The Profit Volume ratio, usually written as the P/V ratio, is an important tool in cost accounting and break-even analysis. It shows the relationship between contribution and sales ā that is, how much of each rupee of sales is available as contribution towards covering fixed costs and earning profit. The P/V ratio is widely used to find the break-even point, the margin of safety and the profit at different levels of sales. A higher P/V ratio is better, because it means more contribution per rupee of sales.
P/V ratio shows the relationship between contribution and sales.
Formula: P/V Ratio = (Contribution / Sales) Ć 100.
Contribution = Sales ā Variable Cost.
P/V Ratio can also be found as (Change in Profit / Change in Sales) Ć 100.
Break-Even Point (in ā¹) = Fixed Cost / P/V Ratio.
A higher P/V ratio means higher profitability.
P/V ratio improves by raising prices, cutting variable costs or changing product mix.
The Profit Volume ratio is calculated as:
P/V Ratio = (Contribution / Sales) Ć 100
Where Contribution = Sales ā Variable Cost.
So the P/V ratio can also be written as: P/V Ratio = [(Sales ā Variable Cost) / Sales] Ć 100
Other useful forms: ā¢ P/V Ratio = (Change in Profit / Change in Sales) Ć 100 ā¢ P/V Ratio = (Contribution per unit / Selling price per unit) Ć 100
The P/V ratio is usually expressed as a percentage.
Example 1: Sales = ā¹2,00,000; Variable Cost = ā¹1,20,000. Contribution = Sales ā Variable Cost = 2,00,000 ā 1,20,000 = ā¹80,000. P/V Ratio = (80,000 / 2,00,000) Ć 100 = 40%.
Example 2 (using change in profit and sales): If sales increase from ā¹1,00,000 to ā¹1,50,000 and profit increases from ā¹10,000 to ā¹30,000: Change in profit = 30,000 ā 10,000 = ā¹20,000. Change in sales = 1,50,000 ā 1,00,000 = ā¹50,000. P/V Ratio = (20,000 / 50,000) Ć 100 = 40%.
The P/V ratio is used to find several important figures:
Break-Even Point (BEP): BEP (in ā¹) = Fixed Cost / P/V Ratio.
Contribution: Contribution = Sales Ć P/V Ratio.
Profit: Profit = (Sales Ć P/V Ratio) ā Fixed Cost.
Margin of Safety: Margin of Safety = Profit / P/V Ratio.
Importance: ā¢ A higher P/V ratio means more profit; a lower one means less. ā¢ It helps in deciding which product is more profitable. ā¢ It helps in fixing selling prices and planning sales targets.
The P/V ratio can be improved by increasing the selling price, reducing variable costs, or changing the product mix towards products with a higher P/V ratio.
The Profit Volume (P/V) ratio shows the relationship between contribution and sales ā how much of each rupee of sales is available as contribution to cover fixed costs and earn profit. It is calculated as (Contribution / Sales) Ć 100, where contribution is sales minus variable cost. It is mainly used in break-even analysis.
The P/V ratio is calculated as (Contribution / Sales) Ć 100, where Contribution = Sales ā Variable Cost. It can also be found as (Change in Profit / Change in Sales) Ć 100, or as (Contribution per unit / Selling price per unit) Ć 100. It is usually expressed as a percentage.
The break-even point in rupees is found using the formula: BEP = Fixed Cost / P/V Ratio. For example, if fixed cost is ā¹40,000 and the P/V ratio is 40% (0.40), the break-even sales = 40,000 / 0.40 = ā¹1,00,000. At this level of sales, there is neither profit nor loss.
The P/V ratio can be improved by: increasing the selling price of the product, reducing the variable cost per unit, or changing the sales mix in favour of products that have a higher P/V ratio. A higher P/V ratio means more contribution per rupee of sales and therefore more profit.
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