What is the Margin of Safety?

• A. The amount by which budgeted sales can fall before a loss occurs.
• B. The difference between total revenue and total costs at breakeven
• C. The amount by which fixed costs exceed variable costs
• D. The difference between budgeted profit and actual profit

Answer: (A)

Margin of safety shows how much budgeted sales could fall before the business starts making a loss. It’s the cushion between what you expect to sell and the break-even point, where revenue just covers costs. So, Margin of Safety equals budgeted sales minus break-even sales, and it can be shown in currency, units, or as a percentage of budgeted sales. For example, if budgeted sales are 120,000 and the break-even point is 100,000, the margin of safety is 20,000 (or about 16.7% of budgeted sales). A larger cushion means less risk from a drop in sales.

The other statements don’t fit this idea: the difference between revenue and costs at break-even is zero, fixed costs versus variable costs describes cost structure rather than the sales cushion, and the gap between budgeted and actual profit is a performance variance, not the cushion against losses from falling sales.