Profit/Volume Ratio (P/V Ratio)

Profit/Volume Ratio (P/V Ratio)

P/V ratio is a valid ratio which is useful for further analysis. The different formulae for the P/V ratio are as follows:



P/V ratio =

Contribution
Sales

Sales ? Variable costs
=
Sales


The relationship between BEP and P/V ratio is as follows:



BEP =

Fixed cost
P/V ratio


The following formula helps us find the M.S. using the P/V ratio:
M.S. = Profit
P/V ratio

EXAMPLE 1 Consider the following data of a company for the year 1997:
Sales = Rs. 1,20,000
Fixed cost = Rs. 25,000
Variable cost = Rs. 45,000
Find the following: (a) Contribution
(b) Profit (c) BEP (d) M.S.

Solution

(a) Contribution = Sales – Variable costs
= Rs. 1,20,000 – Rs. 45,000
= Rs. 75,000

(b) Profit = Contribution – Fixed cost
= Rs. 75,000 – Rs. 25,000
= Rs. 50,000
EXAMPLE 2 Consider the following data of a company for the year 1998:

Sales = Rs. 80,000
Fixed cost = Rs. 15,000
Variable cost = 35,000
Find the following:
(a) Contribution
(b) Profit
(c) BEP
(d) M.S.


Solution

(a) Contribution = Sales – Variable costs
= Rs. 80,000 – Rs. 35,000
= Rs. 45,000

(b) Profit = Contribution – Fixed cost
= Rs. 45,000 – Rs. 15,000
= Rs. 30,000