## Margin of Safety

### 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 - - 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.

You could use the margin of safety as a target (for planning), or a real-time metric (for directing and controlling). For control purposes, it’s 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.

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