The ratio that shows the relationship between contribution margin and sales, indicating how much profit changes with each rupee change in sales.
The Profit Volume Ratio (also called Contribution to Sales ratio or C/S ratio) measures how efficiently sales are converted into contribution toward fixed costs and profit. A higher P/V ratio means each additional rupee of sales contributes more to profit — indicating better pricing power or lower variable costs. It's used to: compare profitability of different products, calculate break-even sales, determine sales required for target profit, and make product mix decisions. The P/V ratio remains constant at all levels of output (assuming selling price and variable cost per unit are constant).
Product sells at ₹1,000. Variable cost: ₹600. Contribution: ₹400. P/V Ratio = ₹400/₹1,000 = 40%. Fixed costs: ₹20,00,000. Break-even sales: ₹20,00,000 ÷ 0.40 = ₹50,00,000. Sales for ₹10L profit: (₹20,00,000 + ₹10,00,000) ÷ 0.40 = ₹75,00,000.
Ensures accurate financial reporting and record-keeping
Helps maintain regulatory and tax compliance
Enables better-informed business decisions
Improves operational efficiency and cash flow management
Two ways: 1) Increase selling price (if market allows — premium positioning, value addition, reducing discounts). 2) Reduce variable costs (better supplier negotiations, process efficiency, automation, bulk purchasing, alternative materials). Even a 5% improvement in P/V ratio can dramatically reduce the break-even point and increase profit at every sales level.
The product with the highest P/V ratio per unit of the limiting factor (machine hours, labor hours, raw material). Example: Product A has 60% P/V ratio but takes 2 machine hours. Product B has 40% P/V ratio but takes 0.5 hours. Per machine hour: A contributes ₹300, B contributes ₹800. Prioritize B despite lower P/V ratio.
The point at which a business's total revenue equals total costs, resulting in neither profit nor loss.
The amount remaining from sales revenue after deducting variable costs, available to cover fixed costs and generate profit.
A costing method that assigns only variable costs to products and treats all fixed costs as period expenses charged to the profit & loss account.
A financial analysis tool that examines the relationship between costs, sales volume, and profit to determine how changes in any of these affect profitability.
The percentage of revenue that exceeds the cost of goods sold, showing how much of each rupee in sales is retained as gross profit.
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