Within the breakeven analysis, we have something called the margin of safety which answers the question, “How much would our sales have to decrease before we start losing money?” In this example, we saw that $87,500 was the amount of sales we needed to generate to break even. Let’s say that our sales are actually $107,500.

That means that our sales would have to decrease by $20,000 before we started losing money ($107,500 actual sales – $87,500 breakeven sales). In other words, $20,000 is the margin of safety.