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Margin of Safety
The margin of safety measures how much sales can fall or fixed costs can rise before the company begins to operate at a loss.
It can also be expressed as a ratio simply by diving the Margin of Safety by sales
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Example: Margin of Safety
ABC Inc. produces desk lamps that it sells for $50 each. The following is the cost data for the desk lamps:
If the company expects to sell 20,000 lamps this year, what will be its Margin of Safety and Margin of Safety ratio?
Mark Yourself Question
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Practice: Margin of Safety
KG Corporation reported the following financial results in 2019:
Compute the margin of safety and margin of safety ratio.