Accounting › Section Q · Cost-volume-profit analysis › Topic Q.4
Margin of safety and operating leverage
Knowing the break-even point is only half the story. The margin of safety measures how far sales can fall before a loss, and operating leverage measures how sharply profit swings when sales move. Together they describe a business's risk.
In this topic
- Two measures of risk
- Margin of safety
- The margin of safety ratio
- Cost structure and operating leverage
- Degree of operating leverage
- Worked example: Quillmoor in a slow month
- Worked example: two bakeries
- Leverage cuts both ways
- Managing cost structure
- Common mistakes to avoid
- Key takeaways
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