The margin of safety represents the difference between the sales at break-even point and the total sales. It can be expressed as a percentage as well as in value. The size of the margin of safety shows the strength of the business. If the margin of safety is small, it may indicate that the firm has large fixed expenses and is more vulnerable to changes in sales. In other words, if the margin of safety is large a slight fall in sales may not affect the business very much but if it small even a slight fall in sales may adversely affect the business.

The margin of safety can be calculated as:

Profit x Sales / Contribution
Or
Profit / (P/V ratio)

The possible steps to improve the margin of safety are:

1. Increase in the selling price, provided the demand is inelastic so as to absorb the increased prices.
2. Reduction in fixed expenses.
3. Reduction in variable expenses.
4. Increasing the sales volume provided capacity is available.
5. Substitution or introductions of a product mix such that more profitable lines are introduced.