Page 243 - BA2 Integrated Workbook STUDENT 2018

Short-term decision making

2.2 Margin of safety

The margin of safety is the difference between the budgeted (projected) level of sales
and the breakeven point. The larger the margin of safety, the more likely it is that a
profit will be made.

Margin of safety units = budgeted sales – breakeven sales

Margin of safety units = 1,000 – 250 = 750 units

Margin of safety can also be expressed as a percentage. This is also known as the
margin of safety ratio.

Budgeted sales – Breakeven sales
Margin of safety % = —————————————————
Budgeted sales

1,000 − 250
Margin of safety % = ————— = 75%
1,000

Using the margin of safety % puts it in perspective. To quote a margin of safety
without relating it to the projected sales figure is not giving the full picture.

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