Example:

Sales(400 units @ $250) $100,000

Break even sales $87,500
Calculate margin of safety

Calculation:
Sales(400units @$250) $100,000
Break even sales $ 87,500
---------
Margin of safety in dollars $ 12,500
=======
Margin of safety as a percentage of sales:

12,500 / 100,000

= 12.5%

It means that at the current level of sales and with the company's current prices and
cost structure, a reduction in sales of $12,500, or 12.5%, would result in just breaking
even.

In a single product firm, the margin of safety can also be expressed in terms of the
number of units sold by dividing the margin of safety in dollars by the selling price per unit.

In this case, the margin of safety is 50 units ($12,500 ÷ $ 250 units = 50 units).
Review Problem:
Voltar company manufactures and sells a telephone answering machine. The company's
contribution margin income statement for the most recent year is given below:

Description Total Per unit Percent of Sales

Sales (20,000 units) $ 1,200,000 $60 100%
Less variable expenses 900,000 $45 ?%
--------- -------- --------
Contribution margin 300,000 $15 ?%
Less fixed expenses 240,000 ====== =====
---------
Net operating income 60,000
======

Required: margin of safety of safety both in dollars and percentage form.

Solution to Review Problem:

Margin of safety = Total sales – Break even sales*

= $1,200,000 – $960,000

= $240,000

Margin of safety percentage = Margin of safety in dollars / Total sales

= $240,000 / $1,200,000

= 20%

*The break even sales have been calculated as follows:

Sales = Variable expenses + Fixed expenses + Profit

$60Q = $45Q + $240,000 + $0**

$15Q = $240,000

Q = $240,000 / $15 per unit

Q = 16,000 units; or at $60 per unit. $960,000

**We know that break even is the level of sales where profit is zero