When the contribution from sales is expressed as a sales value percentage, then it is known as profit/volume ratio (or P/V ratio). The relationship between the contribution & sales is expressed by it. Sound ‘financial health’ of a company’s product is indicated by better P/V ratio.
**Improvement of P/V Ratio:**
By the following ways, an improvement in this ratio can be achieved by:
The selling price increase; but the risk that the volume of sales might be affected in involved in it.
By purchasing the latest machinery, a reduction in the variable cost per unit can be achieved, thereby cutting the hours which may be required to complete each operation. However, higher fixed costs such as depreciation & insurance might offset this reduction.
By concentrating on those products by which highest contribution can be achieved.
For doing business analysis, in the hands of management, the P/V ratio is an invaluable tool.