CA Intermediate · Cost and Management Accounting · Marginal Costing
Ravi Auto Components makes a part with selling price ₹80, variable cost ₹50 and fixed costs ₹3,00,000. Its margin of safety is 40% of actual sales at current volume. What is the current profit?
The current profit is ₹2,00,000. Break-even units are 10,000, which represent 60 percent of actual volume, so actual volume is about 16,667 units. Contribution is ₹5,00,000 at ₹30 per unit, and subtracting fixed costs of ₹3,00,000 leaves ₹2,00,000.
- A₹1,20,000
- B₹2,00,000Correct
- C₹1,50,000
- D₹3,00,000
Explanation
Contribution per unit is ₹30, break-even units = 3,00,000/30 = 10,000. Break-even is 60% of actual sales, so actual = 10,000/0.6 = 16,667 units approx. Better use P/V: profit = margin of safety x P/V ratio. P/V = 30/80 = 37.5%. Actual sales = break-even sales ₹8,00,000 / 0.6 = ₹13,33,333; margin of safety = ₹5,33,333; profit = 5,33,333 x 0.375 = ₹2,00,000. Check: units 16,667 x 30 = 5,00,000 less 3,00,000 = 2,00,000.
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