Margin of Safety

Written by True Tamplin, BSc, CEPF®

Reviewed by Subject Matter Experts

Updated on March 03, 2023

Margin of Safety: Definition

The difference between the actual sales volume and the break-even sales volume is called the margin of safety. It shows the proportion of the current sales that determine the firm's profit.

Formula to Calculate the Margin of Safety

Margin of safety = Actual sales volume - Break-even sales volume

Formula to Calculate the Margin of Safety Ratio

Margin of safety ratio = (Actual sales - Break-even sales) / Actual sales


Using the data provided below, calculate the margin of safety for five start-up enterprises.

  • Actual sales (4,000 units @ $25/unit) = $100,000
  • Contribution margin per unit = $15
  • Total fixed costs = $25,000


First of all, we know the following formula to calculate the margin of safety:

Margin of safety = Actual sales volume - Break-even sales volume

Therefore, as an initial step, we need to calculate the break-even sales volume. This is done as follows:

Break-even sales = Fixed costs / Contribution margin per unit

= 25,000 / 15

= 1,667 units

= 1,667 x 25 = $41,675

Now we can calculate the margin of safety:

= 100,000 - 41,675

= $58,325

We can also calculate the margin of safety in percentage terms:

= 58,325 / 100,000

= 0.5832

= 58.32 %

As shown above, the margin of safety can be expressed as an absolute amount (e.g., $58,325) or as a percentage of sales (e.g., 58.32%).

The margin of safety ratio is an ideal index that can be used to rank firms within an industry.

To show this, let's consider the example of two firms with the same net income shown in their income statement but with a different margin of safety ratio.

In the case of the firm with a high margin of safety, it will be able to withstand large reductions in sales volume.

By contrast, the firm with a low margin of safety will start showing losses even after a small reduction in sales volume.

Margin of Safety FAQs

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website or view his author profiles on Amazon, Nasdaq and Forbes.