# P/V Ratio and Variable Cost Ratio

The Profit-Volume Ratio expresses contribution as a fraction of sales — the percentage of every rupee of sales that is available to cover fixed costs and create profit.

## Formulas

P/V Ratio = Contribution ÷ Sales
Variable Cost Ratio = Variable Cost ÷ Sales
P/V Ratio + Variable Cost Ratio = 100% (they are complementary)

If VC ratio is 60%, P/V ratio is 40%, automatically.

## When to use P/V Ratio in leverage problems

1. Reconstructing the income statement from leverage data. Given DOL and FC, work out Contribution; divide by Sales to get P/V.

2. Finding break-even sales. BEP (₹) = Fixed Cost ÷ P/V Ratio.

3. Translating a sales shock into a contribution shock. Δ Contribution = Δ Sales × P/V Ratio (selling price and VC per unit assumed constant).

4. Comparing companies. Higher P/V ratio = higher leverage potential, because each additional rupee of sales pushes more into profit once fixed costs are covered.

## Quick decomposition

Given only Sales and Variable Cost Ratio, you can build the entire upper income statement:

Variable Cost = Sales × VC ratio
Contribution = Sales × P/V ratio
EBIT = Contribution − Fixed Cost

Worked example

### Example 1

Sept 2025 KRY Ltd.: Sales ₹75,00,000, P/V ratio 40%.

→ Contribution = 75,00,000 × 0.40 = ₹30,00,000.

→ Variable Cost = 75,00,000 × 0.60 = ₹45,00,000.

With DOL = 2.4, EBIT = Contribution ÷ DOL = 30,00,000 / 2.4 = ₹12,50,000.

Fixed Cost (excl. interest) = Contribution − EBIT − total interest items already in EBIT calc = 30,00,000 − 12,50,000 = ₹17,50,000.

### Example 2

RTP Sept 2025 X Ltd.: Variable cost ratio 60% → P/V ratio 40%. MOS 0.1667 → DOL = 1/0.1667 = 6. So Contribution = 6 × EBIT, and Sales = Contribution / 0.40 = 15 × EBIT. This single substitution chain unlocks the entire reconstruction.

⚠️ Common exam mistakes

Using sales price per unit minus VC per unit as P/V ratio (that's contribution per unit, not the ratio).
Forgetting that P/V ratio is a percentage of sales, not of contribution or EBIT.
Applying P/V ratio to changes in units — the ratio works on rupee sales when selling price and VC per unit are held constant.

Reference:

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