CA Intermediate · Cost and Management Accounting · Marginal Costing
Arvind Engineering has a margin of safety of Rs 4,00,000, which is 25% of its actual sales. Its P/V ratio is 40%. What is its profit?
Profit is Rs 1,60,000. Profit equals margin of safety multiplied by the P/V ratio, so Rs 4,00,000 at 40% gives Rs 1,60,000. Total contribution of Rs 6,40,000 includes fixed costs and is therefore not the profit figure.
- ARs 1,60,000Correct
- BRs 2,40,000
- CRs 6,40,000
- DRs 4,00,000
Explanation
Profit = Margin of safety x P/V ratio = 4,00,000 x 40% = Rs 1,60,000. Check: actual sales = 16,00,000, break-even sales = 12,00,000, fixed cost = 12,00,000 x 40% = 4,80,000; contribution = 6,40,000; profit = 6,40,000 - 4,80,000 = 1,60,000. Rs 6,40,000 is total contribution, not profit.
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