Introduction of the term P-V ratio

Question

Give a brief introduction of the term P/V ratio and Contribution?

Answer 1

P/V Ratio (or Profit Volume Ratio) is the ratio of contribution to sales that points out the contribution earned with respect to one rupee of sales. It as well evaluates the rate of change of profit because of change in volume of sales. Its essential property is that if per unit sales price and variable cost are steady then P/V Ratio will be steady at all the levels of activities. A change is fixed cost does not influence P/V Ratio. It is evaluated as under:

(Contribution * 100) / Sales

(Change in profits * 100) / (Change in sales)

A high P/V Ratio points out that a small raise in sales without raise in fixed costs will result in higher profits. A low P/V ratio that points to low profitability can be developed by rising selling price, falling marginal costs or selling products having high P/V ratio.

Contribution is the differentiation between variable cost and sales revenue (or also known as variable cost). Variable cost is the significant cost in deciding profitability as fixed costs are deny by marginal costing.

It can be stated in two ways:

- Sales Revenue – Variable Cost

- Fixed Cost + Profit

The condition generating higher contribution is treated as a profitable condition.