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CMA Intermediate · Management Accounting · Marginal Costing (Management Accounting)

Gupta Traders has a margin of safety of ₹2,00,000, which is 25% of its actual sales. Its P/V ratio is 40%. What is its profit?

Profit is ₹80,000. Profit equals the margin of safety multiplied by the P/V ratio, so ₹2,00,000 x 40% = ₹80,000. Checking: actual sales are ₹8,00,000, contribution is ₹3,20,000, break-even sales are ₹6,00,000 with fixed cost ₹2,40,000, leaving ₹80,000.

  1. A₹80,000Correct
  2. B₹1,20,000
  3. C₹3,20,000
  4. D₹60,000

Explanation

Profit = margin of safety x P/V ratio = 2,00,000 x 40% = ₹80,000. Actual sales = 8,00,000, break-even sales = 6,00,000, fixed cost = 2,40,000; contribution 3,20,000 less 2,40,000 = 80,000. ₹3,20,000 is total contribution, not profit.

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