CMA Foundation · Fundamentals of Financial and Cost Accounting · Application of Cost Accounting for Business Decisions
Mehta Ltd. has sales of ₹8,00,000, variable costs of ₹5,20,000 and fixed costs of ₹1,40,000. What is its margin of safety ratio?
The margin of safety ratio is 50%. Contribution is ₹2,80,000, giving a P/V ratio of 35%, so break-even sales are ₹4,00,000. Actual sales exceed this by ₹4,00,000, which is half of total sales.
- A50%Correct
- B25%
- C35%
- D45%
Explanation
Contribution = 8,00,000 - 5,20,000 = 2,80,000; P/V ratio = 35%. Break-even sales = 1,40,000/0.35 = 4,00,000. Margin of safety = 4,00,000, which is 50% of sales. The figure 25% would arise by wrongly using fixed cost over contribution incorrectly.
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