Margin of safety
The margin of safety shows how far sales can fall before a loss. As a percentage it relates to planned sales.
Worked example
Price £26.00, variable cost £17.50 per unit, fixed costs £11,475.00. Planned sales are 2,600 units. What is the margin of safety?
Worked solution
- 1.Break-even = £11,475.00 / (£26.00 − £17.50) = 1,350 units
- 2.Margin of safety = 2,600 − 1,350 = 1,250 units
- 3.in % = 1,250 / 2,600 × 100 = 48.08%
Typical mistake: Relating the margin of safety to the break-even quantity instead of planned sales.
Your turn
Three problems of exactly this type, each time with new numbers. Amounts with or without thousands separators.
Task
Price £23.50, variable cost £11.50 per unit, fixed costs £25,200.00. Planned sales are 3,250 units. What is the margin of safety?
Break-even quantity in units
Margin of safety in units
Margin of safety in % of planned sales (2 decimal places)
Amounts like 12,500 or 12500.50; percentages as a number (12.5). Round to the penny or 2 decimal places.
Formulas for this topic
- Break-even quantity = fixed costs / unit contribution
- Break-even revenue = quantity × price
- Quantity for a target profit = (fixed costs + profit) / unit contribution
- Margin of safety = planned sales − break-even quantity
Typical mistake: Relating the margin of safety to the break-even quantity instead of planned sales.
Frequently asked questions
What is the typical mistake in "Margin of safety"?
Relating the margin of safety to the break-even quantity instead of planned sales.
Why divide by contribution and not by price?
Each unit first covers its own variable cost; only the rest, the contribution, is left for fixed costs.