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:
- Increase the volume of sales
- increase the selling price
- reduce fixed cost
- reduce variable cost
- improve sales mix by increasing the sales of the product with higher profit volume ratio