What Is a Profit-Volume Ratio?

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There's more than one way to measure the profitability of a business, and the profit-volume is one of the simplest. This number measures sales volume and selling price as a direct ratio; the higher your P/V, the more profitable your company. You can keep track of P/V on every product you sell and use it as a measure of the performance of different departments and of the company as a whole.

The Contribution Number

The P/V ratio consists of two numbers: "contribution" and selling price. Contribution measures total sales less variable costs on whatever product or line of products you're offering. This is the top "numerator" of the profit-volume ratio. A hotel's contribution, for example, consists of all payments for rooms, less expenses such as maintenance, salaries and utilities. Companies selling more than one product keep contribution numbers on each individual item as they follow sales trends through the months and years.

Calculating the Ratio

The denominator profit-volume ratio is the selling price. Profit-volume measures the profit as a percentage of contribution. If total contribution on desks is $10, and the price on the desk is $100, then the P-V ratio is simply .10 or 10 percent. By measuring P/V, a company can determine its most profitable products and take measures to increase the profitability of those items with a lower ratio.