### Management Accounting- Contribution and P/v Ratio

The Profit/volume ratio, which is also called the ‘contribution ratio’ or ‘marginal ratio’, expresses the relation of contribution to sales and can be expressed as under:

P/V Ratio = Contribution/Sales Since Contribution = Sales – Variable Cost = Fixed Cost + Profit, P/V ratio can also be expressed as: P/V Ratio = Sales – Variable cost/Sales i.e. S – V/S or, P/V Ratio = Fixed Cost + Profit/Sales i.e. F + P/S or, P/V Ratio = Change in profit or Contribution/Change in Sales

This ratio can also be shown in the form of percentage by multiplying by 100. Thus, if selling price of a product is Rs. 20 and variable cost is Rs. 15 per unit, then P/V Ratio = 20 – 15/20 × 100 = 5/20 × 100 = 25% The P/V ratio, which establishes the relationship between contribution and sales, is of vital importance for studying the profitability of operations of a business. It reveals the effect on profit of changes in the volume. In the above example, for every Rs. 100 sales, Contribution of Rs. 25 is made towar…

P/V Ratio = Contribution/Sales Since Contribution = Sales – Variable Cost = Fixed Cost + Profit, P/V ratio can also be expressed as: P/V Ratio = Sales – Variable cost/Sales i.e. S – V/S or, P/V Ratio = Fixed Cost + Profit/Sales i.e. F + P/S or, P/V Ratio = Change in profit or Contribution/Change in Sales

This ratio can also be shown in the form of percentage by multiplying by 100. Thus, if selling price of a product is Rs. 20 and variable cost is Rs. 15 per unit, then P/V Ratio = 20 – 15/20 × 100 = 5/20 × 100 = 25% The P/V ratio, which establishes the relationship between contribution and sales, is of vital importance for studying the profitability of operations of a business. It reveals the effect on profit of changes in the volume. In the above example, for every Rs. 100 sales, Contribution of Rs. 25 is made towar…