company determines the selling price of its products after calculating of the fixed cost, variable cost involved in productions and sales of the items produced by it. There are three other important workings in the process viz.1000000-625000=375000
Margin of safety (MOS) is also calculated by another formula
Margin of safety=Profit/PV ratio
Profit earned is total sales - fixed cost-variable cost
=Rs.1000000-250000-600000=150000
=150000/40%=Rs.375000Now let us calculate contribution* i.e. 1000000-600000= Rs.400000/-
 P/V ratio =contribution x100/sales i.e. 400000x100/1000000=40%
PV ratio=40%
Now we will find out what is breakeven point (BEP).In the cases of low margin, the company has to either increase the selling price to improve the PV ratio or increase the sales turnover to earn satisfactory profit in the business.The following illustration further clarifies how to calculate the p/v ratio, breakeven point and the margin of safety ratio.We can calculate BEP in another method
BEP=Fixed cost/PV ratio,= 250000/40%= Rs.625000/-
It means the company's sales  should be Rs.625000 @ Rs.10 per unit to reach BEP.It is one of the important ratios for computing profitability as it indicates contribution earned with respect of sales.For example, the sale price of a TEU is Rs.80, its variable cost is Rs.60, then PV ratio is (80-60)x 100/80=20x100/80=25%.profit volume ratio, breakeven point and margin of safety.Fixed cost: The Company has to meet its overhead expenses, irrespective of the volume of production and the sales.Thus, the variable cost is the important cost in deciding profitability when fixed costs are constant.From the above example, we may observe that the variable cost is the important cost in deciding profitability when fixed costs are constant.The formula for calculating breakeven point (BEP) is as under.The PV ratio or P/V ratio is arrived by using following formula.What is Profit Volume ratio?.