CA Intermediate · Cost and Management Accounting · Marginal Costing
Tarun Foods has a margin of safety of Rs 3,00,000, which is 25% of its actual sales. Its profit is Rs 1,20,000. What is the fixed cost (in Rs)?
Fixed cost is Rs 3,60,000. Actual sales are Rs 12,00,000, the P/V ratio is 40 percent from profit divided by margin of safety, so contribution is Rs 4,80,000. Subtracting profit of Rs 1,20,000 from contribution leaves fixed cost of Rs 3,60,000.
- ARs 2,40,000
- BRs 3,60,000Correct
- CRs 1,20,000
- DRs 4,80,000
Explanation
Actual sales = 3,00,000/0.25 = 12,00,000. Profit = margin of safety x P/V ratio, so P/V = 1,20,000/3,00,000 = 40%. Contribution = 12,00,000 x 0.40 = 4,80,000. Fixed cost = 4,80,000 - 1,20,000 = Rs 3,60,000. Check: break-even sales = 9,00,000, and 12,00,000 - 9,00,000 = 3,00,000, which matches. Rs 4,80,000 is the contribution, not the fixed cost.
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