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Profit Volume ratio is the relationship between contribution and sales. If sales are Rs.100
and contribution (Sales – variable costs) is Rs.60, then the P/V ratio is contribution ÷ Sales
and this shows to what extent sales covers contribution. Higher the ratio, higher the profit
and vice versa assuming that the fixed costs have not changed. Contribution is the
combination of Fixed costs and profit. This ratio studies the profitability of operations. The
ratio can be expressed either as a fraction or as a percentage. PV Ratio is helpful to find out
the profitability of different products. Enterprises should focus for higher PV Ratio by
reducing variable costs or direct costs by effectively using men material and machines;
switching to more profitable product lines; increase the selling price, of course reading the
market trends. PV ratio is also useful to determine the break even point and level of output
or sales to earn a desirable profit. This is also useful to calculate variable costs and profit for
any volume of sales
P/V Ratio = Contribution ÷ Sales ie., C/S
PV Ratio = ( Fixed expenses + Profit) ÷ Sales
or (F + P) ÷ S
or (S – V) ÷ S
2. Cookwell Ltd., manufactures pressure cookers the selling price of which is Rs.300 per
unit. Currently the capacity utilization is 60% with a sales turnover of Rs.18 lakh. The
company proposes to reduce selling price by 20% but desires to maintain the same
profit position by increasing the output. If the increased output could be made and
sold, determine the level at which the Company should operate to achieve the
deemed objective. The following data are available:
Variable cost per unit: Rs. 60; Semi-variable cost (including a variable element of
Rs.10 per Unit) Rs. 1,80,000; Fixed costs Rs.3,00,000 will remain constant up to 80%
level. Beyond this an additional amount of Rs.60,000 will be incurred.
( output required to be maintain the same profit with reduced selling price)
Product A B C D
Production units 20,000 5,000 25,000 15,000
Selling price Rs/unit 21.75 36.75 44.25 64.00
Direct materials Rs/unit 6.00 13.50 10.50 24.00
Direct wages Rs/unit 7.50 10.00 18.00 24.00
Variable overheads Rs/unit 2.25 5.00 6.00 6.50
Fixed overheads Rs per annum 75,000 25,000 2,25,000 1,80,000
When the budget was discussed, it was proposed that the production should be
increased by 10,000 units for which the capacity existed in 1989.
It was also decided that for the next year, i.e., 1990, the production capacity should
be further increased by 25,000 units over and above the increase of 10,000 units
envisaged as above for 1989. The additional production capacity of 25,000 units
should be used for the manufacture of Product B for which new production facilities
were to be created at an annual fixed overhead cost of Rs.35,000. The direct material
costs of the four products were expected to increase by 10% in 1990 while the other
costs and selling price would remain the same. Required (a) Find the profit of 1989 on
the assumption that the existing capacity of 10,000 units is utilized to maximize the
profit. (b) Prepare a statement of profit for 1990. (c) Assuming that the increase in
the output of Product B may not fully materialize in the year 1990, find the number of
units of Product B to be sold in 1990 to earn the same overall profit as in 1989.