PV Ratio Formula is Profit Volume Ratio Formula
This Formula helps in calculating the profits of a product.
Every Business Model seeks to profit by selling services or goods to customers. The first steps in this process are planning and preparation.
Budgeting is a component of such preparation. Budgets estimate the costs of acquiring raw materials, purchasing machinery, paying wages, maintaining equipment, and other expenses.
Then, comes the estimation of profits and sales volume.
The PV Ratio is a metric that aids in determining a product’s profitability. Let’s break it down with the PV Ratio formula and some examples.
PV Ratio means Profit Volume ratio. The ratio helps express the relationship of Contribution to Sales. This ratio is also called as Contribution to Sales ratio.
The Profit Volume ratio isn’t just useful during the initial phase of business. But also facilitates the continuing business too.

Table of contents
What’s the formula for the PV ratio?
Profit Volume ratio is expressed in terms of Contribution and Sales. It is also called as Contribution ratio.
Profit Volume Ratio = (Contribution/Sales)*100
Are you wondering what does Contribution mean?
Contribution is the amount of sales revenue available to cover the fixed costs and profit.
The only thing that matters in a business is how much money the company makes in sales. Contribution is one such metric that helps in determining the sales revenue that remains after reducing the variable costs.
Let’s understand the calculation of contribution.
Contribution = Sales Revenue – Variable Costs
Therefore, the contribution is the amount that contributes to the remaining costs which includes Fixed costs and also profit.
So, Contribution also has a different formula i.e., Contribution = Fixed Costs + Profits
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PV Ratio Additional Formulas
We can replace the contribution element with Sales revenue and Variable costs in the Contribution ratio formula. Profit Volume ratio is expressed as
PV Ratio = (Sales – Variable Cost)*100/Sales
How about an example to understand the PV Ratio?
ABC Company is a manufacturer looking to grow its business. The cost of expanding a business is enormous. So, it’s important to know how much money it’ll be making. As a result, the company is interested in learning more about how their sales ratio has changed over time.
Since that’s the case, the company wants to see if the current year’s PV ratio is consistent with last year’s ratio. The information you need to compute the ratio is below.
- Sales = $10,000
- Variable Costs = $6,000
- Fixed Costs = $2,500
- Prior year PV ratio = 39%
1) Contribution = Sales – Variable Costs
= $10,000 – $6,000
= $4,000
2) PV Ratio = (Contribution/Sales)*100
= $4,000*100/$10,000
= 40%
The above findings led us to the conclusion that the PV ratio is comparable to that of previous years.
Do we have any different ways to find the Profit Volume Ratios?
PV ratio can also be computed based on the change in contribution or profits and the change in sales.
Profit Volume Ratio = (Change in Contribution/Change in Sales) *100
= (Change in Profits/Change in Sales) *100
Example
Happy Company is in the business of manufacturing soft toys. As the financial year end is near, the company wants to understand the Contribution ratio. However, does not have the complete information.
So, requested your help to find out the PV ratio with the below-limited information.

Contribution to Sales Ratio (based on Contribution amount)
= ($10,000 – $9,000)/($30,000 – $27,000)
= 33.33%
Note: Profit volume Ratio value will be the same irrespective of whether the contribution or profits are considered in the formulas
What are the advantages of the PV Ratio?
- The Profits Volume ratio helps in decision-making. A higher PV ratio for the business is more favorable as it indicates high profits. Thus, it aids in understanding if the business is moving towards or away from the profit zone. So, the PV ratio helps in decision-making as well.
Think of a scenario, where, the entity runs multiple products, which are not related. The business operations need to be strategic in expansion and optimizing the resource (including capital) usage. Thus, the entity needs a measuring tool like the PV ratio to decide on what’s the best allocation of resources to the better interest of the business. - Also assists in calculating the Contribution, Profits, Break-Even point, and margin of safety.
- Businesses always focus on profit and wealth maximization. The business strategic team always focuses on checking multiple business models to maximize sales and profits. This team does quantitative analysis with the help of various ratios including the PV ratio. Thus, this ratio is utilized to understand what the effect of a $1 increase or decrease in price or a change in sales quantity or production quantity.
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Runners Insight#1
What does Break Even Point means?
Break-even point is the number of sales to be made so that the entity incurs neither profits nor losses. So, this is a neutral position.
Break Even point is not just in quantity. We can express that in terms of value as well. The formula for the break-even point is below.
BEP in Value = (Fixed Costs/PV ratio)*100
BEP in Sales Units =(Fixed Costs/Contribution per unit)
Runners Insight#2
What does Margin of Safety means?
The margin of Safety is the difference between the total sales and break-even sales.
The margin of Safety is the point where the business moves into a favorable position as there will be an inflow of revenue contributing to the profits.
Similar to the break-even point, we can express the Margin of safety as well in both value and sale units. Let’s see the formulas for it.
The Margin of Safety in Sales Units = Total Sales – BEP Sales
The Margin of Safety in Value = (Total Sales – BEP Sales)* Contribution per unit. (or) Profit/PV ratio
Also Read: Cash Coverage Ratio
Practical Examples
We understood all three concepts – Contribution Ratio, BEP, and Margin of Safety. Theoretical knowledge does not suffice for a complete learning experience. So, we will do a knowledge check of these concepts with an example.
Worry Ltd Company wants to find out the Profit Volume ratio, Margin of Safety, and Break-even point for the Current year. Details of Costs are below.
- Sales = 100,000 Units and the Selling price is $30 per unit
- Variable Costs is $15 per unit
- Fixed Costs is $1,000,000
Contribution = Sales – Variable Costs = $15 per unit
Profit Volume ratio = (15/30)*100 = 50%
Break Even Point = Fixed Costs/PV ratio = $1,000,000/50% = 2,000,000
Margin of Safety = Total Sales – Break Even Sales = $1,000,000
Conclusion
PV ratio is expressed in terms of contribution to sales. This helps in calculating contribution and also various ratios like Break-even point and margin of safety. There are various applicable formulas for the PV ratio. The Most Common one is Contribution over Sales multiplied by 100 to arrive at a percentage.
For entities with a multi-product business and limited capital, the PV ratio is a good metric to determine which is the more profitable business to invest in. So, a higher PV ratio implies increased profits.