A decrease in variable costs will reduce the margin of safety.

Question

Quizplus · Accepted Answer

A decrease in variable costs will increase the margin of safety. This is because the margin of safety is the amount by which actual sales exceed the break-even point, which is determined by dividing fixed costs by the contribution margin (sales revenue minus variable costs). If variable costs decrease, the contribution margin will increase, which means the break-even point will be reached at a lower sales volume. As a result, the margin of safety will increase.

A Decrease in Variable Costs Will Reduce the Margin of Safety