Problems on Calculation of P/V Ratio, BEP, Margin of Safety, Profit Earned at a given Level of Sales, Sales required to earn desired Profit
by Assume that a company has Sales = ₹5,00,000, Variable Cost = ₹3,00,000 and Fixed Cost = ₹1,00,000.
1. P/V Ratio
P/V Ratio shows the relationship between contribution and sales.
Contribution = Sales − Variable Cost
= ₹5,00,000 − ₹3,00,000 = ₹2,00,000
P/V Ratio = (Contribution ÷ Sales) × 100
= (₹2,00,000 ÷ ₹5,00,000) × 100 = 40%
2. Break Even Point
BEP is the level of sales where total revenue equals total cost and there is no profit or loss.
BEP = Fixed Cost ÷ P/V Ratio
= ₹1,00,000 ÷ 40% = ₹2,50,000
3. Margin of Safety
Margin of Safety represents the excess of actual sales over break even sales.
MOS = Actual Sales − BEP Sales
= ₹5,00,000 − ₹2,50,000 = ₹2,50,000
4. Profit Earned at Given Sales
Profit = Contribution − Fixed Cost
At sales of ₹5,00,000:
Contribution = ₹5,00,000 × 40% = ₹2,00,000
Profit = ₹2,00,000 − ₹1,00,000 = ₹1,00,000
5. Sales Required to Earn Desired Profit
Suppose the desired profit is ₹2,00,000.
Required Sales = (Fixed Cost + Desired Profit) ÷ P/V Ratio
= (₹1,00,000 + ₹2,00,000) ÷ 40%
= ₹7,50,000
Thus, sales of ₹7,50,000 are required to earn the desired profit of ₹2,00,000.