# The Profit Volume (PV) Ratio is the ratio of Contribution over Sales.

It measures the Profitability of the firm and is one of the important ratios for computing profitabilty. The Contribution is the extra amount of sales over variable cost. Contribution is also Fixed cost plus profit. Profit = Sales - Variable Cost - Fixed Cost. Thus Contribution is: Profit + Fixed Cost = Sales - Variable Cost. Therefore PV Ratio = (Contribution/Sales)X100. (This as a percentage of sales) Profit/Volume Ratio: When the contribution from sales is expressed as a sales value percentage, then it is known as profit/volume ratio (or P/V ratio). The relationship between the contribution & sales is expressed by it. Sound ‘financial health’ of a company’s product is indicated by better P/V ratio. The change in profit due to change in volume is reflected by this is reflected by this ratio. If expressed on equal footing with sales, it will show how large the contribution will appear. If size of sales is \$ 100, then P/V ratio of 60% will mean that contribution is \$ 60. One important characteristic of P/V ratio is that at all levels of output it will remain constant because at various levels, variable cost as a proportion of sales remains constant.. When P/V ratio is considered in conjunction with margin of safety, it becomes particularly useful. P/V ratio can be referred by other terms like: (a) marginal income ratio, (b) contribution to sales ratio, & (c) variable profit ratio. P/V ratio may be expressed as: P/V ratio= Contribution / Sales = Sales – Variable cost Sales = 1- Variable cost Sales Or, P/V ratio = Fixed Cost + Profit Sales It is also possible to express the ratio in terms of percentage by multiplying by 100. Thus a relationship between the contribution & sales is established by the profit/volume ratio. Hence it might be better to call it as a Contribution/Sales ratio (or C/S ratio), though the term Profit/Volume ratio (P/V ratio) is now widely called.

3. For doing business analysis. the greater will be the contribution towards fixed costs & profit. by comparing the change in contribution to change in sales or by change in profit to change in sales. factories etc. companies. Advantages of P/V Ratio: Some of its uses are under mentioned: 1. By concentrating on those products by which highest contribution can be achieved. The higher the rate. Change in profit Change in Sales Improvement in P/V ratio should always be tried to be bought in by the management. an increase in contribution will mean increase in profit. it is possible to compute the ratio. thereby cutting the hours which may be required to complete each operation. However. Because it is assumed that the fixedcost will remain the same at different levels of output. The selling price increase. Thereby.Also. sales. but the risk that the volume of sales might be affected in involved in it. 4. By purchasing the latest machinery. 3. This ratio determines profitability of a line of product & also overall profitability of a number of products. Limitations of P/V Ratio: . turnover which may be required for a desired profit or to offset reduction in price or to meet increased expenditure. P/V ratio =Change in contribution Change in sales Or. 2. 2. an improvement in this ratio can be achieved by: 1. Improvement of P/V Ratio: By the following ways. a reduction in the variable cost per unit can be achieved. higher fixed costs such as depreciation & insurance might offset this reduction. the P/V ratio is an invaluable tool. in the hands of management. This ratio compares the profitability of different lines of products. profit at different levels of output. This ratio calculates break-even sales.

