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.
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.
Also Read: Margin of Safety
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|
|Variable cost per unit||$2||$2|
|Total variable cost||$200,000||$140,000|
|Contribution per unit||$3|
($5 – $2)
($5 – $2)
|Sales at BEP||$300,000 |
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.
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.