CMA Foundation · Fundamentals of Financial and Cost Accounting · Application of Cost Accounting for Business Decisions
A firm has sales of ₹8,00,000, variable costs of ₹4,80,000 and fixed costs of ₹2,00,000. What is the margin of safety as a percentage of sales?
The margin of safety is 37.5% of sales. The P/V ratio is 40%, so break-even sales are ₹5,00,000 (fixed costs ₹2,00,000 divided by 0.40). Actual sales exceed this by ₹3,00,000, which is 37.5% of ₹8,00,000.
- A25%Correct
- B37.5%
- C62.5%
- D40%
Explanation
P/V ratio = (8,00,000 - 4,80,000)/8,00,000 = 40%. Break-even sales = 2,00,000/0.40 = ₹5,00,000. Margin of safety = 3,00,000/8,00,000 = 37.5%, so the key is 37.5%.
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