First place we will calculate the break even

= 40,000/(20-16)

= 10,000 units

Margin of safety = 25,000-10,000

                              = 15,000 units

Margin of safety in % = 15,000 units/ 25,000 units

                                      = 60%