# Margin of Safety (MOS)

In break-even analysis, margin of safety is the extent by which actual or projected sales exceed the break-even sales. It may be calculated simply as the difference between actual or projected sales and the break-even sales. However, it is best to calculate margin of safety in the form of a ratio. Thus we have the following two formulas to calculate margin of safety:

MOS = Budgeted Sales − Break-even Sales |

MOS = | Budgeted Sales − Break-even Sales |

Budgeted Sales |

Margin of Safety can be expressed both in terms of sales units and currency units.

The margin of safety is a measure of risk. It represents the amount of drop in sales which a company can tolerate. Higher the margin of safety, the more the company can withstand fluctuations in sales. A drop in sales greater than margin of safety will cause net loss for the period.

## Example

Use the following information to calculate margin of safety:

Sales Price per Unit | $40 |

Variable Cost per Unit | $32 |

Total Fixed Cost | $7,000 |

Budgeted Sales | $40,000 |

__Solution__

Breakeven Sales Units | = $7,000 ÷ ($40 - $32) | = 875 |

Budgeted Sales Units | = $40,000 ÷ $40 | = 1,000 |

Margin of Safety | = (1000 − 875) ÷ 1,000 | = 12.5% |

Written by Irfanullah Jan and last revised on