Margin of safety

The margin of safety is a relationship used in CVP analysis which is the difference between actual or expected sales and sales at the break-even point. This relationship measures the “cushion” that management has, allowing it to still break even if expected sales fail to materialize. The margin of safety is expressed in dollars or as a ratio.

The formula for stating the margin of safety in dollars is actual (or expected) sales minus break-even sales.

                  Actual (expected) sales   - break-even sales   = margin of safety in dollars

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