analysis has to be broadened. 3. Final decision cannot be taken by mere inspection of P/V ratio. The profitable products lines which might be emphasized & unprofitable product lines which might be re-evaluated for elimination. Thereby. The capital outlays that are required by the additional productive capacity & the additional fixed costs. About its product. Following are the limitations of the use of P/V ratio: 1. is a growing trend among managers. then a new break-even sales. Problem 1: A company produces a single article. (c) Sales to earn a profit of \$ 2000. (d) Profit at sales of \$ 12000. are not taken into consideration by the P/V ratio. Sales * P/V ratio = Contribution (a) P/V ratio = Contribution / Sales * 100 = [(40-24)/40] * 100 . the following cost data has been given: Selling price per unit Marginal cost per unit Fixed cost per annum \$ 40 \$ 24 \$ 1600 Calculate: (a) P/V ratio. for taking into consideration differential cost of the decision & opportunity costs etc. that are added. (e) If sales price is reduced by 10%. Sales (Sales –Variable Cost)/Sales = Fixed cost + Profit Or. Solution: We know that Sales – Variable cost = Fixed cost + Profit By multiplying & dividing left hand side by Sales Or. for the purpose of decision making. only the area that needs to be probed is indicated. it has been referred to as the questionable device. On excess of revenues over variable cost. 2.Using of P/V ratio for deciding the product-worthy additional sales efforts & productive capacity & host of other managerial exercises. Because only an indication regarding the relative profitability of the products or product lines is given by the P/V ratio. For this purpose. P/V ratio are good for forming impression & not for making decision provided other things are equal. the P/V ratio heavily leans on. (b) Break-even sales. can be suggested by the inspection of P/V ratio of the products. 4.

B. Sales * 40% = 1600 + 2000 Or.33% .\$24 = \$12 P/V ratio = Contribution / Sales = (12/36) *100 = 33. 12000 * 40% = 1600 + Profit Or. contribution is equal to fixed cost) Or.E.33% B.E.E. Or. Sales * 40% = 1600 Sales = 1600/40 Sales = \$ 4000 (or 200 units) (c) Sales to earn a profit of \$ 2000 Sales * P/V ratio = Fixed cost + Profit Or.S = 1600/33.= 16/40 * 100 = 40% (b) Break-even Sales = Sales * P/V ratio= Fixed cost Or. Or. if sales price is reduced by 10% New Sales price = \$40 .\$4 = \$36 Marginal cost = \$24 Contribution = \$36 . Profit = \$ 3200 (e) New Break-even sales. Sales = \$ 4500 (or 112.S * P/V ratio = Fixed Cost (at B. Sales = 1800/40% Or.P.5 units) (d) Profit at sales of \$ 12000 Sales * P/V ratio = Fixed cost + Profit Or.

Sales at BEP= Fixed cost/ P/V ratio Or. Labour cost \$ 12. & (d) If break-even point is to be brought down to 40% activity level. B. Calculate: (a) Activity level at Break-even point. (b) Number of units which need to be sold so that net income of 8% can be earned.Or.S = \$ 4800 Problem 2: Break-even point A company. The cost data are as under: Material cost \$ 15 per unit. \$ 50x – 35x = \$ 300000 + 8% of (\$ 50x) Or. x = 27273 units. which currently utilizing 80% capacity with a turnover of \$ 1600000 at \$ 50 per unit.50 per unit) .50 per unit. \$ 50x – 35x = \$ 300000 + 4x Or. Semi-variable cost (including variable cost of \$ 7. what will be the selling price per unit? Solution: (a) Activity level of break-even point Sales at BEP * P/V ratio = Fixed Cost Or. the number of units sold be x: Or.\$ 360000 Fixed cost \$ 180000 up to 80% level of output. (c) Activity level needed to earn a profit of \$ 190000: . (c) Activity level needed for earning a profit of \$ 190000.E. manufactures a product. Activity level of break-even point = (Fixed cost/ P/V ratio) / Selling Price = {\$ 300000/ (15/50)} / 50 = 2 0000 units = (20000 / 40000) * 100 = 50% (b) Let us assume that for earning net income of 8% of sales. beyond this an additional \$ 40000 will be incurred.

