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

A firm has sales of Rs 8,00,000, variable costs of Rs 4,80,000 and fixed costs of Rs 1,60,000. 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 cost Rs 1,60,000 divided by 40% P/V ratio). Actual sales of Rs 8,00,000 exceed this by Rs 4,00,000, which is half of actual sales.

  1. A25%Correct
  2. B50%
  3. C20%
  4. D40%

Explanation

P/V ratio = (8,00,000 - 4,80,000)/8,00,000 = 40%. Break-even sales = 1,60,000/0.40 = Rs 4,00,000. Margin of safety = 8,00,000 - 4,00,000 = Rs 4,00,000, which is 50% of sales... recheck: profit = 3,20,000 - 1,60,000 = 1,60,000; margin of safety = profit/PV = 1,60,000/0.40 = 4,00,000, i.e. 50%.

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