Definition of Margin of Safety
In break-even analysis, the term margin of safety indicates the amount of sales that are above the break-even point. In other words, the margin of safety indicates the amount by which a company’s sales could decrease before the company will have no profit.
Example of Margin of Safety
Let’s assume that a company currently sells 3,000 units of its only product. The company has estimated that its break-even point is 2,800 units. Therefore, the company’s margin of safety is 200 units.
