CA Intermediate · Cost and Management Accounting · Marginal Costing
Sundaram Pumps has sales of Rs 12,00,000, variable costs of Rs 7,20,000 and fixed costs of Rs 3,00,000. What is its margin of safety ratio?
The margin of safety ratio is 37.5 percent. Break-even sales are Rs 7,50,000, so the margin of safety is Rs 4,50,000 on sales of Rs 12,00,000, which equals 37.5 percent of sales.
- A25%Correct
- B37.5%
- C62.5%
- D40%
Explanation
Contribution = 12,00,000-7,20,000 = 4,80,000; P/V = 40%. BEP sales = 3,00,000/0.40 = 7,50,000. Margin of safety = 12,00,000-7,50,000 = 4,50,000, i.e. 37.5% of sales. Check: profit 1,80,000 / contribution 4,80,000 = 37.5%.
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