Question

The Margin of safety can be increased by __________.

• A. Decreasing selling price
• B. Decreasing production
• C. Increasing fixed costs
• D. Decreasing variable costs

Answer 1

The correct option is D Decreasing variable costs

Margin of safety is the level of sales over and above the break even sales.

Break even sales is having direct correlation with selling price and variable cost.

If variable cost decreases, break even level will improve and this gives more safety to the organization as margin of safety will also improve.

Example:

Case 1 Case 2

Selling Price Per unit Rs.10 Rs.10

Variable cost Per unit Rs.5 Rs.4

Contribution Rs.5 Rs.6

Fixed Cost Rs.3000 Rs.3000

Break Even Point = Fixed Cost 3000/5 3000/6

Contribution

Break Even Point in units = 600 500

Break Even Point in Rs. 6000 5000

Margin of Safety= Actual Sales-Break Even sales

10000-6000 10000-5000

=4000 =5000

It is evident that Margin of Safety increases if variable cost decreases.