{"id":83,"date":"2021-01-26T22:02:23","date_gmt":"2021-01-26T22:02:23","guid":{"rendered":"https:\/\/courses.lumenlearning.com\/wm-managerialaccounting\/?post_type=chapter&#038;p=83"},"modified":"2021-05-06T22:03:07","modified_gmt":"2021-05-06T22:03:07","slug":"margin-of-safety","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/suny-clinton-managerialaccounting\/chapter\/margin-of-safety\/","title":{"raw":"Margin of Safety","rendered":"Margin of Safety"},"content":{"raw":"<div class=\"textbox learning-objectives\">\r\n<h3>Learning Outcomes<\/h3>\r\n<ul>\r\n \t<li>Calculate margin of safety<\/li>\r\n<\/ul>\r\n<\/div>\r\n<img class=\"size-medium wp-image-777 alignright\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5469\/2021\/01\/17150454\/tom-hermans-9BoqXzEeQqM-unsplash-300x200.jpg\" alt=\"Multiple books on a cart.\" width=\"300\" height=\"200\" \/>The <strong>margin of safety<\/strong> looks at how far above the break-even point a company\u2019s sales are. The greater the difference, the more secure a company can feel about hedging against possible declines in sales. The margin of safety can be expressed as a dollar amount, a percentage, or a number of units.\r\n\r\nAssume BlankBooks, Inc. is currently operating at a production\/sales level of 2,900 units per month.\r\n<h3>What is the margin of safety as a dollar amount?<\/h3>\r\nMargin of safety in dollars = contribution margin at current production - break-even contribution margin\r\n\r\n$4,930.00 - $3,400.00 = $1,530.00\r\n<div align=\"left\">\r\n<table class=\"fin-table acctstatement fw\"><caption>BlankBooks, Inc.\r\nCVP Analysis - current production\r\nFor the month ending July 31, 20XX<\/caption>\r\n<tbody>\r\n<tr>\r\n<th class=\"r\" scope=\"col\"><\/th>\r\n<th class=\"r\" scope=\"col\">Units<\/th>\r\n<th class=\"r\" scope=\"col\">$\/Unit<\/th>\r\n<th class=\"r\" scope=\"col\">Total<\/th>\r\n<\/tr>\r\n<\/tbody>\r\n<tbody>\r\n<tr>\r\n<td>Sales<\/td>\r\n<td class=\"r\">2,900<\/td>\r\n<td class=\"r\">$\u00a0\u00a0\u00a0\u00a0\u00a010.00<\/td>\r\n<td class=\"r\">$\u00a0\u00a0\u00a0\u00a0\u00a029,000.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Variable costs<\/td>\r\n<td class=\"r\">2,900<\/td>\r\n<td class=\"r\">$\u00a0\u00a0\u00a0\u00a0\u00a0\u00a08.30<\/td>\r\n<td class=\"r\">24,070.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Contribution Margin<\/td>\r\n<td><\/td>\r\n<td class=\"r\">$\u00a0\u00a0\u00a0\u00a0\u00a0\u00a01.70<\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>4,930.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Fixed costs<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td class=\"r\">\u00a0\u00a0\u00a0\u00a0\u00a0\u00a03,400.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Operating income<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$\u00a0\u00a0\u00a0\u00a0\u00a0\u00a01,530.00<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<\/tr>\r\n<tr>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>CM ratio<\/td>\r\n<td><\/td>\r\n<td class=\"r\">17.00%<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<\/div>\r\n&nbsp;\r\n<div align=\"left\">\r\n<table class=\"fin-table acctstatement fw\"><caption>BlankBooks, Inc.\r\nCVP Analysis - break-even\r\nFor the month ending July 31, 20XX<\/caption>\r\n<tbody>\r\n<tr>\r\n<th class=\"r\" scope=\"col\"><\/th>\r\n<th class=\"r\" scope=\"col\">Units<\/th>\r\n<th class=\"r\" scope=\"col\">$\/unit<\/th>\r\n<th class=\"r\" scope=\"col\">Total<\/th>\r\n<\/tr>\r\n<\/tbody>\r\n<tbody>\r\n<tr>\r\n<td>Sales<\/td>\r\n<td class=\"r\">2,000<\/td>\r\n<td class=\"r\">$10.00<\/td>\r\n<td class=\"r\">$ \u00a0 20,000.