Calculation of P / V Ratio

P / V Ratio stands for Profit Volume Ratio, which refers to the relationship between the contribution margin and sales revenue of a company. It is used to determine the profitability of a company and helps in making decisions regarding pricing, product mix, and sales volume.

The formula for calculating P / V Ratio is as follows:

P / V Ratio = (Contribution / Sales) x 100

Where, Contribution = Sales - Variable Cost

Given data:

Sales Revenue = ₹ 200 per unit x 300 units = ₹ 60,000

Marginal Cost = ₹ 120 per unit x 300 units = ₹ 36,000

Fixed Cost = ₹ 8,000

Contribution = Sales Revenue - Marginal Cost
= ₹ 60,000 - ₹ 36,000
= ₹ 24,000

P / V Ratio = (Contribution / Sales) x 100
= (₹ 24,000 / ₹ 60,000) x 100
= 40%

Explanation of P / V Ratio

P / V Ratio is an important financial tool that helps in analyzing the impact of changes in sales volume and variable costs on the profitability of a company. It is a measure of the percentage of sales revenue that is available to cover the fixed costs and generate profits.

In the given scenario, the P / V Ratio is 40%, which means that for every ₹ 100 of sales revenue, ₹ 40 is available to cover the fixed costs and generate profits. This ratio can be used to analyze the impact of changes in sales volume and variable costs on the profitability of the company.

For example, if the company increases the selling price of the product, the P / V Ratio will increase, which means that the profitability of the company will increase. Similarly, if the company reduces the variable costs, the P / V Ratio will increase, resulting in higher profitability.

Therefore, P / V Ratio is an important financial tool that helps in making decisions regarding pricing, product mix, and sales volume.