Profit-Volume Analysis is cost benefit analysis

cost accounting

1. By Dr. Preeti Jindal Qualification: M.Com , Ph.D , Ugc -NET&JRF Experience: 2.5 years experience of teaching M.com classes Profit-Volume Analysis

2. MEANING OF P/V RATIO The Profit/volume ratio, which is also called the ‘contribution ratio’ or ‘marginal ratio’, expresses the relation of contribution to sales and can be expressed as under: P/V Ratio = Contribution/Sales Contribution is excess of sales revenue over variable cost. It is the amount available to cover fixed costs and to contribute to income.

3. MEANING OF P/V RATIO Contribution = Sales revenue – variable cost Profit = Contribution – fixed cost Since Contribution = Sales – Variable Cost = Fixed Cost + Profit, P/V ratio can also be expressed as: P/V Ratio = Sales – Variable cost/Sales i.e. S – V/S or, P/V Ratio = Fixed Cost + Profit/Sales i.e. F + P/S This ratio is usually shown in the form of percentage by multiplying by 100

4. EXAMPLE Example- Sales revenue of X ltd. Is Rs 50000, Variable cost is Rs 35000 and fixed cost is Rs 10000. Find out P/V ratio. P/V ratio = [contribution/sales] × 100 = [15000/50000] × 100 = 30%

5. OBJECTIVE OF P/V ANALSIS P/V analysis aims at studying Assumption: Effect on Profit fixed cost will remain constant Due to changes in sales volume hence it considers only variable cost

6. USES OF PROFIT-VOLUME RATIO P/V ratio is one of the most important ratios to watch in business. It is an indicator of the rate at which profit is being earned. The profitability of different sections of the business, such as sales areas, classes of customers, product lines, methods of production, etc., may also be compared with the help of profit-volume ratio . It is very helpful in pricing policy, product analysis and profit planning.

7. IMPROVING P/V RATIO A high profit-volume ratio is always desirable. Because a high Profit volume ratio indicates high profitability and a low ratio indicates low profitability in the business. Hence every firm must try to maintain high P/V ratio or to increase it. If profit- volume ratio is lower, it can be improved in the following manner i ) Increasing the selling price per unit (ii) Reducing the variable or marginal cost. (iii) Changing the sales mixture and selling more profitable products for which the P/V ratio is higher .

8. CONCLUSION As P/V ratio indicates the rate of profitability; any improvement in this ratio without increase in fixed costs, would result in higher profits.

9. Thank You