CA Intermediate · Cost and Management Accounting · Marginal Costing
Meera Industries has sales of ₹12,00,000, variable cost of ₹7,20,000 and fixed cost of ₹3,00,000. What is its margin of safety ratio (as a percentage of sales)?
The margin of safety ratio is 37.5%. The P/V ratio is 40%, so break-even sales are ₹7,50,000. Actual sales of ₹12,00,000 exceed this by ₹4,50,000, which is 37.5% of sales. Equivalently, profit divided by contribution gives the same value.
- A37.5%Correct
- B25%
- C62.5%
- D40%
Explanation
Contribution = 12,00,000 - 7,20,000 = 4,80,000; P/V ratio = 40%. Break-even sales = 3,00,000 / 0.40 = 7,50,000. Margin of safety = 12,00,000 - 7,50,000 = 4,50,000, which is 37.5% of sales. Check: profit 1,80,000 / contribution 4,80,000 = 37.5%. 62.5% is the break-even sales ratio, not margin of safety.
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