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CMA Foundation · Fundamentals of Financial and Cost Accounting · Application of Cost Accounting for Business Decisions

Sharma Traders has a P/V ratio of 40% and fixed costs of Rs 1,20,000. What sales value is needed to earn a profit of Rs 30,000?

Sales of Rs 3,75,000 are needed. To earn the target profit, contribution must cover fixed costs of Rs 1,20,000 plus profit of Rs 30,000, totalling Rs 1,50,000. Dividing this by the 40% P/V ratio gives the required sales value.

  1. ARs 3,00,000
  2. BRs 3,75,000Correct
  3. CRs 4,50,000
  4. DRs 3,00,000 less Rs 30,000, i.e. Rs 2,70,000

Explanation

Required sales = (Fixed cost + Desired profit) / P/V ratio = (1,20,000 + 30,000) / 0.40 = Rs 3,75,000. Rs 3,00,000 is the break-even sales (1,20,000/0.40) and ignores the target profit.

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