MARGIN OF SAFETY

Another term that Phillip Thow believes that every business should utterly know is the margin of safety. This term signifies the strength of the business. According to Phil Thow, this can be used as a tool to identify the precise amount the business has earned or lost above or under the breakeven point.
The equation used in order to derive the margin of safety:
Margin of safety = ((sales - break-even sales) / sales) x 100% If P/V ratio is given then profit/ PV ratio
In unit sales
Phillip Thow affirms that if the product has large volume sales above or equal the breakeven point, then the company is assured of revenues, however, if it occurs below the point, the company is bound to have deficits.
Break-even quantity can be derived by:
Total fixed costs / (selling price - average variable costs).
Rationalization - in the denominator, "price minus average variable cost" is the variable profit per unit, or contribution margin of each unit that is sold.