Margin of safety decreases when break-even sales increase

Steps:

• Margin of safety (MOS) = actual sales - break-even (BE) sales; assumes sales volume constant.
• BE sales = fixed costs (FC) / contribution margin (CM) ratio, where CM ratio = (sales price - variable cost per unit) / sales price.
• Increasing FC raises BE sales; increasing variable cost per unit lowers CM ratio, raising BE sales.
• Option D raises both FC and variable cost, increasing BE sales and decreasing MOS.

Why D is correct:

• Both changes increase BE sales per the BE formula, reducing MOS by widening the gap between sales and BE point.

Why the others are wrong:

• A: Both changes decrease BE sales, increasing MOS.
• B: Decreasing variable cost lowers BE, offsetting FC increase; net effect unclear or increases MOS.
• C: Increasing variable cost raises BE, but FC decrease lowers it; net effect unclear or increases MOS.

Final answer: D