ABC Ltd has total sales of Rs 20 lakhs in a year with a P V ratio of 40 If the fixed cost is Rs 5 la...........

Costing ( Revenue Account ) Basics of Cost Control and Analysis

ABC Ltd has total sales of Rs. 20 lakhs in a year with a P/V ratio of 40%. If the fixed cost is Rs. 5 lakhs, the margin of safety is:

Rs. 5,00,000

Rs. 2,50,000

Rs. 10,00,000

Rs. 7,50,000

- P/V Ratio (Profit/Volume Ratio): It's a measure of profitability. Here, it is 40%, meaning 40% of sales contribute to profits.

- Sales: Total sales are Rs. 20 lakhs.

- Contribution: With a P/V ratio of 40%, the contribution margin is Rs. 8 lakhs (40% of Rs. 20 lakhs).

- Fixed Cost: This is Rs. 5 lakhs and doesn't change with sales volume.

- Profit: Profit = Contribution - Fixed Cost = Rs. 8 lakhs - Rs. 5 lakhs = Rs. 3 lakhs.

- Margin of Safety (MOS): It's the amount by which sales can drop before reaching the break-even point. MOS = Profit / P/V Ratio.

- Calculation: MOS = Rs. 3 lakhs / 0.40 = Rs. 7.5 lakhs.

Option 4: Rs. 7,50,000 is correct.

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