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AT CERTAIN LEVEL OF BUDGETED SALES LEVEL,IF THERE IS AN INCREASE IN 12% IN SELLING PRICE AND VARIABLE COST. WHAT EFFECT WILL BE ON MARGIN OF SAFETY?
1.NO EFFECT
2.FALL
3.INCREASE
4.DATA IN THE QUESTION IS NOT SUFFICIENTPLEASE HELP SOMEONE HAD FACE IN CBE! AND GIVE SOLID REASON
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With increase in selling price ,Margin of safety is also increased ,there is direct relationship b/w selliong price nd margin of safety………………
Nd with increase in variable cost, Margin of safety go to decreased,bcz there is indirect relationship……………
in ur question selling price nd variable cost both are increased by 12%……………..now the effect of increase in selling price is to increase margin of safety nd effect of increase in variable cost is to decrease margin of safety there is confusion but i make it clear……………………selling price is greater than cost………….effect of increased selling price is more than effect of increased variable cost……………..so margin of safety is to be increased………..
so ur ans is 3. increase…………..Jaswinder is correct.
Here is another way of explaining it 🙂
Margin of safety is the difference between budget and breakeven.
Breakeven is fixed costs / contribution per unit.
If sales and variable costs both increase by 12%, then contribution per unit also increases by 12%.
If contribution per unit is higher, then breakeven is lower (because you are dividing fixed costs by a higher number.)
If breakeven is lower then there is a bigger difference between budget and breakeven – a bigger margin of safety.
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I’m New here, please any one help me for the exam tip F2. I just failed CBE exam.
Thank you
Su
Selling price will increase, and so to will VC = Contribution will therefore increase (because sales price increases by more than VC, and remember contribution is sales prices less all VC) = BE point will subsequently decrease (look at the BE unit formula) and hence your MOS will increase (Look at your MOS formula).
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