### Learning Outcomes

- Calculate margin of safety

The **margin of safety** looks at how far above the break-even point a company’s 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.

Assume BlankBooks, Inc. is currently operating at a production/sales level of 2,900 units per month.

### What is the margin of safety as a dollar amount?

Margin of safety in dollars = contribution margin at current production – break-even contribution margin

$4,930.00 – $3,400.00 = $1,530.00

Units | $/Unit | Total | |
---|---|---|---|

Sales | 2,900 | $ 10.00 | $ 29,000.00 |

Variable costs | 2,900 | $ 8.30 | 24,070.00 |

Contribution Margin | $ 1.70 | Single Line4,930.00 | |

Fixed costs | 3,400.00 | ||

Operating income | Single Line$ 1,530.00Double line | ||

CM ratio | 17.00% |

Units | $/unit | Total | |
---|---|---|---|

Sales | 2,000 | $10.00 | $ 20,000.00 |

Variable costs | 2,000 | $8.30 | 16,600.00 |

Contribution Margin | $1.70 | Single Line 3,400.00 | |

Fixed costs | 3,400.00 | ||

Operating income | Single Line$ –Double line | ||

CM ratio | 17.00% |

Margin of safety in units = current units – break-even units

2,900 – 2,000 = 900

Margin of safety as a percentage = margin of safety in dollars / contribution margin at current production

$1,530.00 / $4,930.00 = 0.310344827586207…

Rounded to the nearest ten-thousandth = 0.3103

Multiply by 100 to get percentage (per-cent literally means “per one hundred”)

0.3103 * 100 = 31.03%

Rounded to the nearest whole number = 31%

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.

Now, let’s check your understanding of the margin of safety.