Example of Margin of Safety

Example of Margin of Safety

Margin of safety is basically difference between the budgeted sales volume and break even sales volume and is calculated for risk analyses. Margin of safety may be expressed in terms of volume, amount or percentage. Margin of safety tells management that what margin available after which the profit will touch the break even level.

Formula for Margin of Safety

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

 ii) Budgeted (Revenue) – Break Even (Revenue

Example of Margin Safety

Sale price	220
Variable cost	180
Fixed Cost	20,000
Budgeted units	800

Calculate the margin of safety level

Solution

Step 1 Calculate unit contribution

Sale price	220
Variable cost	180
Unit contribution ( 220-180)	40

Step 2 Break even point

Fixed Cost	20,000
Unit Contribution	40
Break even volume ( units) 20,000/40	500

Step 3 Calculate Margin of Safety

Budgeted units	800
Less: Break even	500
Margin of safety	300 Units

Margin of safety in percentage is calculated with reference to the budgeted units, therefore the margin of safety in percentage would be 37.5% i.e. (300 unit/ 800 units)