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We will compute the margin of safety in dollars and in percentage and learn the significance of margin of safety. Companies with lower margin of safety should be concerned about how vulnerable they are to even small downturns in sales. Management can increase the margin of safety by increasing total sales or by decreasing costs, or both.

$-1$:$37$

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Summarized data for Ralph Corporation:

Selling price $ $200$ per unit

Variable expenses $ $150$ per unit

Fixed expenses $ $1,000,000$ per year

Unit sales $25,000$ per year

Knowledge Check $01$

What is Ralph Corporation$$s margin of safety in dollars? selling price of $$190$ per unit, variable costs per unit of $$76,$ and fixed expenses of $$96,000.$ The company believes sales will increase by $300$ units, if the company introduces sales commissions as an incentive for the sales staff. The change will decrease the selling price to $$175$ per unit, increase variable cost per unit to $$100,$ and decrease fixed expenses by $$20,000.$ What is the net operating income after the changes?