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CMA Foundation · Fundamentals of Financial and Cost Accounting · Application of Cost Accounting for Business Decisions

Kapoor Ltd has a P/V ratio of 40% and sales of Rs. 5,00,000. Fixed costs are Rs. 1,50,000. What is the profit, and what is the variable cost?

Profit is Rs. 50,000 and variable cost is Rs. 3,00,000. Contribution equals 40% of sales, i.e. Rs. 2,00,000. Variable cost is the remaining sales of Rs. 3,00,000, and subtracting fixed costs of Rs. 1,50,000 from contribution gives the profit.

  1. AProfit Rs. 50,000; variable cost Rs. 3,00,000Correct
  2. BProfit Rs. 50,000; variable cost Rs. 2,00,000
  3. CProfit Rs. 2,00,000; variable cost Rs. 3,00,000
  4. DProfit Rs. 3,50,000; variable cost Rs. 1,50,000

Explanation

Contribution = 40% of 5,00,000 = Rs. 2,00,000. Variable cost = sales - contribution = Rs. 3,00,000. Profit = 2,00,000 - 1,50,000 = Rs. 50,000. Rs. 2,00,000 as variable cost mistakes contribution for variable cost.

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