Question

Lake Co. has just increased its direct labor wage rates. All other budgeted costs and revenues were unchanged. How did this increase affect Lake’s budgeted breakeven point and budgeted margin of safety?

Answer 1

Budgeted break-even point will increase while margin of safety will decrease.

Step-by-step explanation:

Lake Co. increased direct labor wage rates which is a variable cost. Contribution is computed as sales less variable cost. increase in variable cost will decrease contribution.

Break-even point is calculated by dividing fixed expenses by contribution. As such, as contribution decreases, break-even point will increase. So, there will be an increase in budgeted break-even point with the increase in direct labor wage rate.

Margin of safety is sales level less break-even point. So as break-even point increases, margin of safety will decrease since there is no change in sales.