How to Calculate Margin of Safety Without Having Price
In accounting, the margin of safety is a calculation that typically measures the difference between the break-even sales of a product or company, and the actual amount of sales. The margin of safety is an indication of a company's financial health; if it has a substantial margin of safety, it can afford to incur an unexpected decrease in sales and still turn a profit. Normally, the margin of safety is measured in a dollar amount, but it is also possible to calculate it in terms of sales quantities without knowing sales price.
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Instructions
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Determine the actual amount of sales in terms of units sold.
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Find the break-even sales point also in terms of quantity sold. This will be the amount of sales that need to be made for a company to break even (no profit or loss).
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Find the margin of safety using the formula: Margin of Safety = (Actual Sales - Break-even sales). For example, if a company's break-even sales are 100 units, and its total sales are 250 units, it would result in 250 units minus 100 units, which would yield a margin of safety of 150 units.
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