(d) Selling price per unit if break-even point is to be brought down to 40% (or 16000 units): Let us assume that selling price = X Activity level at BEP = 16000 16000 units = (Fixed cost / P/V ratio) / Selling price 16000 units = \$300000 * X_ * 1 X-35 X Or. Limitations of P/V Ratio: .Sales required to earn a profit of \$ 190000 = (Fixed cost + Desired profit) / contribution per unit.50+7.50) Contribution per unit \$ 50 35 15 (2) Number of units sold at 80% capacity = \$1600000/50 = 32000 units Maximum capacity = 32000/80% = 40000 units (3) Fixed cost element in semi-variable cost: Semi-variable cost Less: Variable cost 32000 units @ \$ 7. activity level needed to earn a profit of \$ 190000 = (353330/40000) * 100 = 88. 16000X -560000 = 300000 Or.33%. X = (560000+300000) / 16000 = \$ 53.75 Working Notes: (1) Selling price Variable cost (15+12. Required sales = \$ (300000 + 40000 + 190000) / 15 = 35333 units Thus.50 Fixed cost element \$ 360000 240000 120000 (4) Total fixed cost of 80% capacity = \$ 180000+ \$ 120000 = \$300000 Online Live Tutor Advantages of P/V Ratio.

Thus we have the following two formulas to calculate margin of safety: MOS = Budgeted Sales − Break-even Sales Budgeted Sales − Break-even Sales MOS = Budgeted Sales . Online Profit/Volume Ratio. it is best to calculate margin of safety in the form of a ratio. we have excellent tutors who can provide you with Homework Help.We have the best tutors in Economics in the industry. Our tutors can break down a complex Advantages of P/V Ratio. Our tutors have many years of industry experience and have had years of experience providing Profit/Volume Ratio. Improvement of P/V Ratio problems on which you need help and we will forward then to our tutors for review. Limitations of P/V Ratio concepts. Our tutors who provide Profit/Volume Ratio. Limitations of P/V Ratio tutoring and experience the quality yourself. Limitations of P/V Ratio problem into its sub parts and explain to you in detail how each step is performed. Improvement of P/V Ratio Homework Help. margin of safety is the extent by which actual or projected sales exceed the break-even sales. Please do send us the Profit/Volume Ratio. Improvement of P/V Ratio help are highly qualified. Improvement of P/V Ratio Homework problem and need help. Margin of Safety (MOS) In break-even analysis. It may be calculated simply as the difference between actual or projected sales and the break-even sales. Our tutors are highly qualified and hold advanced degrees. However. You will get one-to-one personalized attention through our online tutoring which will make learning fun and easy. Please do send us a request for Advantages of P/V Ratio. Improvement of P/V Ratio Help: If you are stuck with an Profit/Volume Ratio. This approach of breaking down a problem has been appreciated by majority of our students for learning Advantages of P/V Ratio.

It represents the amount of drop in sales which a company can tolerate.000 \$40. A drop in sales greater than margin of safety will cause net loss for the period.000 ÷ (\$40 .000 . the more the company can withstand fluctuations in sales. Higher the margin of safety. The margin of safety is a measure of risk.000 ÷ \$40 = 1.5% \$40 \$32 \$7.\$32) = 875 Budgeted Sales Units = \$40.000 Margin of Safety = (1000 − 875) ÷ 1.Margin of Safety can be expressed both in terms of sales units and currency units.000 = 12. Example Use the following information to calculate margin of safety: Sales Price per Unit Variable Cost per Unit Total Fixed Cost Budgeted Sales Solution Breakeven Sales Units = \$7.

and can be used as a measure of operating leverage. Contents • • • • • • • 1 Definition 2 Explanation 3 Applications 4 Examples o 4.1 Contribution Margin as a measure of efficiency in the operating room 5 See also 6 Notes 7 References Definition The Unit Contribution Margin (C) is Unit Revenue (Price. costs are linear in volume. It is a useful quantity in carrying out various calculations.Contribution margin From Wikipedia. Typically. P) minus Unit Variable Cost (V): . contribution margin is the marginal profit per unit sale. search Decomposing Sales as Contribution plus Variable Costs. the free encyclopedia Jump to: navigation. In cost-volume-profit analysis. low contribution margins are prevalent in the labour-intensive tertiary sector while high contribution margins are prevalent in the capital-intensive industrial sector. a form of management accounting. In the Cost-Volume-Profit Analysis model.

