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Margin of safety - example

This is usually expressed as a quantity, and you should always do this. However, it is better, as well, to put the margin of safety in context by expressing it as a percentage of the break-even quantity. Numbers alone can be misleading.


Example - margin of safety

Two competing companies in the MP3 market have the following break-even information about their production facilities and levels

Company 3tec Zensa
Capacity 2,000 700
Break-even quantity 750 200
Production 1,000 400
Margin of safety (units) 250 200

The larger margin of safety in absolute terms represents a smaller relative quantity. 3tec will go into a loss position faster than Zensa.