Study Guide · Commerce

P/V Ratio (Profit Volume Ratio) Formula

The P/V Ratio (Profit Volume Ratio), also known as the Contribution Margin Ratio, is a critical formula in Marginal Costing and Management Accounting. It measures the relationship between Contribution and Sales.

Question (Click to Flip)

If Sales = ₹100,000 and Variable Cost = ₹60,000, what is the P/V Ratio?

Answer

Contribution = Sales - VC = 100,000 - 60,000 = 40,000. P/V Ratio = (40,000 / 100,000) × 100 = 40%.

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Key Facts

The P/V ratio remains constant at all levels of output (assuming selling price and variable cost per unit do not change). It is not affected by changes in fixed costs.

The Primary Formula

P/V Ratio = (Contribution / Sales) × 100

(Since Contribution = Sales - Variable Cost) We can also write it as: P/V Ratio = (Sales - Variable Cost) / Sales × 100

Alternative Formulas

Depending on the data available in the question, you can use these variations:

1. When Fixed Cost and Profit are given: Since Contribution = Fixed Cost + Profit P/V Ratio = (Fixed Cost + Profit) / Sales × 100

2. When comparing data from two different periods: P/V Ratio = (Change in Profit / Change in Sales) × 100

This is the most frequently tested formula in CA/CMA and B.Com exams.

Why is P/V Ratio Important?

Higher is better: A high P/V ratio means a small increase in sales will lead to a large increase in profit. A low P/V ratio indicates low profitability.
Break-Even Point: P/V ratio is required to calculate the Break-Even Point (BEP) in sales value. BEP (in Value) = Fixed Cost / P/V Ratio

Questions and Answers

If Sales = ₹100,000 and Variable Cost = ₹60,000, what is the P/V Ratio?+

Contribution = Sales - VC = 100,000 - 60,000 = 40,000. P/V Ratio = (40,000 / 100,000) × 100 = **40%**.

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