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