CA Intermediate · Cost and Management Accounting · Marginal Costing
Mehta Appliances has sales of Rs 10,00,000, variable costs of Rs 6,00,000 and fixed costs of Rs 2,00,000. The management wants to know the margin of safety ratio. What is it?
The margin of safety ratio is 50 percent. The P/V ratio is 40 percent, so break-even sales are Rs 5,00,000. Actual sales exceed this by Rs 5,00,000, which is half of actual sales of Rs 10,00,000.
- A50%Correct
- B40%
- C60%
- D20%
Explanation
P/V ratio = (10,00,000 - 6,00,000)/10,00,000 = 40%. Break-even sales = 2,00,000/0.40 = Rs 5,00,000. Margin of safety = 10,00,000 - 5,00,000 = Rs 5,00,000, which is 50% of sales. Using profit/sales (20%) is wrong because profit is Rs 2,00,000, and that ratio is not the margin of safety.
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