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CMA Foundation · Fundamentals of Financial and Cost Accounting · Application of Cost Accounting for Business Decisions

A company's sales are Rs 8,00,000, variable costs are Rs 5,00,000 and fixed costs are Rs 1,50,000. What is its margin of safety as a percentage of sales?

The margin of safety is 50% of sales. Break-even sales are Rs 4,00,000 (fixed costs of Rs 1,50,000 divided by the 37.5% P/V ratio), so actual sales of Rs 8,00,000 exceed break-even by Rs 4,00,000, which is half of sales.

  1. A25.00%
  2. B37.50%
  3. C50.00%Correct
  4. D62.50%

Explanation

Contribution = 3,00,000; P/V ratio = 37.5%. Break-even sales = 1,50,000/0.375 = Rs 4,00,000. Margin of safety = 8,00,000 - 4,00,000 = 4,00,000, which is 50% of sales. Profit/sales (18.75%) would be a wrong base.

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