On January 1, 2020, Randolph Co. increased its direct labor wage rates. All other budgeted costs and revenues were unchanged. How did this increase affect Randolph's budgeted break-even point and budgeted margin of safety? (CPA adapted)

Budgeted Break-even Point Budgeted Margin of Safety
A. Increase Increase
B. Increase Decrease
C. Decrease Decrease
D. Decrease Increase
Multiple Choice

Option A

Option B

Option C

Option D

The answer is option B.

Explanation:

Break-even point is the point at which total revenue equals total cost. The point at which there is no profit or loss.

Break-even formula is:

Fixed cost/contribution margin

Where contribution margin is the sales per unit - variable cost per unit

Margin of safety is the difference between sales and break-even sales.

In the question, direct labor wage which is a variable cost has increased. This will make contribution margin to decrease, thereby increasing budgeted break even sales.

Sales remain the same, break even sales increase, this will make the margin of safety to decrease.

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