Margin of safety - meaning and formula

Margin of safety – meaning and formula

Margin of safety is the excess of actual or budgeted sales over the break even point.

Margin of safety= actual sales – break even pint sales

Margin of safety shows the sales volume which gives profit. The larger the margin of safety the greater is the profit.

Margin of safety ratio

= (budgeted sales-break even point sales)/budgeted sales

Or can be calculated using the following formula

= profit/profit volume ratio

The following are measures which may be taken to improve the margin of safety:

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