Free Monroe Clock Company Essay Sample
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.