unit contribution margin is the amount each unit sale adds to profit: it's the slope of the Profit line. minus the Total Fixed Costs. Thus Profit is Unit Contribution times Number of Units. then the unit contribution margin is \$8. Cost-Volume-Profit Analysis (CVP): assuming the linear CVP model. Contribution margin can be thought of as the fraction of sales that contributes to the offset of fixed costs.The Contribution Margin Ratio is the percentage of Contribution over Total Revenue. which can be calculated from the unit contribution over unit price or total contribution over Total Revenue: For example. Explanation Profit and Loss as Contribution minus Fixed Costs. Alternatively. if the price is \$10 and the unit variable cost is \$2. The above formula is derived as follows: . and the contribution margin ratio is \$8/\$10 = 80%. the computation of Profit and Loss (Net Income) reduces as follows: where TC = TFC + TVC is Total Cost = Total Fixed Cost + Total Variable Cost and X is Number of Units.

and the Net Income (Profit and Loss) is Total Contribution Margin minus Total Fixed Costs: Applications Contribution arises in Cost-Volume-Profit Analysis. where it simplifies calculation of Net Income. one breaks down the revenue from a given sale into a part to cover the Unit Variable Cost. and about how to structure sales commissions or bonuses. Contribution margin analysis is a measure of operating leverage: it measures how growth in sales translates to growth in profits. . and especially break even analysis. about how to price a product or service. Given the contribution margin.From the perspective of the matching principle. and a part to offset against the Total Fixed Costs. Contribution is different than Gross Margin in that a contribution calculation seeks to separate out variable costs (included in the contribution calculation) from fixed costs (not included in the contribution calculation) on the basis of economic analysis of the nature of the expense whereas gross margin is determined using accounting standards. a manager can easily compute breakeven and target income sales. The contribution margin is computed by using a contribution income statement: a management accounting version of the income statement that has been reformatted to group together a business's fixed and variable costs. Breaking down Total Costs as: one breaks down Total Revenue as: Thus the Total Variable Costs offset. and make better decisions about whether to add or subtract a product line.

452 Less Variable Costs: Cost of Goods Sold \$ 230.770 Contribution Margin (34%) \$ 158.000 Total Fixed Costs \$ 96.934 Sales Commissions \$ 58.[2] Contribution margin is also one of the factors to judge whether a company has monopoly power in competition law.[2][3] Examples Here's an example of a contribution format income statement: Beta Sales Company Contribution Format Income Statement For Year Ended December 31. This means that.682 Less Fixed Costs: Advertising \$ 1.850 Depreciation \$ 13.250 Insurance \$ 5.[1] The contribution margin analysis is also applicable when the tax authority performs tax investigation.984 Total Variable Costs \$ 303. For example.600 Utilities \$ 17.852 Delivery Charges \$ 13. 201X Sales \$ 462. for every dollar of sales. after the costs that were directly related to the sales were subtracted.200 Rent \$ 9. Contribution format income statements can be drawn up with data from more than one year's income statements.400 Payroll Taxes \$ 8.101 Net Operating Income \$ 62. a production line with positive contribution margin should be kept even it causes negative total profit. 34 cents remained to contribute toward paying for the indirect (fixed) costs and later for profit.581 The Beta Company's contribution margin for the year was 34 percent. when the contribution margin offsets part of the fixed cost.Calculating the contribution margin is an excellent tool for managers to help determine whether to keep or drop certain aspects of the business. when a person is interested in tracking contribution margins . by identifying target interviewee who has unusual high contribution margin ratio then other companies in the same industry. However. it should be dropped if contribution margin is negative because the company would suffer from every unit it produces.801 Wages \$ 40. such as use of the Lerner Index test.

