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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

or (Change in profits/Contributions) ÷ Change in sales

Break Even point = Fixed costs ÷ P/V ratio

Value of sales to earn desired profit = (Fixed costs + Desired profit) ÷ PV ratio

Variable costs = Sales (1 – PV ratio)

Margin of safety is the difference between actual sales and the break- even sales. Margin of

safety also represents excess of output over break even point output. At break-even point,

no profit is earned, and only fixed expenses are covered. Margin of safety is some thing

more than break-even point which normally includes profit.

Margin of safety (MS) = Present sales – Break- even sales.

Margin of safety = Profit ÷ PV ratio

Margin or Safety (in Units) = Profit ÷ Contribution per unit

MS can be expressed as a percentage of sales ie., (MS X 100) ÷ total sales.

Higher the MS, more the profit. At BEP MS is nil. If MS is small, then reduction in sales or

production would lead to loss. MS can be increased by:

Increase in the level of production or sales and utilizing the unused capacity; increase the

selling price; reduce the fixed or variable costs or substitute the existing products with more

profitable products.

Problems:

1. ABC Ltd., manufactures and sells four types of products under brand names pf P,Q,R

1 2 2 1

and S and their sales mix in value comprises 33 3%, 41 3 %, 16 3 % 𝑎𝑛𝑑 8 3 % of

products respectively. The total budgeted sales are Rs.60,000 per month. Operating

costs are: Variable costs: P 60%, Q 68%, R 80% and S 40% of their selling prices. Fixed

costs are Rs.14,700 per month. Calculate the BEP for the products on an overall basis.

(Calculation of break-even point for the products)

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)

Selling price per tonne: Rs.69.50; Variable cost per tonne: Rs.35.50; Fixed expenses:

Rs.18.02 lakh. If this volume represents 40% capacity, what is the additional profit for

an added production of 40% capacity, the selling price of which is 10% lower for 20%

capacity production and 15% lower than the existing price for the other 20% capacity.

(BE Volume -Resultant profit due to increase in capacity)

current year is as under: Material: Rs.120 per unit; Labour: Rs.30 per unit; Overheads:

Rs.12 per unit. The selling price per unit is Rs.270 and the fixed cost and sales during

the current year are: Rs.14 lakh and Rs.40.5 lakh respectively.

During the forthcoming year the direct workers will be entitled to a wage increase of

10% from the beginning of the year and the material cost, variable overhead and

fixed overhead are expected to increase by 7.5%, 5% and 3% respectively.

You are required to compute (a) New sale price in the forthcoming year if the current

PV ratio is to be maintained (b) Number of units that would require to be sold during

the forthcoming year so as to yield the same amount of profit in the current year,

assuming that the selling price per unit will not be increased.

(Revised selling price due to increase in various cost components at existing PV

ratio)

5. XYZ Co has the following budget for the year 1986-87:

Sales 1,00,000 units at Rs.20 per unit Rs. 20,00,000; variable cost Rs.10,00,000;

Contribution Rs. 10,00,000; Fixed cost Rs.4,00,000 and net profit Rs. 6,00,000.

From the following information, find out: (a) the adjusted profits for 1986-87 if the

following two sets of changes are introduced and also suggest which plan should be

implemented.

Plan A Plan B

Increase in price 20% Decrease in price 20%

Decrease in volume 25% Increase in volume 25%

Increase in variable cost 10% Decrease in variable cost 10%

Increase in fixed cost 5% Decrease in fixed cost 5%

(b) the PV ratio and break even points under the two plans referred to above.

6. (a) ABC Ltd., has developed a new product which is about to be launched into the market.

The variable cost of selling the product is Rs. 17 per unit. The marketing department has

estimated that at a sale price of Rs.25, annual demand would be 10,000 units. However, , if

the sale price is set above Rs.25, sales demand would fall by 500 units for each Re o.50

increase above Rs.25. similarly, if the price is below Rs.25, demand would increase by 500

units for each Re.0.50 stepped reduction in price below Rs.25.

(b) Determine the price which would maximize ABC Ltd., profit in the next year. The break-

even of a manufacturing company is Rs.1,60,000. Fixed cost is Rs. 48,000. Variable cost is

Rs.12 per unit. Required: Determine the contribution/margin ratio.

7.SV Ltd., engaged in the manufacture of four products, has prepared the budget for 1989:

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.

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