Fox Club Clothiers is managed as traditionally as the button-down shirts that have made it famous. Arch Fox founded the business in 1972 and has directed operations "by the seat of his pants" ever since. Approaching retirement, he must turn over the business to his son, Ralph. Recently Arch and Ralph had this conversation:

Ralph: Dad, I am convinced that we can increase sales by advertising. I think we can spend \(\$ 600\) monthly on advertising and increase monthly sales by \(\$ 6,000\). With our contribution margin, operating income should increase by \(\$ 3,000\).

Arch: You know how I feel about advertising. We've never needed it in the past. Why now?

Ralph: Two new shops have opened near us this year, and those guys are getting lots of business. I've noticed our profit margin slipping as the year has unfolded. Our margin of safety is at its lowest point ever.

Arch: Profit margin I understand, but what is the contribution margin that you mentioned": And what is this "margin of safety"?

Requirement 

Explain for Arch Fox the contribution margin approach to decision making. Show how Ralph Fox computed the \(\$ 3,000\). (Advertising is a fixed cost.) Also, describe what Ralph means by margin of safety; and explain why the business's situation is critical.