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.

You are watching: P/v ratio

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

Illustration 1:

Find out:

Solution:

Proof:

Illustration 2:

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?