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Computation of profit volume (PV) Ratio for household timers

          Description

 selling price $8-unit

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

 

 

                  75%

 

                 86%

Contribution per unit

               $6/unit

  S11.07/unit if same PV ratio  

         is to be maintained

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:

          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.

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