Chesterfield Corporation has been operating well above its break-even point.What will happen to Chesterfield's margin of safety if the variable cost per unit increases?
A) The break-even point would decrease, and the margin of safety would decrease.
B) The break-even point would decrease, and the margin of safety would increase.
C) The break-even point would increase, and the margin of safety would decrease.
D) The break-even point would increase, and the margin of safety would increase.

Question

Quizplus · Accepted Answer

If the variable cost per unit increases, it will increase the break-even point (point where revenues cover all costs). This means that the level of sales needed to cover all costs will be higher, hence the margin of safety (the amount by which sales can fall before the company incurs losses) will decrease.

Chesterfield Corporation Has Been Operating Well Above Its Break-Even Point