Profit volume ratio of an enterprise is 40%. To offset 10% decrease in selling price, how much sales must be increased ?
20%
Profit volume (P/V) ratio = contribution ÷ sales. Take a selling price of ₹100 per unit: with a P/V ratio of 40%, contribution is ₹40 and variable cost is ₹60 per unit.
A 10% fall in price makes the new price ₹90. Variable cost stays at ₹60, so the new contribution is ₹30 per unit and the new P/V ratio is \( \frac{30}{90} = \frac{1}{3} = 33\tfrac{1}{3}\% \).
To offset the price cut, total contribution must remain at its original level of ₹40 (on sales of ₹100). Required sales at the new P/V ratio: \( \text{Sales} = \frac{\text{Contribution}}{\text{P/V ratio}} = \frac{40}{1/3} = 120 \), that is ₹120.
Sales value must therefore rise from ₹100 to ₹120: \( \frac{120 - 100}{100} \times 100 = 20\% \). (In physical terms the firm must sell one-third more units, since each unit now earns ₹30 instead of ₹40; at the lower price this volume is worth 20% more in sales value.)
Hence, 20%.
Important Questions from Marginal Costing
- Which one of the following is not correct ?
From the following information, find out the number of units that must be sold by the firm to earn profit of ₹ 80,000 per year.
Sales price : ₹ 25 per unit
Variable manufacturing costs – ₹ 12 per unit
Variable selling costs – ₹ 3 per unit
Fixed factory overheads – ₹ 5,00,000
Fixed selling costs – ₹ 3,00,000
The Break Even point expressed in amount of sales in rupees of X Ltd having selling Price of ₹ 20 per unit, variable cost of ₹ 14 per unit and fixed cost of ₹ 7,92,000 is:
