Margin of safety

Melton Inc. has sales of $1,750,000, and the break-even point in sales dollars is $875,000. Determine the company’s margin of safety as a percent of current sales.

Junck Company has sales of $550,000, and the break-even point in sales dollars is $385,000. Determine the company’s margin of safety as a percent of current sales.

**ANSWER: 50% and 30%**

To calculate the margin of safety, subtract the current breakeven point from sales, and divide by sales. The formula is:

__Current Sales Level – Breakeven Point__

Current Sales Level

The amount of this buffer is expressed as a percentage

(1,750,000-875,000)/1,750,000

The company’s margin of safety as a percent of current sales: 50% i.e $875,000