Page 70 - DCOM206_COST_ACCOUNTING_II

Unit 4: Cost Volume Profit Analysis

4.3 Effect of Certain Changes on Profit-Volume Ratio Notes

The profit-volume ratio, popularly known as the P/V ratio, expresses the relation of contribution
to sales. This ratio is also known as contribution to sales or the marginal income ratio.

Note The profit-volume ratio is often expressed as a percentage and is a guide to the
profitability of a business firm. Normally, this ratio is expressed in percentage. P/V ratio
is very important in decision-making. It can be used for the calculation of BEP and in
problems regarding profit sales relationship.

The formula for computing the P/V ratio is given below:
Contribution C
P/V Ratio =  100 OR =  100
Sales S
Contributionperunit Cperunit
P/V Ratio =  100 OR =  100
Sellingpriceperunit SP perunit
In addition to above, the P/V ratio can be expressed in the following further forms:

Fixedcost+Profit F P

P/V Ratio = ×100 OR =  100
Sales S

Sales-Variable cost S V
P/V Ratio = ×100 OR =  100
Sales S
Change inprofit(In two periods)
P/V Ratio =  100
Change insales(In two periods)
4.3.1 Improvement of P/V Ratio

Profit-volume ratio is the function of sales and variable costs. Therefore, an improvement of the
ratio will mean increasing the gap between sales and variable costs. This can be done by:
(i) Increasing selling price,
(ii) Reducing or decreasing variable costs, and

(iii) Altering sales mixture, i.e., product having low P/V ratio will be substituted by a product
with a higher ratio.

Uses of Profit-Volume Ratio

The profit-volume ratio is usually used to ascertain the following:
(i) To determine the variable cost for any volume of sales,

(ii) To determine the volume of sales required to earn a given profit,
(iii) To fix the selling prices,
(iv) To locate the break-even point and margin of safety,
(v) To determine the volume of sales required for maintaining the present level of profit, if
selling price is reduced, and
(vi) To compute the profit when margin of safety is given.

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