The correct answer is B.
The profit-volume ratio (P/V ratio) is a measure of a company’s ability to generate profit from sales. It is calculated by dividing the contribution margin by sales. The contribution margin is the amount of revenue that remains after deducting variable costs from sales.
The P/V ratio is a useful tool for managers because it can be used to estimate the impact of changes in sales on profits. For example, if a company’s P/V ratio is 0.5, then a 1% increase in sales will result in a 0.5% increase in profits.
The P/V ratio can also be used to compare the profitability of different products or services. For example, if a company has two products, Product A and Product B, and Product A has a P/V ratio of 0.6 and Product B has a P/V ratio of 0.4, then Product A is more profitable than Product B.
The P/V ratio is a valuable tool for managers, but it is important to remember that it is only one measure of profitability. Other factors, such as fixed costs, should also be considered when making decisions about pricing and production.
Here is a brief explanation of each option:
- Option A: This is the correct formula for the P/V ratio.
- Option B: This formula is incorrect because it includes fixed costs. Fixed costs are not included in the P/V ratio because they do not vary with changes in sales.
- Option C: This formula is incorrect because it subtracts variable costs from sales. Variable costs are included in the P/V ratio because they do vary with changes in sales.
- Option D: This formula is correct. It is the formula for the contribution margin.
- Option E: This formula is incorrect because it divides fixed costs by sales. Fixed costs are not included in the P/V ratio because they do not vary with changes in sales.