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CMA Intermediate · Management Accounting · Applications of Marginal Costing in Short Term Decision Making

Mehta Pens has a P/V ratio of 40% and break-even sales of ₹5,00,000. What is the profit when sales are ₹8,00,000?

Profit is ₹1,20,000. Fixed costs equal break-even sales times the P/V ratio, which is ₹2,00,000. Contribution on ₹8,00,000 sales is ₹3,20,000, and subtracting fixed costs leaves ₹1,20,000.

  1. A₹1,20,000Correct
  2. B₹3,20,000
  3. C₹2,00,000
  4. D₹1,00,000

Explanation

Fixed costs = 5,00,000 x 40% = ₹2,00,000. Contribution at 8,00,000 sales = 3,20,000. Profit = 3,20,000 - 2,00,000 = ₹1,20,000. Equivalently, margin of safety 3,00,000 x 40% = 1,20,000.

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