Margin of safety is the difference between the actual sales

Margin of safety is the difference between the actual sales and the sales at break even point. One of the assumption of marginal costing is that output will coincide sales, so margin of safety is also the excess production over the break even point’s output. Sales or output beyond break even point is known as margin of safety because it gives some profit, at break even point only fixed expenses are recovered. Margin of safety can also be express in the percentage.

Formula for the Calculation of margin of safety:

Margin of Safety (M/S) = Present Sales – Break Even Sales

Margin of safety can also be calculated with the help of followings:

Margin of Safety (M/S) =   Profit / P/V  Ratio

Margin of Safety is that sales or output which is above break even point. All fixed expenses are recovered at break even point; so fixed expenses have been excluded from the formula of margin of safety given above. Margin of safety is that sales which gives us profit after meeting fixed costs; so formula of its calculation takes only profit. If the margin of safety is large, it is an indicator of the strength of a business because with a substantial reduction in sales or production, profit shall be made. On the other hand, if the margin is small, a small reduction in sales or production will be a serious matter and lead to loss. The margin of safety at break even point is nil because actual sales volume is just equal to the break even sales. Efforts should be made be the management to increase the margin of safety so that more profit many be earned. This margin can be increased by taking the following steps:

1.        Increase the level of production
2.        Increase the selling price
3.        Reduce the fixed and variable costs or both
4.        Substitute the existing products by more profitable products.