Ask Joey ™ a Question

What is margin of safety and how is it calculated?

Margin of safety is a concept related to breakeven analysis. Basically, it helps a company and its management team understand the difference between total sales and breakeven sales. Breakeven sales is essentially the amount of sales needed to generate enough gross profit to cover the company’s fixed costs.

A low margin of safety means that total sales barely exceeds breakeven sales. This is a big risk for the company because if total sales fall to the breakeven level or even below breakeven, that may result in the company have a hard time covering their fixed costs.

Margin of safety can be expressed in dollar or in percentage form:

You might also be interested in...

  • How can variable sampling risk impact the efficiency or effectiveness of an audit?

    Audit risk is comprised of inherent risk, control risk, and detection risk. The level of substantive testing that the audit performs is based on detection risk, which is set after the audit team assesses inherent risk and control risk. Variable Sampling – Substantive Testing When the audit team is performing substantive testing, they will use […]

  • What happens if control risk is set too high or too low?

    Audit risk is comprised of inherent risk, control risk, and detection risk. Depending on how the audit team assesses control risk, they would set detection risk, which determines the level of substantive testing that should be performed. To assess control risk, the audit team would use attribute sampling to determine if the controls were operating […]

  • What is business intelligence?

    In general, business intelligence is the strategy and technology used by a company to analyze their data. There are a number of difference functions that fall under the business intelligence umbrella. These include analytics, data mining, processing mining, use of dashboards, etc. The biggest problem most companies face is that they have a ton, and […]