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

A firm's selling price is ₹120 per unit and its P/V ratio is 35%. Fixed costs are ₹2,10,000. What is the variable cost per unit and the sales value needed to earn zero profit?

Variable cost is ₹78 per unit and break-even sales are ₹6,00,000. A 35% P/V ratio gives contribution of ₹42 on ₹120, leaving ₹78 variable cost. Dividing fixed costs of ₹2,10,000 by 0.35 gives the break-even sales value.

  1. AVariable cost ₹78; break-even sales ₹6,00,000Correct
  2. BVariable cost ₹42; break-even sales ₹6,00,000
  3. CVariable cost ₹78; break-even sales ₹7,36,000
  4. DVariable cost ₹84; break-even sales ₹4,00,000

Explanation

Contribution per unit = 35% of 120 = ₹42, so variable cost = 120 - 42 = ₹78. Break-even sales = fixed cost / P/V ratio = 2,10,000 / 0.35 = ₹6,00,000. Option with ₹42 as variable cost confuses contribution with variable cost.

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