CS Executive · Corporate Accounting and Financial Management · Operational Approach to Financial Decision
Verma Foods Ltd has sales of Rs 10,00,000, variable costs of Rs 6,00,000 and fixed costs of Rs 2,00,000. What is its margin of safety as a percentage of sales?
The margin of safety is 50% of sales. The P/V ratio is 40%, so break-even sales are Rs 2,00,000 divided by 0.40, which is Rs 5,00,000. Actual sales exceed this by Rs 5,00,000, which is half of the Rs 10,00,000 sales.
- A20%
- B50%Correct
- C40%
- D60%
Explanation
P/V ratio = (10,00,000 - 6,00,000)/10,00,000 = 40%. Break-even sales = 2,00,000/0.40 = Rs 5,00,000. Margin of safety = 10,00,000 - 5,00,000 = Rs 5,00,000, which is 50% of sales. Using fixed cost over sales gives 20%, the wrong approach.
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