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CA Intermediate · Cost and Management Accounting · Marginal Costing

Arjun Ltd has sales of Rs 12,00,000, a P/V ratio of 30% and fixed costs of Rs 2,40,000. What is its margin of safety in rupees?

Margin of safety is Rs 4,00,000. Break-even sales equal fixed costs of Rs 2,40,000 divided by the 30 percent P/V ratio, which is Rs 8,00,000. Subtracting this from actual sales of Rs 12,00,000 gives the cushion by which sales can fall before losses begin.

  1. ARs 4,00,000Correct
  2. BRs 8,00,000
  3. CRs 3,60,000
  4. DRs 9,60,000

Explanation

Break-even sales = 2,40,000 / 0.30 = Rs 8,00,000. Margin of safety = 12,00,000 - 8,00,000 = Rs 4,00,000. Check: profit = 12,00,000 x 0.30 - 2,40,000 = 1,20,000, and 1,20,000/0.30 = 4,00,000. Rs 8,00,000 is the break-even sales, not the margin.

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