In the other words the company’s sales should be Rs.625000 Rs.10 per unit to reach the break even point.īEP=Fixed cost/PV ratio,= 250000/40%= Rs.625000/. Thus, the company shall sell 62500 units Rs.10 per unit to reach the breakeven point. Wherein X is the total number of units to be sold, FC is the Fixed Cost, P is the price of the unit, V is the variable cost per unit. X= Fixed Cost÷ (Price-Variable Costs) i.e. The formula for calculating breakeven point (BEP) is as under. The company can make profit when its sales exceed breakeven point. The break- even point is a point of sales of a company wherein total sales covers exactly its total costs and there is no profit or loss at that point of sales. Now we will find out what is breakeven point (BEP). Its fixed cost is Rs.250000 and variable cost is 600000. Let us assume a company’s sales are Rs.1000000 Rs.10 per unit.
#Ratios and price per unit calculator how to
The following illustration further clarifies how to calculate the p/v ratio, breakeven point and the margin of safety ratio.
The situation of high PV ratio is called profitable situation. In the cases of low margin, the company has to either increase the selling price to improve the PV ratio or increase the sales turnover to earn satisfactory profit in the business. A low P/V ratio indicates low profit margin.
When P/V ratio is high it indicates the high profit margin. Here contribution is multiplied by 100 to arrive the percentage.įor example, the sale price of a cup is Rs.80, its variable cost is Rs.60, then PV ratio is (80-60)× 100/80=20×100÷80=25%.įrom the above example, we may observe that the variable cost is the important cost in deciding profitability when fixed costs are constant. P/V ratio =contribution x100/sales (*Contribution means the difference between sale price and variable cost). The PV ratio or P/V ratio is arrived by using following formula. It is one of the important ratios for computing profitability as it indicates contribution earned with respect of sales. The Profit Volume (P/V) Ratio is the measurement of the rate of change of profit due to change in volume of sales. Thus, the variable cost is the important cost in deciding profitability when fixed costs are constant. Variable Cost: The Variable costs are those expense which changes with the level of sales. Therefore, these fixed expenses are called as fixed cost. This expense is fixed and does not change proportionately to sales.
Let us study how the companies examine all these.įixed cost: The Company has to meet its overhead expenses, irrespective of the volume of production and the sales. profit volume ratio, breakeven point and margin of safety. There are three other important workings in the process viz. A company determines the selling price of its products after calculating of the fixed cost, variable cost involved in productions and sales of the items produced by it.
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