Sales Units 30,000
Total Sales (in Rs): 600000.00
Fixed Cost 136000
Variable Costs: 24/unit
in this case, the contribution is negetive (600000-(24*30000)), what to do with P/V Ratio?
Ayyswariya RG
(Knowledge Seeker)
(3711 Points)
Replied 11 August 2013
Goahead and calculate the PV ratio indicating it as Negative PV ratio.
Let us understand what it is :
The negative contribution margin ratio indicates that your variable costs and expenses exceed your sales. In other words, if you increase your sales in the same proportion as the past, you will experience larger losses.
If a business has an overall negative contribution margin, the business often needs to think creatively to resolve the issue. In many cases, the company will find that only some of its products and services result in the negative contribution margin. The business should specifically examine those products and the pricing for those products that cause the negative contribution margin. In the same way, the business should look at individual customers in terms of what they buy, how much they buy and what prices they pay to Identify individual sources that result in the negative overall contribution margin for the company.
How to eliminate :
a) Raise selling prices
b) Reduce variable costs
c) A combination of both
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