CMA Intermediate · Management Accounting · Marginal Costing (Management Accounting)
Kapoor Appliances has a P/V ratio of 40% and fixed costs of ₹3,00,000 per year. Sales in the year were ₹10,00,000. What is its margin of safety ratio (as a percentage of actual sales)?
The margin of safety ratio is 25%. Break-even sales are ₹3,00,000 divided by 40%, which is ₹7,50,000. Actual sales of ₹10,00,000 exceed this by ₹2,50,000, and that excess is 25% of actual sales.
- A25%Correct
- B40%
- C75%
- D60%
Explanation
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. Check: profit = 4,00,000 - 3,00,000 = 1,00,000; 1,00,000 / 4,00,000 = 25%, consistent. The 75% option is the break-even sales percentage, not the margin of safety.
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