CA Intermediate · Cost and Management Accounting · Marginal Costing
Ganga Foods has sales of ₹12,00,000, variable costs of ₹7,20,000 and fixed costs of ₹2,40,000. What is its margin of safety in rupees?
The margin of safety is ₹6,00,000. The P/V ratio is 40%, so break-even sales are ₹2,40,000 divided by 0.40, which is ₹6,00,000. Subtracting this from actual sales of ₹12,00,000 gives the margin of safety of ₹6,00,000, which equals profit divided by P/V ratio.
- A₹4,00,000
- B₹6,00,000
- C₹8,00,000Correct
- D₹2,40,000
Explanation
P/V ratio = (12,00,000 - 7,20,000)/12,00,000 = 40%. Break-even sales = 2,40,000/0.40 = ₹6,00,000. Margin of safety = 12,00,000 - 6,00,000 = ₹6,00,000. Check: profit = 4,80,000 - 2,40,000 = 2,40,000, and 2,40,000/0.40 = ₹6,00,000. So the correct option is ₹6,00,000, not ₹8,00,000.
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