CMA Intermediate · Cost Accounting · Marginal Costing
Narmada Plastics has a P/V ratio of 40% and a margin of safety of ₹3,00,000, which is 25% of actual sales. What is its profit?
Profit is ₹1,20,000. Only the margin of safety sales earn pure profit because break-even sales just recover fixed costs. Multiplying the margin of safety of ₹3,00,000 by the 40 per cent P/V ratio gives the profit figure.
- A₹1,20,000Correct
- B₹3,00,000
- C₹4,80,000
- D₹2,40,000
Explanation
Profit = margin of safety x P/V ratio = 3,00,000 x 40% = ₹1,20,000. Actual sales = 12,00,000, break-even sales = 9,00,000, fixed cost = 3,60,000; contribution 4,80,000 - 3,60,000 = ₹1,20,000. The ₹4,80,000 option is total contribution, not profit.
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