CMA Foundation · Fundamentals of Financial and Cost Accounting · Application of Cost Accounting for Business Decisions
A company has sales of ₹5,00,000, variable costs of ₹3,00,000 and fixed costs of ₹1,20,000. What is its margin of safety as a percentage of sales?
The margin of safety is 40% of sales. The P/V ratio is 40%, so break-even sales are ₹3,00,000 (₹1,20,000 divided by 0.40). Actual sales exceed this by ₹2,00,000, which is 40% of ₹5,00,000.
- A40%
- B20%Correct
- C24%
- D60%
Explanation
P/V ratio = (5,00,000 - 3,00,000)/5,00,000 = 40%. Break-even sales = 1,20,000/0.40 = ₹3,00,000. Margin of safety = 5,00,000 - 3,00,000 = ₹2,00,000, which is 40% of sales. Check: profit 80,000 / contribution ratio 40% = 2,00,000.
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