CMA Foundation · Fundamentals of Financial and Cost Accounting · Application of Cost Accounting for Business Decisions
Verma Ltd. has a P/V ratio of 40% and fixed costs of ₹6,00,000. Actual sales are ₹20,00,000. What is the margin of safety in rupees?
The margin of safety is ₹5,00,000. Break-even sales are fixed costs divided by the P/V ratio, ₹6,00,000/0.40 = ₹15,00,000. Subtracting this from actual sales of ₹20,00,000 gives the margin of safety.
- A₹5,00,000Correct
- B₹15,00,000
- C₹8,00,000
- D₹2,00,000
Explanation
Break-even sales = 6,00,000/0.40 = ₹15,00,000. Margin of safety = 20,00,000 - 15,00,000 = ₹5,00,000. The figure ₹15,00,000 is the break-even sales, not the margin of safety.
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