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Cost Accounting · Marginal Costing

CVP Analysis and P/V Ratio for CMA Intermediate

Updated 10 October 2026 · Fact-checked

Cost-Volume-Profit (CVP) analysis studies how profit changes when sales volume, selling price and costs change. The P/V ratio is contribution ÷ sales. Break-even sales = fixed cost ÷ P/V ratio. Margin of safety = actual sales − break-even sales. Target sales = (fixed cost + target profit) ÷ P/V ratio.

Understand Cost-Volume-Profit Analysis and P/V Ratio

Costs behave in two ways. Variable costs rise and fall with output. Fixed costs stay the same in total over the relevant range of output. CVP analysis uses this split to show how profit reacts to a change in volume.

Contribution is sales minus variable cost. It first covers fixed cost. Once fixed cost is fully covered, every further rupee of contribution is profit. So Profit = Contribution − Fixed cost.

The P/V ratio (profit-volume ratio, also called contribution to sales ratio) tells you how much of each rupee of sales becomes contribution. A P/V ratio of 40% means ₹0.40 of every ₹1 of sales is contribution. A higher ratio means profit grows faster as sales grow.

The break-even point (BEP) is the level of sales where contribution equals fixed cost, so profit is zero. Below it there is a loss; above it there is a profit. The margin of safety (MOS) is the gap between actual sales and break-even sales. It shows how far sales can fall before you make a loss.

A break-even chart plots sales, total cost and fixed cost against volume; the point where the sales line cuts the total cost line is the BEP. A profit-volume graph plots profit (or loss) against sales. It starts at the fixed cost loss on the vertical axis at zero sales and cuts the horizontal axis at the BEP. The slope of this line is the P/V ratio. These rules assume constant selling price, constant variable cost per unit and fixed cost fixed over the range considered.

Key rules to remember

Contribution
Contribution = Sales − Variable cost = Fixed cost + Profit
Per unit: Contribution per unit = Selling price per unit − Variable cost per unit.
P/V ratio
P/V ratio = Contribution ÷ Sales × 100 = Change in profit ÷ Change in sales × 100
The second form works when you have two periods with the same fixed cost and no other data.
Break-even point (units)
BEP (units) = Fixed cost ÷ Contribution per unit
Use when the question gives unit data.
Break-even point (sales value)
BEP (₹) = Fixed cost ÷ P/V ratio
Also equals BEP units × selling price per unit.
Margin of safety
MOS (₹) = Actual sales − BEP sales = Profit ÷ P/V ratio
MOS ratio = MOS ÷ Actual sales × 100.
Target profit
Required sales (₹) = (Fixed cost + Desired profit) ÷ P/V ratio
In units: (Fixed cost + Desired profit) ÷ Contribution per unit. For profit after tax, first convert to profit before tax.
Variable cost ratio
V/S ratio = 1 − P/V ratio
Variable cost ÷ Sales.

How to solve Cost-Volume-Profit Analysis and P/V Ratio questions

Use this order for any CVP question. It keeps the numbers organised and earns step marks.

  1. 1Read the data and separate costs into variable and fixed. If a cost is semi-variable, split it first.
  2. 2Find contribution: total, per unit and as a percentage of sales (the P/V ratio).
  3. 3Write down the formula you will use before putting in numbers.
  4. 4Compute the BEP in units or rupees, as the question asks.
  5. 5Compute margin of safety and, if asked, the MOS ratio.
  6. 6For a target profit, add the target to fixed cost and divide by contribution per unit or by the P/V ratio.
  7. 7For a changed situation (new price, cost or fixed cost), recompute contribution and fixed cost, then repeat steps 4 to 6.
  8. 8State the answer with units, and add one line of interpretation.

Quickest way: P/V ratio shortcut

When to use it: Use when the question gives sales, variable cost or profit for one or two periods and asks for BEP, MOS or sales for a target profit.

  1. Work out P/V ratio = Contribution ÷ Sales. With two periods, use change in profit ÷ change in sales.
  2. Fixed cost = Contribution − Profit.
  3. BEP = Fixed cost ÷ P/V ratio.
  4. MOS = Profit ÷ P/V ratio.
  5. Target sales = (Fixed cost + Target profit) ÷ P/V ratio.

Common mistakes in Cost-Volume-Profit Analysis and P/V Ratio

  • Using total cost instead of variable cost when finding contribution.

    Students see 'cost' in the question and subtract all of it from sales.

    Fix: Contribution = Sales − Variable cost only. Fixed cost is deducted after contribution, never before.

  • Dividing fixed cost by P/V ratio and calling the answer units.

    The two BEP formulas look alike.

    Fix: Fixed cost ÷ P/V ratio gives rupees of sales. Fixed cost ÷ contribution per unit gives units. Label the answer.

