The Profit/volume ratio, i m sorry is also called the ‘contribution ratio’ or ‘marginal ratio’, expresses the relation of contribution to sales and can be expressed together under:
P/V ratio = Contribution/Sales
Since donation = Sales – Variable price = Fixed price + Profit, P/V proportion can likewise be expressed as:
P/V proportion = Sales – change cost/Sales i.e. S – V/S
or, P/V ratio = Fixed expense + Profit/Sales i.e. F + P/S
or, P/V proportion = adjust in benefit or Contribution/Change in Sales
This ratio can also be shown in the form of portion by multiply by 100. Thus, if marketing price that a product is Rs. 20 and also variable cost is Rs. 15 every unit, then
P/V proportion = 20 – 15/20 × 100 = 5/20 × 100 = 25%
The P/V ratio, which develops the relationship between contribution and sales, is of an essential importance for examining the benefit of operations of a business. The reveals the result on benefit of changes in the volume.
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In the over example, because that every Rs. 100 sales, contribution of Rs. 25 is made in the direction of meeting the addressed expenses and then the profit comparison because that P/V ratios have the right to be make to find out i beg your pardon product, department or process is an ext profitable. Greater the P/V ratio, an ext will be the profit and lower the P/V ratio, lesser will be the profit. Thus, every management aims at raising the P/V ratio.
The ratio can be raised by boosting the contribution. This can be done by:
(i) raising the selling price every unit
(ii) to reduce the change or marginal cost.
(iii) changing the sales mixture and also selling more profitable products because that which the P/V ratio is higher.
See more: Which Of The Following Can Be Represented By A Discrete Random Variable S
The principle of P/V proportion is additionally useful to calculate the break-even point, the benefit at a given volume the sales, the sales volume required to knife a given (or desired) profit and the volume that sales forced to maintain the existing profits if the offering price is lessened by a mentioned percentage.
The formula because that the sales volumes required to knife a provided profit is:
P/V proportion = Contribution/Sales
or, P/V proportion = Fixed price + Profit/Sales
or, Sales = Fixed expense + Profit/P/V ratio = F + P/P/V ratio
Sale that a product quantities to 200 units per month at Rs. 10 per unit. Resolved overhead price is Rs. 400 every month and also variable expense is Rs. 6 per unit. Over there is a proposal to mitigate prices through 10 every cent. Calculation present and also future P/V ratio. How countless units must he sold to knife the present total profits?