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CS Executive · Corporate Accounting and Financial Management · Operational Approach to Financial Decision

Iyer Motors Ltd has a P/V ratio of 40% and fixed costs of Rs 4,00,000. Management wants a profit of Rs 2,00,000. What sales value is required?

Required sales are Rs 15,00,000. Fixed costs plus target profit total Rs 6,00,000, and dividing by the 40% P/V ratio gives Rs 15,00,000. Break-even sales alone would be Rs 10,00,000, which ignores the desired profit of Rs 2,00,000.

  1. ARs 10,00,000
  2. BRs 5,00,000
  3. CRs 15,00,000Correct
  4. DRs 6,00,000

Explanation

Required sales = (Fixed cost + desired profit)/P/V ratio = (4,00,000 + 2,00,000)/0.40 = Rs 15,00,000. Check: contribution 40% of 15,00,000 = 6,00,000; less fixed 4,00,000 gives profit 2,00,000. Rs 10,00,000 is just the break-even sales, ignoring the target profit.

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