CA Intermediate · Cost and Management Accounting · Marginal Costing
Sundaram Foods sells a product with a P/V ratio of 40%. Fixed costs are Rs 3,60,000 per year. In the current year its sales were Rs 12,00,000. What is its margin of safety in rupees?
The margin of safety is Rs 3,00,000. Break-even sales equal fixed costs of Rs 3,60,000 divided by the 40% P/V ratio, giving Rs 9,00,000. Subtracting this from actual sales of Rs 12,00,000 leaves the margin of safety of Rs 3,00,000.
- ARs 3,00,000Correct
- BRs 9,00,000
- CRs 4,80,000
- DRs 2,10,000
Explanation
Break-even sales = Fixed cost / P/V ratio = 3,60,000/0.40 = Rs 9,00,000. Margin of safety = actual sales - break-even sales = 12,00,000 - 9,00,000 = Rs 3,00,000. Check: profit = 12,00,000 x 40% - 3,60,000 = 1,20,000; profit/PV = 3,00,000. Rs 9,00,000 is the break-even sales, not the margin of safety.
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