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CMA Intermediate · Management Accounting · Applications of Marginal Costing in Short Term Decision Making

Arjun Engineering has a P/V ratio of 40% and fixed costs of ₹6,00,000. The company wants a profit of ₹2,00,000. What sales value is required?

Required sales are ₹20,00,000. The contribution needed is fixed cost ₹6,00,000 plus target profit ₹2,00,000, which is ₹8,00,000, and dividing this by the 40% P/V ratio gives the sales value.

  1. A₹15,00,000
  2. B₹20,00,000Correct
  3. C₹5,00,000
  4. D₹8,00,000

Explanation

Required contribution = fixed cost + target profit = 6,00,000 + 2,00,000 = 8,00,000. Sales = 8,00,000 / 0.40 = ₹20,00,000. Check: 40% of 20,00,000 = 8,00,000, less 6,00,000 gives 2,00,000 profit. ₹15,00,000 is the break-even sales only.

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