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Definition

Margin of safety ratio

The margin of safety ratio is the margin of safety in dollars divided by actual (or expected) sales. The formula and computation for determining the margin of safety ratio are:

                  Margin of safety in dollars actual (expected) sales = margin of safety ratio

                                           $250,000                      $750,000                = 33%

This means that the company’s sales could fall by 33% before it would be operating at a loss.

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