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Variable costs<\/td>\r\n<td class=\"r\">2,000<\/td>\r\n<td class=\"r\">$8.30<\/td>\r\n<td class=\"r\">\u00a0 16,600.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Contribution Margin<\/td>\r\n<td><\/td>\r\n<td class=\"r\">$1.70<\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>\u00a0 \u00a0 3,400.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Fixed costs<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td class=\"r\">\u00a0 \u00a0 3,400.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Operating income<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$\u00a0 \u00a0 \u00a0 \u00a0  &nbsp;\u00a0 -<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>CM ratio<\/td>\r\n<td><\/td>\r\n<td class=\"r\">17.00%<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<\/div>\r\n&nbsp;\r\n\r\nMargin of safety in units = current units - break-even units\r\n\r\n2,900 - 2,000 = 900\r\n\r\nMargin of safety as a percentage = margin of safety in dollars \/ contribution margin at current production\r\n<p style=\"padding-left: 30px;\">$1,530.00 \/ $4,930.00 = 0.310344827586207...<\/p>\r\n<p style=\"padding-left: 30px;\">Rounded to the nearest ten-thousandth = 0.3103<\/p>\r\nMultiply by 100 to get percentage (per-cent literally means \u201cper one hundred\u201d)\r\n\r\n0.3103 * 100 = 31.03%\r\n\r\nRounded to the nearest whole number = 31%\r\n\r\nThe margin of safety is 31%, which gives the company a significant cushion over its break-even point. The higher the margin of safety, and the more it exceeds the break-even point, the better.\r\n<div class=\"textbox shaded\">You could use this as a target (for planning), or a real-time metric (for directing and controlling). For control purposes, it\u2019s a fairly high-level measurement that you would use to identify problems as they arise. You would have to examine detailed data to discover causes and implement solutions.<\/div>\r\nNow, let\u2019s check your understanding of the margin of safety.\r\n<div class=\"textbox tryit\">\r\n<h3>Practice Question<\/h3>\r\n[ohm_question hide_question_numbers=1]217766[\/ohm_question]\r\n\r\n<\/div>","rendered":"<div class=\"textbox learning-objectives\">\n<h3>Learning Outcomes<\/h3>\n<ul>\n<li>Calculate margin of safety<\/li>\n<\/ul>\n<\/div>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"size-medium wp-image-777 alignright\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5469\/2021\/01\/17150454\/tom-hermans-9BoqXzEeQqM-unsplash-300x200.jpg\" alt=\"Multiple books on a cart.\" width=\"300\" height=\"200\" \/>The <strong>margin of safety<\/strong> looks at how far above the break-even point a company\u2019s sales are. The greater the difference, the more secure a company can feel about hedging against possible declines in sales. The margin of safety can be expressed as a dollar amount, a percentage, or a number of units.<\/p>\n<p>Assume BlankBooks, Inc. is currently operating at a production\/sales level of 2,900 units per month.<\/p>\n<h3>What is the margin of safety as a dollar amount?<\/h3>\n<p>Margin of safety in dollars = contribution margin at current production &#8211; break-even contribution margin<\/p>\n<p>$4,930.00 &#8211; $3,400.00 = $1,530.00<\/p>\n<div style=\"text-align: left;\">\n<table class=\"fin-table acctstatement fw\">\n<caption>BlankBooks, Inc.