What Is the Margin of Safety?
Formula, a worked example, and how to read it.
Home › Accounting Glossary › Margin of Safety
| Can be shown in | Units, sales value, or percentage |
|---|---|
| Related | Contribution margin |
| Topic | Management accounting · CVP analysis |
Margin of safety in plain English
If a business sells far more than it needs to break even, it has a big safety cushion. If it sells only slightly more, a small drop in sales could push it into a loss.
Worked example
Break-even sales are 1,000 units (50,000 in sales value). Expected sales are 1,400 units (70,000).
Margin of safety in units = 1,400 − 1,000 = 400 units.
Margin of safety in value = 70,000 − 50,000 = 20,000.
As a percentage = 20,000 ÷ 70,000 × 100 = 28.6%. Sales can fall by about 28.6% before the business makes a loss.
- Dividing by break-even sales instead of by actual or budgeted sales.
- Assuming the margin stays the same if costs or prices change.
Frequently asked questions
Is a high margin of safety good?
Generally yes. It means sales can fall a long way before the business loses money.
How can a business increase its margin of safety?
Increase sales, raise prices, cut variable costs, or reduce fixed costs to lower the break-even point.
What is the relationship with break-even?
The margin of safety is the gap between actual or budgeted sales and break-even sales.
Keep learning
This page is for general learning. Accounting rules vary by country and standard.