What is the PV Ratio?
The PV Ratio, also known as the Profit-Volume Ratio, is a financial metric that measures the relationship between a company’s profits and its sales revenue. It represents the percentage of each sales dollar that contributes to the company’s profits after covering its variable costs.
PV Ratio Formula
PV Ratio = (Contribution Margin / Sales Revenue) x 100
Where the Contribution Margin is the difference between the sales revenue and the variable costs of a company. The variable costs are the costs that vary directly with the level of production or sales, such as raw materials, direct labor, and sales commissions.
PV Ratio Calculation with Example
Our formula for calculating PV Ratio stated as
PV ratio = (Contribution Margin / Total Sales) x 100
Where you know that Contribution Margin = Total Sales – Total Variable Costs
So, For example, if a company has total sales of $100,000 and total variable costs of $60,000, the contribution margin would be $40,000. To calculate the PV ratio, you would divide the contribution margin by the total sales and multiply the result by 100.
PV ratio = ($40,000 / $100,000) x 100 = 40%
By understanding above example every dollar in sales, 40 cents contributes to covering the fixed costs and profits. The PV ratio is an important metric for companies as it helps them to determine the minimum sales required to cover their fixed costs and generate a profit.
Take a another example of the PV Ratio
For example, the sale price of the cup is Rs. 80, it’s variable cost is Rs.60 then Profit volume Ratio is
(20/80) * 100 (from our Formula of Profit volume Ratio)
0.25 * 100 = 25%
From other example, we may observe that the variable cost is the important cost in deciding profitability when fixed costs are constant.
When P/V Ratio is high it indicates the high profit margin. A low P/V Ratio indicates the low profit margin. In the cases of low margin, the company has to increase the selling price to improve the PV Ratio or increase the sale turnover to earn satisfactory profit in the business.
Uses of PV Ratio
The PV ratio is a very important tool for businesses to understand their profitability, breakeven point, and impact of changes in sales volume or price on their profits. In this answer, I will tell you the uses of PV ratio in detail.
Assessing the profitability of products –
It helps businesses to assess the profitability of their products. By comparing the PV ratios of different products, a business can identify the products that are contributing more to its profits. The products with higher PV ratios are more profitable than those with lower PV ratios. The PV ratio can also be used to analyze the impact of changes in product mix on the profitability of a business.
Determining the breakeven point –
The breakeven point is the sales volume at which a business neither makes a profit nor a loss. The PV ratio is an essential tool for calculating the breakeven point. By dividing the fixed costs by the PV ratio, a business can calculate the sales volume required to cover its fixed costs. The breakeven point is an important metric for businesses to understand as it helps them to determine their minimum sales volume required to stay afloat.
Analyzing the impact of changes in sales volume –
PV ratio helps businesses to analyze the impact of changes in sales volume on their profitability. By calculating the PV ratio at different sales volumes, a business can determine the sales volume required to achieve a certain level of profit. For example, if a business wants to achieve a 20% profit margin, it can use the PV ratio to determine the sales volume required to achieve this margin.
Making a Pricing Decisions –
PV ratio is an essential tool for businesses to make pricing decisions. By calculating the PV ratio at different price points, a business can determine the optimal price point that maximizes its profitability. For example, if a business has a PV ratio of 60%, it can calculate the price points that will achieve this ratio and maximize its profits.
Evaluating the impact of cost changes –
It also helps businesses to evaluate the impact of changes in costs on their profitability. By calculating the PV ratio before and after changes in costs, a business can determine the impact of these changes on its profitability. This information can help businesses to make informed decisions about their cost structure and profitability.
In my understanding you know that what is PV Ratio it’s Formula and Calculation and it’s uses. Now we will How important is the PV in Businesses
Importance of PV Ratio
PV ratio is very important because it helps businesses to determine their breakeven point. This is the point at which the company’s sales revenue equals its total expenses, and it is not making a profit or loss. By calculating the PV ratio, businesses can determine the level of sales they need to achieve to break even, and then use this information to set targets for future sales.
In another way, PV ratio helps in making decisions related to pricing and product mix. For instance, businesses can use the PV ratio to evaluate the profitability of different products or services and to determine which products are generating the highest contribution to fixed costs and profits. This information can be used to make decisions regarding pricing strategies or to decide which products to focus on in order to maximize profits
Some Frequently asked Questions
What is the Full form of PV Ratio ?
The Full form of PV Ratio is Profit volume Ratio
Profit volume ratio is improved by reducing
To improve the PV Ratio, a business can take several steps, Such as reducing its fixed costs, increasing its sales volume and increasing its selling price. However, reducing variable costs can also improve the PVR as it directly affects the contribution margin.
What is the PV Ratio Formula ?
PV Ratio = (Contribution Margin / Sales Revenue) * 100
Profit volume ratio is also known as
The profit volume ratio is also known as the contribution margin ratio. It is a measure of the percentage of sales revenue that is available to cover fixed costs and contribute to profits after variable costs have been deducted. The contribution margin ratio is calculated by dividing the contribution margin (which is the difference between sales revenue and variable costs) by the sales revenue.
What is the Advantages of PV Ratio ?
- Helps in determining the break-even point.
- Helps in determining the sales mix.
- Provides insight into the profitability of a business.
- Useful in cost-volume-profit analysis.
- Assists in pricing decisions
For more information about the PV Ratio and it’s questions and answers visit the site toppr.com/pv-ratio