CA Intermediate · Cost and Management Accounting · Marginal Costing
Gupta Brothers make a single product. Sales are ₹10,00,000, variable costs ₹6,00,000 and fixed costs ₹3,00,000. What is the margin of safety as a percentage of sales?
The margin of safety is 25% of sales. Break-even sales are ₹7,50,000 (fixed cost ₹3,00,000 divided by 40% P/V ratio), so the margin of safety is ₹2,50,000 out of ₹10,00,000 sales.
- A25%Correct
- B30%
- C10%
- D75%
Explanation
P/V ratio = (10,00,000 - 6,00,000)/10,00,000 = 40%. Break-even sales = 3,00,000/0.40 = ₹7,50,000. Margin of safety = 10,00,000 - 7,50,000 = ₹2,50,000, which is 25% of sales. Cross-check: profit 1,00,000 / contribution 4,00,000 = 25%. The 75% option is the break-even sales percentage, not the margin of safety.
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