034 \$ 65.998 25% 26% 54% Sales Less Variable Costs: Cost of Goods Sold Sales Commissions Delivery Charges Total Variable Costs Contribution Margin percentage Although this shows only the top half of the contribution format income statement.an income statement that references only variable costs). FIGURE: Metric Measure for OR efficiencyMacario A. the statement indicates that perhaps prices for line A and line B products are too low.900 \$60. Metric Measures Excess Staffing Costs Start-time tardiness (mean tardiness for elective cases/day) Case cancellation rate Post Anesthesia Care Unit (PACU) admission delays (% workdays with at least one delay in PACU admission) Contribution Margin (mean) per operating room hour Operating Room Turnover Time (mean setup and cleanup turnover times for all cases) Prediction Bias (bias in case duration estimates per 8 hours of operating room time) 0 >10% >60 min >10% >20% <\$1.016 \$ 74. Are Your Hospital Operating Rooms "Efficient"? Anesthesiology 2006.000 \$ 89.000/hr 2.002 \$70.050 \$0 \$ 900 \$ 8. showing a breakdown of Beta's three main product lines Line A Line B Line C \$120.084 \$ 5.004 \$ 30.732 \$ 149.802 \$40.400 \$202. This is information that can't be gleaned from the regular income statements that an accountant routinely draws up each period.000/hr 25-40 min <25 min 5-15 min <5 min .over time.000/hr >40 min >15 min 1 5-10% 2 <5% 45-60 min <45 min 5-10% 10-20% <5% <10% \$1– >\$2.030 \$100. 105:237-40.668 \$ 53. Moreover. even though Beta gets more sales revenue from Line B(which is also an example of what is called Partial Contribution Margin . they can be drawn up for each product line or service. Here's an example.050 \$140. it's immediately apparent that Product Line C is Beta's most profitable one. Contribution Margin as a measure of efficiency in the operating room The following discussion focuses on Contribution Margin (mean) per operating room hour in the operating room and how it relates to operating room efficiency.004 \$18. It appears that Beta would do well by emphasizing Line C in its product mix. Perhaps even more usefully.

The angle formed at the right side of the break-even point indicates the profit area while that formed at the left side indicates the loss area. A study of angle of incidence. The contribution margin per hour of OR time is the hospital revenue generated by a surgical case. In other words. The size of the angle of incidence is indication of the quantum of profit or loss made by the firm at different output/sales levels. vary directly with the volume of cases performed. Variable costs. For example. A narrow angle also indicates that the variable cost as a proportion to sales is quite high and therefore very little has been left by way of contribution. break-even point and margin of safety can help the management in having a better understanding about profitability.Prolonged turnovers (%turnovers > 60 min) >25% 10-25% <10% A surgical suite can schedule itself efficiently but fail to have a positive contributution margin if many surgeons are slow. if the angel of incidence is narrow to the right side of the BEP it indicates that the quantum of profits made by the firm is also low. (i) (ii) the angle formed at the right side of the break-even point. less all the hospitalization variable labor and supply costs. such as implants. use too many instruments or expensive implants. the angle formed at the left side of the break-even point. This can be understood by taking the following four different situations: . stability and incidence of fixed and variable costs on the performance of the firm. Similarly. This is because fee-for-service hospitals have a positive contribution margin for almost all elective cases mostly due to a large percentage of OR costs being fixed. if it narrow to the left side of the BEP it indicates that the quantum of loss made by the firm is also low. These are all measured by the contribution margin per OR hr. contribution margin per OR hour averages one to two thousand USD per OR hour. Question: What is the Meaning of Angle of Incidence? Answer: ANGLE OFINCIDENCE: Angle of incidence is formed at the inter-section of total cost line and total sales line. As a matter of fact there are two angles of incidence. etc. a narrow angle of incidence shows a slow rate of profit earning while a wider angle of incidence indicates a swift rate of profit earning capacity of the firm. For USA hospitals not on a fixed annual budget.