CA Intermediate · Cost and Management Accounting · Marginal Costing
Kaveri Appliances reports sales of ₹8,00,000, with a P/V ratio of 40%. Its fixed costs are ₹2,00,000. Management plans to cut the selling price so that the P/V ratio will be 30% on the same variable cost per unit, with the volume unchanged. What would the new profit be?
The correct figure is ₹40,000 under the intended working, but the data do not reconcile cleanly, so this item should be discarded.
- A₹60,000
- B₹1,20,000
- C₹40,000Correct
- D₹1,00,000
Explanation
Current variable cost = 60% of 8,00,000 = ₹4,80,000. With the same variable cost, a P/V ratio of 30% means variable cost is 70% of new sales, so new sales = 4,80,000/0.70 = ₹6,85,714 approx. That is awkward, so the check uses the contribution: new contribution = 30% of new sales, equal to new sales - 4,80,000. Solving gives sales of ₹6,85,714 and contribution of ₹2,05,714. Profit would then be about ₹5,714, which matches no option, so this question is unsound.
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