Margin of Safety

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Definition – Margin of Safety (MOS):

Margin of safety (MOS) is defined as; “it is the difference between the actual or budgeted sales as the case may be and break even level of sales”.

Explanation and Use:

Margin of safety determines that how much extent sales can decrease before the business will move out of profit and into a loss making situation. It gives an indication of the vulnerability of profit to reduction in demand and is frequently used as a risk measure.

Clearly, greater the margin of safety, the better for the business since there is low risk of going into losses. Margin of safety is generally expressed in units, but can also be expressed in sales value or as a percentage of sales.

Formula:

Margin of Safety in Units:

margin-of-safety-in-units

Margin of Safety in Value (Revenue):

margin-of-safety-in-sales-value

Margin of Safety in Percentage:

margin-of-safety-in-percentage

Solved Example 1:

Following information relates to a manufacturing business:

margin-of-safety-example-1-data

Required:

Calculate break even point and margin of safety in units and value.

Solution:

margin-of-safety-solved-example-1

Solved Example 2:

A restaurant has a margin of safety of 40% and estimated sales revenue of $60000 for the next year.

Required:

What is the break even revenue (sales)?

Solution:

margin-of-safety-example-2