<br \/>\nCVP Analysis &#8211; current production<br \/>\nFor the month ending July 31, 20XX<\/caption>\n<tbody>\n<tr>\n<th class=\"r\" scope=\"col\"><\/th>\n<th class=\"r\" scope=\"col\">Units<\/th>\n<th class=\"r\" scope=\"col\">$\/Unit<\/th>\n<th class=\"r\" scope=\"col\">Total<\/th>\n<\/tr>\n<\/tbody>\n<tbody>\n<tr>\n<td>Sales<\/td>\n<td class=\"r\">2,900<\/td>\n<td class=\"r\">$\u00a0\u00a0\u00a0\u00a0\u00a010.00<\/td>\n<td class=\"r\">$\u00a0\u00a0\u00a0\u00a0\u00a029,000.00<\/td>\n<\/tr>\n<tr>\n<td>Variable costs<\/td>\n<td class=\"r\">2,900<\/td>\n<td class=\"r\">$\u00a0\u00a0\u00a0\u00a0\u00a0\u00a08.30<\/td>\n<td class=\"r\">24,070.00<\/td>\n<\/tr>\n<tr>\n<td>Contribution Margin<\/td>\n<td><\/td>\n<td class=\"r\">$\u00a0\u00a0\u00a0\u00a0\u00a0\u00a01.70<\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>4,930.00<\/td>\n<\/tr>\n<tr>\n<td>Fixed costs<\/td>\n<td><\/td>\n<td><\/td>\n<td class=\"r\">\u00a0\u00a0\u00a0\u00a0\u00a0\u00a03,400.00<\/td>\n<\/tr>\n<tr>\n<td>Operating income<\/td>\n<td><\/td>\n<td><\/td>\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$\u00a0\u00a0\u00a0\u00a0\u00a0\u00a01,530.00<span class=\"u-sr-only\">Double line<\/span><\/td>\n<\/tr>\n<tr>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>CM ratio<\/td>\n<td><\/td>\n<td class=\"r\">17.00%<\/td>\n<td><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n<p>&nbsp;<\/p>\n<div style=\"text-align: left;\">\n<table class=\"fin-table acctstatement fw\">\n<caption>BlankBooks, Inc.<br \/>\nCVP Analysis &#8211; break-even<br \/>\nFor the month ending July 31, 20XX<\/caption>\n<tbody>\n<tr>\n<th class=\"r\" scope=\"col\"><\/th>\n<th class=\"r\" scope=\"col\">Units<\/th>\n<th class=\"r\" scope=\"col\">$\/unit<\/th>\n<th class=\"r\" scope=\"col\">Total<\/th>\n<\/tr>\n<\/tbody>\n<tbody>\n<tr>\n<td>Sales<\/td>\n<td class=\"r\">2,000<\/td>\n<td class=\"r\">$10.00<\/td>\n<td class=\"r\">$ \u00a0 20,000.00<\/td>\n<\/tr>\n<tr>\n<td>Variable costs<\/td>\n<td class=\"r\">2,000<\/td>\n<td class=\"r\">$8.30<\/td>\n<td class=\"r\">\u00a0 16,600.00<\/td>\n<\/tr>\n<tr>\n<td>Contribution Margin<\/td>\n<td><\/td>\n<td class=\"r\">$1.70<\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>\u00a0 \u00a0 3,400.00<\/td>\n<\/tr>\n<tr>\n<td>Fixed costs<\/td>\n<td><\/td>\n<td><\/td>\n<td class=\"r\">\u00a0 \u00a0 3,400.00<\/td>\n<\/tr>\n<tr>\n<td>Operating income<\/td>\n<td><\/td>\n<td><\/td>\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$\u00a0 \u00a0 \u00a0 \u00a0  &nbsp;\u00a0 &#8211;<span class=\"u-sr-only\">Double line<\/span><\/td>\n<\/tr>\n<tr>\n<td>CM ratio<\/td>\n<td><\/td>\n<td class=\"r\">17.00%<\/td>\n<td><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n<p>&nbsp;<\/p>\n<p>Margin of safety in units = current units &#8211; break-even units<\/p>\n<p>2,900 &#8211; 2,000 = 900<\/p>\n<p>Margin of safety as a percentage = margin of safety in dollars \/ contribution margin at current production<\/p>\n<p style=\"padding-left: 30px;\">$1,530.00 \/ $4,930.00 = 0.310344827586207&#8230;<\/p>\n<p style=\"padding-left: 30px;\">Rounded to the nearest ten-thousandth = 0.3103<\/p>\n<p>Multiply by 100 to get percentage (per-cent literally means \u201cper one hundred\u201d)<\/p>\n<p>0.3103 * 100 = 31.03%<\/p>\n<p>Rounded to the nearest whole number = 31%<\/p>\n<p>The margin of safety is 31%, which gives the company a significant cushion over its break-even point. The higher the margin of safety, and the more it exceeds the break-even point, the better.<\/p>\n<div class=\"textbox shaded\">You could use this as a target (for planning), or a real-time metric (for directing and controlling). For control purposes, it\u2019s a fairly high-level measurement that you would use to identify problems as they arise. You would have to examine detailed data to discover causes and implement solutions.<\/div>\n<p>Now, let\u2019s check your understanding of the margin of safety.