Profit Volume Ratio

[nikhilchauhan]

The profit volume ratio is commonly renowned as the Contribution margin ratio. The P/V ratio is a key financial metric that helps businesses understand the relationship between sales, costs, and profit. The profit volume ratio gives a calculation of how much contribution is generated against each unit of sales.

The profit volume ratio is necessary for determining profitability for the continuance of production can be examined. The profit volume ratio remains the same irrespective of operation and selling prices to maintain at various levels for suitable application of ratios. If the sale price increases without changing the increase in the variable cost, then profit volume increases.

Here are some of the benefits of using the Profit volume ratio that are outlined below.

• Calculates profitability

This P/V ratio provides an exact indication of the profitability of the business. Therefore, a higher ratio means the business is generating high profit. This helps in assessing the efficiency of profitability and managing variable costs related to sales.

• Determines break-even analysis

This profit volume ratio helps in determining the break-even point. This break-even point is the level of sales at which the company makes no profit and no loss. This ratio helps businesses to plan their sales targets to cover costs and earn profits. Due to this strategic calculation, break-even analysis can be calculated, and better management decisions can be made.

• Helps in Decision-making

This ratio helps in making better decisions about pricing, cost control, and sales strategies. This ratio helps in determining the volume of sales that is required to achieve the desired level of profit. Thus, better decisions will provide an increase in profitability and an increase in the net worth of the companies.

• Compares Different departments

Several companies can use the P/V ratio which helps in calculating and comparing the profitability of different products, services, or departments. This ratio will allow management to understand the risk level in operations.

• Determines margin of Safety calculation

The P/V ratio calculates the margin of safety that shows how much sales can be reduced before the business reaches to break-even point. This helps the management to focus resources on profitable areas and improve less profitable products.

• Impact on cost

This profit volume ratio helps in understanding variable costs or sales prices that will impact the profit. If the profit volume ratio is affected by an increase in cost or price decrease, then the P/V ratio will show profit is affected. Thus, the P/V ratio is a reliable tool that helps companies in making decisions, and pricing strategies, and improves profitability.

• Monitors Business Efficiency

This P/V ratio enables the company to monitor business efficiency. The company regularly calculates this ratio, companies can track changes in operations or cost structures that will improve profitability. There is a direct relationship between sales and profit and this ratio helps the businesses to determine profitability and make adequate decisions. Thus, the management can improve their performance and help them in sustainable future growth.

Profit volume ratio is a useful tool that helps companies in analyzing profitability and financial performance. This P/V ratio helps companies forecast future profits and sales volume. This P/V ratio helps companies in comparing their financial performance to their competitors or industry benchmarks. This ratio helps in identifying areas for improvement in financial performance.

The P/V ratio is calculated by dividing the excess of sales over variable cost by sales. Therefore, a high P/V ratio will signify more profit, and a low means lower profit. This ratio will help the businesses to break down the costs and profits at different levels of sales.

FAQ

1. How to calculate the P/V ratio?
Ans: P/V ratio can be calculated by formulae: contribution / Sales. However, contribution=Sales- variable costs.

2. What are the uses of calculating the P/V ratio?
Ans: This P/V ratio is a financial ratios that give insights to the company for making correct futuristic decision.

Conclusion

This P/V ratio is a financial ratio that is usually expressed as a percentage to measure the profitability of the company. This ratio gives inter-relationships of cost patterns, level of activity, and profit that resulted from each alternative combination. It is a measurement of the rate of change in profit due to change in sales. This ratio gives investment efficiency which is useful for ranking projects with significant capital investments.

This P/V ratio helps in determining the break-even point and profit at any volume of sales. This ratio helps in determining the sales to earn the desired amount of profit. The management can increase the selling price and adapt new strategies to improve profitability by decreasing variable costs. Thus, the profit volume ratio can improve the profitability for better growth of the company. The company can set financial targets by tracking profitability over time. By analyzing the sales volume sales volume can be improved. However, the Break-even point can be calculated by using this formula of fixed cost divided by excess sale price over variable cost per unit.