Margin of safety
The margin of safety is the amount sales can fall before the point (BEP) is reached and the business makes no profit. This calculation also tells a business how many sales it has made over its BEP.
The margin of safety is calculated as follows:
Margin of safety = actual sales − break-even sales
For example, a business has a BEP of 100 products and has made 150 sales. Therefore:
Margin of safety = 150 – 100
= 50 products
This means the business is making profit on 50 of its items sold, and its sales could fall by 50 items before the BEP were reached.
A company can use its margin of safety to see whether a product is worth selling or not. For example, if the BEP is 3,800 items and projected sales are 4,000 items, the business may decide not to sell the product as it would only be making profit on 200 items, making it high risk.
The below example demonstrates a BEP of 100. With sales at 200, this represents a margin of safety of 100 units (ie 200 − 100).
