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The new management accountant of Feather Co wants to introduce cost-volume-profit (CVP) analysis. Which TWO of the following statements regarding cost-volume-profit analysis are true?
1.Changes in the contribution to sales ratio will be proportional to changes in the selling price 2. Increasing fixed costs by 10% will increase the break-even point by more than 10% 3.Increasing fixed costs will lower the margin of safety
4.The margin of safety depends on the sales budget and the break-even salesFound this question but found the answer very confusing, almost all statements seem to be generally true in some way.
1. Assuming variable cost remain constant its true
2. Increase in fixed cost increase bep
3. Reducing mos if safe levels remain same
4. Mos is the difference between budget or actual salesKindly help me out with the correct statements as i find all of them to be correct in their own way
2 & 3 are correct
Increasing fixed costs by 10% will increase the break-even point by more than 10%: This statement is true because the break-even point is calculated as fixed costs divided by the contribution margin ratio.
An increase in fixed costs will lead to a proportionally larger increase in the break-even point, especially if the contribution margin ratio remains constant.
Increasing fixed costs will lower the margin of safety: This statement is also true. The margin of safety is the difference between actual sales and break-even sales. If fixed costs increase, the break-even sales will increase, which can reduce the margin of safety if actual sales remain unchanged.Changes in the contribution to sales ratio will be proportional to changes in the selling price: This statement is not necessarily true. While changes in selling price can affect the contribution margin, the relationship is not always proportional, especially if variable costs also change.
The margin of safety depends on the sales budget and the break-even sales: This statement is misleading. While the margin of safety does relate to both actual sales and break-even sales, it is not directly dependent on the sales budget itself. The margin of safety is more about the relationship between actual sales and the break-even point.
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