Following information is available for the year 2018 and 2019 of ABC Ltd: Calculate P/V ratioYear 2018 2019 Sales Rs. 32,00,000 Rs. 57,00,000 Profit/(Loss) (Rs. 3,00,000) Rs. 7,00,000
40%
Calculating P/V Ratio for ABC Ltd
The Profit Volume Ratio (P/V Ratio) is a crucial metric in cost-volume-profit (CVP) analysis. It shows the relationship between contribution margin and sales volume. It indicates how much contribution is generated for every rupee of sales. A higher P/V ratio generally means that profit increases more quickly with an increase in sales.
Understanding the P/V Ratio Formula
When financial data for two different periods is available, the P/V ratio can be calculated using the change in profit and the change in sales between those periods. The formula is:
\( \text{P/V Ratio} = \frac{\text{Change in Profit}}{\text{Change in Sales}} \times 100 \)
Given Data for ABC Ltd
Here is the information provided for the years 2018 and 2019:
| Year | Sales (Rs.) | Profit/(Loss) (Rs.) |
|---|---|---|
| 2018 | 32,00,000 | (3,00,000) |
| 2019 | 57,00,000 | 7,00,000 |
Step-by-Step Calculation of P/V Ratio
1. Calculate the Change in Profit
The change in profit is the difference between the profit in the later year (2019) and the earlier year (2018).
\( \text{Change in Profit} = \text{Profit in 2019} - \text{Profit in 2018} \)
\( \text{Change in Profit} = \text{Rs. } 7,00,000 - (\text{Rs. } -3,00,000) \)
\( \text{Change in Profit} = \text{Rs. } 7,00,000 + \text{Rs. } 3,00,000 \)
\( \text{Change in Profit} = \text{Rs. } 10,00,000 \)
2. Calculate the Change in Sales
The change in sales is the difference between the sales in the later year (2019) and the earlier year (2018).
\( \text{Change in Sales} = \text{Sales in 2019} - \text{Sales in 2018} \)
\( \text{Change in Sales} = \text{Rs. } 57,00,000 - \text{Rs. } 32,00,000 \)
\( \text{Change in Sales} = \text{Rs. } 25,00,000 \)
3. Calculate the P/V Ratio
Now, use the calculated changes in profit and sales in the P/V ratio formula:
\( \text{P/V Ratio} = \frac{\text{Change in Profit}}{\text{Change in Sales}} \times 100 \)
\( \text{P/V Ratio} = \frac{\text{Rs. } 10,00,000}{\text{Rs. } 25,00,000} \times 100 \)
\( \text{P/V Ratio} = \frac{10}{25} \times 100 \)
\( \text{P/V Ratio} = 0.40 \times 100 \)
\( \text{P/V Ratio} = 40\% \)
Thus, the P/V ratio for ABC Ltd based on the data for 2018 and 2019 is 40%.
Revision Table: Key P/V Ratio Concepts
| Concept | Description | Formula (General) |
|---|---|---|
| P/V Ratio | Relates Contribution Margin to Sales | \( \frac{\text{Contribution Margin}}{\text{Sales}} \times 100 \) |
| Contribution Margin | Sales revenue minus variable costs | Sales - Variable Costs |
| Break-Even Point | Level of sales where total revenue equals total costs (no profit, no loss) | \( \frac{\text{Fixed Costs}}{\text{P/V Ratio}} \) (in Sales Value) or \( \frac{\text{Fixed Costs}}{\text{Contribution Margin per Unit}} \) (in Units) |
| Margin of Safety | The excess of actual or budgeted sales over the break-even sales | Actual Sales - Break-Even Sales |
Additional Information on Profit Volume Analysis
Profit Volume Analysis, often referred to as CVP analysis, helps management understand the relationship between costs, volume, and profit. The P/V ratio is a fundamental part of this analysis. It helps in:
- Determining the break-even point.
- Calculating the sales volume required to achieve a target profit.
- Evaluating the impact of changes in selling price, variable costs, or fixed costs on profit.
- Making decisions regarding product mix and pricing.
The P/V ratio assumes that variable costs are proportional to sales and that fixed costs remain constant within the relevant range of activity. These assumptions are important to remember when using P/V analysis for decision making.
Important Questions from Accounting and Financial Management - Teaching
Given below are two statements:
Statement I: Interest coverage ratio indicates how many times fixed interest charges are earned, based on the earnings available to pay these expenses.
Statement II: One minus the reciprocal of interest coverage ratio indicates how far earnings could decline before it would be impossible to pay the interest charges from current earnings.
In the light of the above statements, choose the most appropriate answer from the options given below:
The salient features of Zero Base Budgeting are:
A. It is a decision oriented approach
B. The decision unit is broken into understandable decision packages which are ranked according to importance
C. The responsibility is shifted from top management to the manager of the decision unit
D. It is an accounting oriented approach
E. Top management decides why a particular amount of money should be spent on a particular decision unit
Choose the correct answer from the options given below:
In case of agency problem, the actions of managers are very likely to be directed towards the goal of
The contribution margin can be increased by which of the following?
A. Increasing the selling price per unit
B. Changing the sales mixture and selling more profitable products for which the P/V ratio is higher
C. Keeping the marginal cost unchanged
D. Increase the amount of fixed assets
E. Decreasing the selling price per unit
Choose the correct answer from the options given below:
Which among the following information shall be disclosed for all public issues of shares irrespective of their issue price?
A. Earning per share
B. Dividend payout ratio
C. Pre-issue P/E ratio
D. Average return on net worth in last 3 years
E. Net asset value per share based on last balance sheet
Choose thecorrectanswer from the options given below:
