Margin of Safety:

Margin of safety is described as the amount by which actual sales volume exceeds the volume required for break even. Thus it represents the amount by which the sales could decrease without incurring any operational loss. Margin of safety for Quality ice- cream company with sales of Rs. 313,725 per month is Rs. 98,040 (Do it yourself). Margin of safety also provides means of estimating operating income through the equation given below:

Operating income = Margin of safety × Contribution rate

The formula is simply understandable from the logic that the margin of safety represents sales above the point of break even. Therefore all the fixed costs are compensated and the contributions from the sales are utilized to enlarge operating income.