<\/p>\n<div class=\"textbox tryit\">\n<h3>Practice Question<\/h3>\n<p><iframe loading=\"lazy\" id=\"ohm217766\" class=\"resizable\" src=\"https:\/\/ohm.lumenlearning.com\/multiembedq.php?id=217766&theme=oea&iframe_resize_id=ohm217766\" width=\"100%\" height=\"150\"><\/iframe><\/p>\n<\/div>\n\n\t\t\t <section class=\"citations-section\" role=\"contentinfo\">\n\t\t\t <h3>Candela Citations<\/h3>\n\t\t\t\t\t <div>\n\t\t\t\t\t\t <div id=\"citation-list-83\">\n\t\t\t\t\t\t\t <div class=\"licensing\"><div class=\"license-attribution-dropdown-subheading\">CC licensed content, Original<\/div><ul class=\"citation-list\"><li>Margin of Safety. <strong>Authored by<\/strong>: Joseph Cooke. <strong>Provided by<\/strong>: Lumen Learning. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/licenses\/by\/4.0\/\">CC BY: Attribution<\/a><\/em><\/li><\/ul><div class=\"license-attribution-dropdown-subheading\">CC licensed content, Shared previously<\/div><ul class=\"citation-list\"><li>Multiple books on a cart. <strong>Authored by<\/strong>: Tom Hermans. <strong>Provided by<\/strong>: Unsplash. <strong>Located at<\/strong>: <a target=\"_blank\" href=\"https:\/\/unsplash.com\/photos\/9BoqXzEeQqM\">https:\/\/unsplash.com\/photos\/9BoqXzEeQqM<\/a>. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/about\/cc0\">CC0: No Rights Reserved<\/a><\/em><\/li><\/ul><\/div>\n\t\t\t\t\t\t <\/div>\n\t\t\t\t\t <\/div>\n\t\t\t <\/section>","protected":false},"author":364389,"menu_order":9,"template":"","meta":{"_candela_citation":"[{\"type\":\"original\",\"description\":\"Margin of Safety\",\"author\":\"Joseph Cooke\",\"organization\":\"Lumen Learning\",\"url\":\"\",\"project\":\"\",\"license\":\"cc-by\",\"license_terms\":\"\"},{\"type\":\"cc\",\"description\":\"Multiple books on a cart\",\"author\":\"Tom Hermans\",\"organization\":\"Unsplash\",\"url\":\"https:\/\/unsplash.com\/photos\/9BoqXzEeQqM\",\"project\":\"\",\"license\":\"cc0\",\"license_terms\":\"\"}]","CANDELA_OUTCOMES_GUID":"","pb_show_title":"on","pb_short_title":"","pb_subtitle":"","pb_authors":[],"pb_section_license":""},"chapter-type":[],"contributor":[],"license":[],"class_list":["post-83","chapter","type-chapter","status-publish","hentry"],"part":23,"_links":{"self":[{"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-managerialaccounting\/wp-json\/pressbooks\/v2\/chapters\/83","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-managerialaccounting\/wp-json\/pressbooks\/v2\/chapters"}],"about":[{"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-managerialaccounting\/wp-json\/wp\/v2\/types\/chapter"}],"author":[{"embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-managerialaccounting\/wp-json\/wp\/v2\/users\/364389"}],"version-history":[{"count":13,"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-managerialaccounting\/wp-json\/pressbooks\/v2\/chapters\/83\/revisions"}],"predecessor-version":[{"id":1396,"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-managerialaccounting\/wp-json\/pressbooks\/v2\/chapters\/83\/revisions\/1396"}],"part":[{"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-managerialaccounting\/wp-json\/pressbooks\/v2\/parts\/23"}],"metadata":[{"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-managerialaccounting\/wp-json\/pressbooks\/v2\/chapters\/83\/metadata\/"}],"wp:attachment":[{"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-managerialaccounting\/wp-json\/wp\/v2\/media?parent=83"}],"wp:term":[{"taxonomy":"chapter-type","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-managerialaccounting\/wp-json\/pressbooks\/v2\/chapter-type?post=83"},{"taxonomy":"contributor","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-managerialaccounting\/wp-json\/wp\/v2\/contributor?post=83"},{"taxonomy":"license","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-managerialaccounting\/wp-json\/wp\/v2\/license?post=83"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}