## Margin of Safety

Margin of Safety Calculator is an online tool that facilitates the calculation of the Margin of safety with a simple click of the user. It is the difference between actual sales and sales at the break-even point. It is the level of revenue reduction before it reaches the break-even point. The Margin of Safety is an important concept under marginal costing. It can be expressed in both money and units.

## Formula For Calculating Margin of Safety

To calculate the margin of safety, one has to subtract sales at the breakeven point from the actual sales. The formula for calculating the margin of safety is as follows:

**MOS** = Actual Sales – Sales at Breakeven Point

## About the Calculator / Features

The calculator effortlessly calculates the margin of safety. The user simply has to provide the following details.

- Actual sales
- Sales at BEP

## Margin of Safety Calculator

## How to Calculate MOS using the Calculator

In order to calculate the margin of safety using the calculator, the user only has to insert the following details into the calculator.

### Actual Sales

It is the sum of the actual sales (net of returns) made by the Company during the accounting period for which you calculate the margin of safety. In addition, we can obtain the value of the actual sales by multiplying the actual sales unit by the selling price per unit. These details can be taken from the Profit and Loss Account of the company.

### Sales at BEP

It is the level of sales at which the company neither makes any profit or loss. In other words, it is a no-profit no-loss situation for the company where it just covers all the variable costs for the product or service from the revenue generated. For calculating breakeven sales, we divide fixed cost from contribution per unit.

## Example of Margin of Safety

Let us try to understand this concept of margin of safety with the help of an example. A company, X ltd., produces plastic cans. The selling price of a can is $5. The variable cost of each can is $2. And the fixed cost for producing cans is $180,000. Let us now calculate the margin of safety when:

Case 1: Sales are 100,000 units

Case 2: Sales are 80,000 units

Particulars | Case 1 | Case 2 |

Units sold | 100,000 | 70,000 |

Selling price | $5 | $5 |

Sales value | $500,000 | $350,000 |

Variable cost per unit | $2 | $2 |

Total variable cost | $200,000 | $140,000 |

Fixed cost | $180,000 | $180,000 |

Contribution per unit | $3 ($5 – $2) | $3 ($5 – $2) |

Total Contribution | 300000 ($3*100000) | 210000 ($3*70000) |

Sales at BEP | $300,000 ($180,000*5/3) | $300,000 ($180,000*5/3) |

Margin of safety:

**Case 1:** $500,000 – $300,000 = $200,000

**Case 2:** $350,000 – $300,000 = $50,000

## Interpretation of Margin of Safety

The margin of safety determines the sales level before it reaches the break-even level. The higher the margin of safety, the lower the risk of breakeven. In the example above, the margin of safety in case 1 ($200,000) is considerably higher than the margin of safety in case 2 ($50,000). Therefore, in times of some demand issues or in case of a slump in demand, case 2 is more likely to falter in achieving the breakeven. While as the margin of safety is quite high in case 1, in all likelihood, the company not only will achieve break-even instead will also make some profits.

## Cautions

The margin of safety may not work in cases of products having seasonal demand as these products may have a very lower quantum of sales in off-seasons. Also, a higher margin of safety may give rise to the high-risk-taking behavior of management. Still, all said, a higher margin of safety is always preferred and keeps the company tension-free.