# Margin of Safety (MOS)

In break-even analysis, margin of safety is the extent by which actual or projected sales exceed the break-even sales. It may be calculated simply as the difference between actual or projected sales and the break-even sales. However, it is best to calculate margin of safety in the form of a ratio. Thus we have the following two formulas to calculate margin of safety:

 MOS = Budgeted Sales − Break-even Sales
 MOS = Budgeted Sales − Break-even Sales Budgeted Sales

Margin of Safety can be expressed both in terms of sales units and currency units.

The margin of safety is a measure of risk. It represents the amount of drop in sales which a company can tolerate. Higher the margin of safety, the more the company can withstand fluctuations in sales. A drop in sales greater than margin of safety will cause net loss for the period.

## Example

Use the following information to calculate margin of safety:

 Sales Price per Unit $40 Variable Cost per Unit$32 Total Fixed Cost $7,000 Budgeted Sales$40,000

Solution

 Breakeven Sales Units = $7,000 ÷ ($40 - $32) = 875 Budgeted Sales Units =$40,000 ÷ \$40 = 1,000 Margin of Safety = (1000 − 875) ÷ 1,000 = 12.5%

Written by Irfanullah Jan