Safety coefficient (business administration)

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In business is safety coefficient , a measure of risk in the framework of the breakeven analysis for uncertainty is used. The safety factor expresses how much the normal utilization , or capacity utilization , must fall before the break-even point is reached.

  • SK = 1 - (X B / X)

in which:

  • X B - amount of breakeven
  • X - amount at normal utilization

example

  • X B = 500 pieces
  • X = 1500 pieces
  • SK = 1 - (X B / X) = 1 - (500/1500) = 2/3 ≈ 0.67

Conclusion: The production volume may decrease by 67% before the breakeven point is reached.

The operating leverage is the reciprocal of the safety coefficient.