Profit volume ratio or cost volume profit analysis ratio or break even ratio
Profit volume ratio (also commonly known as P/v ratio) is the extension of the marginal costing. It is a very important tool in the hands of policy maker to maximize their profit. It checks the relationship of cost and profit to the volume of business to maximize profit.
Business faces different situations like boom, depression, competition etc, in such cases the profit also changes. In such situations p/v ratio helps the management. In narrow sense it helps in finding breakeven point and in broader sense it helps in profit, cost and sale at different level of output.
Objectives of p/v ratio
1) It helps in evaluating the performance of the business.
2) It helps in formulating price.
3) It helps in setting flexible budget.
4) It helps in forecasting profit.
There is a relationship between cost volume and profit. if volume increases profit increases and cost per unit will decreases thus there is a direct relationship between volume and profit and inverse between volume and cost.
Sale = fixed cost+ variable cost +profit & loss
This is the meaning and objectives of Profit volume ratio or cost volume profit analysis ratio or break even ratio