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CMA Intermediate · Cost Accounting · Marginal Costing

Which statement about the P/V ratio is correct, assuming selling price and variable cost per unit are constant?

The P/V ratio equals contribution divided by sales. It measures how much of each rupee of sales remains after variable costs. Fixed cost changes do not alter it, and profit divided by sales is a different measure, the net profit margin.

  1. AIt rises when fixed costs increase
  2. BIt equals contribution divided by salesCorrect
  3. CIt equals profit divided by sales
  4. DIt equals fixed cost divided by contribution

Explanation

P/V ratio is contribution divided by sales, equivalently change in profit over change in sales. Fixed costs do not affect it, as it uses only price and variable cost. Profit divided by sales is the net profit margin, which differs because it deducts fixed costs.

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