Computation of profit volume (PV) Ratio for household timers
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Description
|
selling price $8-unit
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selling priceS.14.70- unit
|
|
Sales of 50,000 units
|
400,000
|
735,000
|
|
Less : variable costs
50,000 units @ $2/unit
|
100,000
|
100,000
|
|
Contribution
|
300,000
|
635,000
|
|
PV ratio : Contribution/sales
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75%
|
86%
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Contribution per unit
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$6/unit
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S11.07/unit if same PV ratio
is to be maintained
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Diagram 1: Computation of PV ratio for 50,000 units
The question is now what the projected units need to be produced and sold in order to maintain a sale price of $11.60 and contribution at the same levels as before -that is, contribution levels remain the same
It is evident that in the event of Unit sale price of $11.60, the assumed contribution would be $9.60. This would bring the contribution levels at 82%
In order to bring the contribution levels at the same levels, it is seen that the new variable costs would be $8.78/unit.
This is because at 82% levels the contribution is 9.60 and therefore for 75% levels this is calculated at $8.78
Thus we can calculates as follows
Sales (per unit) $ 11.60
Less: variable costs $ 2.82(Balancing figure)
Contribution $ 8.78(at previous PV ratio)
Further it is calculated that when sales is 50,000 units, the variable costs is $2
Therefore, when the variable costs are now $2.82, the total number of units is 70,500 units
Thus the new table would be as follows:
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Description
|
selling price
$11.60 unit
|
|
Sales of 70,500 units
|
817,800
|
|
Less : variable costs
70,500 units @ $2.82 per unit
|
198,810
|
|
Contribution
|
618,990
|
|
PV ratio : Contribution/sales
Remains constant as that of 50,000 units
|
75%
|
Diagram 2: Computation of PV ratio for 70,500 units
In order for the contribution to remain the same (PV ratio static at 75% or 3/4 as in the case of 50,000 units, it is necessary to sell 70,500 units. The above Diagram 2 clarifies the details.
