Maths focus: calculating the profit volume ratio by Dawn Weeden
In the Unit 6: Recording and Evaluating Costs and Revenues exam, you may be required to calculate and use the profit volume (PV) ratio. This ratio is used when calculating the break-even point in terms of sales value rather than sales volume.
What maths do you need?
You will need to be able to subtract and to divide.
What do you need to learn?
The PV ratio calculates how much contribution is being generated per £1 of sales. The formula is:
Contribution per unit*
Selling price per unit
*Remember that contribution is calculated as selling price per unit less variable costs per unit.
Once you have calculated the PV ratio, the break-even sales volume can be calculated as:
Total fixed costs
PV ratio
Example
A company manufactures PQwest, which has a selling price of £120 per unit and variable cost per unit of £66. The total fixed overheads for the year are £44,820. Calculate the break-even sales volume using the PV ratio.
We can substitute our figures into the PV ratio:
(£120 - £66) = 0.45
£120
This tells us that each unit sold contributes 45p per £1 towards fixed costs. To calculate the sales revenue required to break even, simply divide the fixed costs by the PV ratio:
£44,820 = £99,600
0.45
So the company needs to sell £99,600 worth of PQwest to cover its fixed costs and break even.
Suppose the company wanted to know the sales value required to make a profit of £27,000. This can also be calculated using the PV ratio. The target profit is added to the fixed costs and then the total is divided by the PV ratio:
£44,820 + £27,000 = £159,600 sales required to make a profit of £27,000
0.45
Now you try
A company manufactures a product with a selling price of £235 and variable costs of £94 per unit. The fixed costs total £52,875. Using the PV ratio:
(a) calculate the value of sales required to break even; and
(b) calculate the value of sales required to make a profit of £17,625.
