P-V ratio and Contribution

Question

Give a brief introduction about 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 to 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 elementary property is that if per unit sales price and variable cost are continuous then P/V Ratio will be continuous at all the levels of activities. A change is fixed cost doesn’t affect P/V Ratio. It is evaluated as under:

(Contribution x 100) / Sales

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

A high P/V Ratio points to that a slight rise in sales without raise in fixed costs will outcome in higher profits. A low P/V ratio which points to low profitability can be progressed by rising selling price, falling marginal costs or selling products having high P/V ratio.

Contribution is the dissimilarity between sales revenue and variable cost (or as well termed as variable cost). Variable cost is the imperative cost in deciding profitability as fixed costs are ignored through marginal costing.

It can be articulated in two ways which are illustrated below:

- Sales Revenue – Variable Cost
- Fixed Cost + Profit

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