  • Leaving the P/V ratio as 40 instead of 0.40 in the formula.

    The ratio is written as a percentage.

    Fix: Convert to a decimal or fraction before dividing, e.g. 40% = 2/5.

  • Taking margin of safety as actual sales minus total cost.

    Confusion with profit.

    Fix: MOS is always actual (or budgeted) sales minus break-even sales.

  • Adding post-tax profit directly to fixed cost for target sales.

    The tax step is skipped.

    Fix: Convert first: profit before tax = profit after tax ÷ (1 − tax rate). Then add it to fixed cost.

  • Applying the old fixed cost after a step-up in capacity.

    Students forget to read the changed data.

    Fix: Underline every change in the question and rebuild fixed cost, price and variable cost for the new case.

Worked examples

Example 1

Sun Traders sells a product at ₹50 per unit. Variable cost is ₹30 per unit and fixed cost is ₹2,00,000 a year. Actual sales are 14,000 units. Calculate (a) P/V ratio, (b) break-even point in units and rupees, (c) margin of safety, (d) sales in units to earn a profit of ₹1,00,000.

Show the solution
  1. Contribution per unit = 50 − 30 = ₹20.
  2. (a) P/V ratio = 20 ÷ 50 × 100 = 40%.
  3. (b) BEP units = 2,00,000 ÷ 20 = 10,000 units. BEP value = 10,000 × 50 = ₹5,00,000. Check: 2,00,000 ÷ 0.40 = ₹5,00,000.
  4. (c) MOS = 14,000 − 10,000 = 4,000 units, or 4,000 × 50 = ₹2,00,000. MOS ratio = 4,000 ÷ 14,000 × 100 = 28.57%.
  5. (d) Required units = (2,00,000 + 1,00,000) ÷ 20 = 15,000 units, i.e. sales of ₹7,50,000.

Answer: P/V ratio 40%; BEP 10,000 units (₹5,00,000); MOS 4,000 units (₹2,00,000), 28.57% of sales; 15,000 units needed for ₹1,00,000 profit.

Example 2

A company had sales of ₹8,00,000 and profit of ₹60,000 in Year 1. In Year 2 sales were ₹10,00,000 and profit was ₹1,20,000. Fixed cost is the same in both years. Find the P/V ratio, fixed cost, break-even sales, and sales needed for a profit of ₹1,50,000.

Show the solution
  1. Change in profit = 1,20,000 − 60,000 = ₹60,000.
  2. Change in sales = 10,00,000 − 8,00,000 = ₹2,00,000.
  3. P/V ratio = 60,000 ÷ 2,00,000 × 100 = 30%.
  4. Contribution in Year 1 = 30% × 8,00,000 = ₹2,40,000.
  5. Fixed cost = Contribution − Profit = 2,40,000 − 60,000 = ₹1,80,000.
  6. Break-even sales = 1,80,000 ÷ 0.30 = ₹6,00,000.
  7. Sales for ₹1,50,000 profit = (1,80,000 + 1,50,000) ÷ 0.30 = 3,30,000 ÷ 0.30 = ₹11,00,000.

Answer: P/V ratio 30%; fixed cost ₹1,80,000; break-even sales ₹6,00,000; sales of ₹11,00,000 for a profit of ₹1,50,000.

Exam tips

  • In MCQs, compute the P/V ratio first. Most options follow from it in one step.
  • Write the formula, then the substitution, then the answer. This earns method marks even if arithmetic slips.
  • Always state units or rupees. Examiners check whether BEP is in units or value.
  • If asked to draw a break-even chart or profit-volume graph, label both axes, mark BEP and the margin of safety, and use a scale that fits the page.
  • Add a short interpretation, for example that a high margin of safety means lower risk of loss.

Practice questions from Marginal Costing

Cost-Volume-Profit Analysis and P/V Ratio in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Cost-Volume-Profit Analysis and P/V Ratio: frequently asked questions

What is the difference between P/V ratio and profit margin?

The P/V ratio uses contribution (sales − variable cost) divided by sales. Profit margin uses profit divided by sales. The P/V ratio stays constant as volume changes, while the profit margin changes with volume because fixed cost is spread differently.

How do I find fixed cost if it is not given?

Use Fixed cost = Contribution − Profit for any period where sales and profit are known. With two periods, first find the P/V ratio from the changes in profit and sales, then apply this.

What does a break-even chart show that a profit-volume graph does not?

A break-even chart shows sales, fixed cost and total cost lines, so you can see the cost structure. A profit-volume graph shows only profit or loss against volume, which makes the BEP and the effect of volume on profit easier to read.

Is there a negative mark in the CMA Inter MCQs on this topic?

No. Neither the question papers nor the ICMAI prospectus provide for negative marking, so attempt every MCQ. Compute the P/V ratio and BEP carefully to pick the correct option.