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PROFIT/VOLUME RATIO (PIV RATIO) PIV ratio is a valid ratio which is useful for further analysis
PROFIT/VOLUME RATIO (PIV RATIO) PIV ratio is a valid ratio which is useful for further analysis. The different formulae for the P/V ratio are as follows: P/V ratio = Contribution Sales Sales - Variable costs Sales The relationship between BEP and P/V ratio is as follows: BEP = Fixed cost P/V ratio The following formula helps us find the M.S. using the P/V ratio: M.S. = Profit P/V ratio EXAMPLE 1.2 Consider the following data of a company for the year 1997: Sales = Rs. 1,20,000 Fixed cost = Rs. 25,000 Variable cost = Rs. 45,000 Find the following: (a) Contribution (b) Profit (c) BEP (d) M.S. Krishna Company Ltd. has the following details: Fixed cost = Rs. 40,00,000 Variable cost per unit = Rs. 300 Selling price per unit = Rs. 500 Find (a) The break-even sales quantity (b) The break-even sales (c) If the actual production quantity is 1,20,000, find the following: (i) Contribution (ii) Margin of safety by all methods Consider the following data of a company for the year 1998. Sales = Rs. 2,40,000 Fixed cost = Rs. 50,000 Variable cost = Rs. 75,000 Find the following: a) Contribution (b) Profit (c) BEP (d) Margin of safety
Expert Solution
Profit volume ratio is nothing but rate of change of profit due to change in volume of sales.it helps to calculate profitability on the basis of revenue earned from sales. We use both fixed cost and variable cost to calculate the ratio. If profit/volume ratio is high then the profit margin is also high and if profit/volume ratio is low then the profit margin is also low.
Already formula is given
P/v = Contribution/Sales
Contribution = Sales - variable cost
Example 1.2
Consider the following data of a company for the year 1997:
In the question they have given
Sales = Rs.120, 000 (revenue from selling output, Sales = price per unit * total output)
Fixed cost = Rs.25, 000 (Cost of fixed factors used in proportion)
Variable cost = Rs.45, 000 (Cost of variable factors used in proportion)
a) Contribution
Contribution = Sales - variable cost
= 12,0000 – 45,000
= 75,000
b) Profit
Profit is reward for an entrepreneur for taking risk in business and making combination of various factors of production. It can be calculated from revenue and cost.
Profit = Revenue – cost
= revenue from sales – (fixed cost + variable cost)
= 120,000 – (25,000+45,000)
= 120,000 – 70,000
= 50,000
c) BEP – Break-even Point
It is an accounting term which tells the situation where a company’s revenue and expenditure were equal within a specific period. This is also called as no profit no loss point.
BEP = 
P/v = Contribution/Sales
= 75,000/ 120,000
= 0.625
BEP =
= 25,000/0.625
= 40,000
d) M.S – margin of safety
It is nothing but difference between actual sales and break-even sales. It can be calculated by using
M.S =
= 50,000/0.625
= 80,000
Krishna Company Ltd has the following details:
Fixed cost = Rs. 40,00,000
Variable cost per unit = Rs.300
Selling price per unit = Rs.500
a) The Break-even sales quantity : It is nothing but break-even sales per unit
Break-even sales quantity = fixed cost / sales price per unit – variable cost per unit
= 40,00,000/500-300
= 40,00,000/ 200
= 20,000
b) The Break-even sales: It is the amount of revenue earned by a company at zero profit.
Break-even sales = Fixed cost / sales price per unit × Break-even sales quantity
= 40,00,000/ 500 × 20,000
= 40,00,000/10,000,000
= 0.4
c) If the actual price is 1,20,000 find the following :
(i) Contribution
Contribution = Sales - variable cost
Sales = quantity × Price = 12,0000 × 500 = 60,000,000
Variable cost = Variable cost per unit × quantity = 300 × 12,00,000 = 36,000,000
= 60,000,000 - 36,000,000
= 24,000,000
(ii) M.S – margin of safety
Profit = Revenue – cost
= revenue from sales = quantity × Price = 12,0000 × 500
= 60,000,000
Cost = (fixed cost + variable cost) 40,00,000+ (Variable cost = Variable cost per unit × quantity = 300 × 12,00,000 = 36,000,000)
= 76,000,000
Profit = Revenue – cost = 60,000,000 - 76,000,000 = 16,000,000
P/v = Contribution/Sales
= 24,000,000/60,000,000 = 0.4
M.S =
= 16,000,000/0.4
= 40,000,000
Consider the following data of a company for the year 1997:
Sales = Rs. 2, 40,000 (revenue from selling output, Sales = price per unit * total output)
Fixed cost = Rs.50, 000 (Cost of fixed factors used in proportion)
Variable cost = Rs.75, 000 (Cost of variable factors used in proportion)
a) Contribution
Contribution = Sales - variable cost
= 240,000 – 75,000
= 165,000
b) Profit
Profit is reward for an entrepreneur for taking risk in business and making combination of various factors of production. It can be calculated from revenue and cost.
Profit = Revenue – cost
= revenue from sales – (fixed cost + variable cost)
= 240,000 – (50,000+75,000)
= 240,000 – 125,000
= 115,000
c) BEP – Break-even Point
It is an accounting term which tells the situation where a company’s revenue and expenditure were equal within a specific period. This is also called as no profit no loss point.
BEP = 
P/v = Contribution/Sales
= 165,000/ 240,000
= 0.6875
BEP =
= 50,000/0.6875
= 72,727.27
d) M.S – margin of safety
It is nothing but difference between actual sales and break-even sales. It can be calculated by using
M.S =
= 115,000/0.6875
= 167,272.72
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