If variable costs decrease and all other factors remain the

If variable costs? decrease, and all other factors remain the? same, the margin of safety will become larger.

True or False?

The Correct Answer would be True

Margin of Safety = Actual Sales in dollars - Break even point in dollars

Where Break even point dollars = Sales Price per unit * Break even point in Units

Break even point in Units = Fixed Cost / (Sales Price per unit - Variable Cost per unit)

Now let us understand our answer with an example

Sales Price per unit = $40

Variable Cost per unit = $20

Fixed Cost is $7,500

Number of Units = 500

Step 1 - Break even point in Units = $7,500 / ($40 - $20)

Break even point in Units = 375

Step 2 - Break even point dollars = $40 * 375

= $15,000

Step 3 - Margin of Safety

= (500 * 40) - $15,000

= $5000

All the data of the above example remaining same, only variable cost decreases to $15 per unit

Step 1 - Break even point in Units = $7,500 / ($40 - $15)

Break even point in Units = 300

Step 2 - Break even point dollars = $40 * 300

= $12,000

Step 3 - Margin of Safety

= (500 * 40) - $12,000

= $8000

The margin of safety increased from $5000 to $8000 due to reduction in variable cost.

Thus it can be concluded that if variable costs? decrease, and all other factors remain the? same, the margin of safety will become larger.