A firm has total sales of Rs. 4,00,000 and variable cost of Rs. 2,00,000. If the firm has made profit of Rs. 50,000, then the profit volume ratio of the firm is _______.
- A.50%
- B.30%
- C.20%
- D.40%
Correct answer
Explanation
The correct answer is A, 50%. The profit volume ratio measures contribution as a percentage of sales, and contribution is sales minus variable cost. Here contribution is four lakh rupees minus two lakh rupees, that is two lakh rupees, and the ratio is two lakh divided by four lakh, which is one half or 50 per cent. The profit figure of fifty thousand rupees is not needed for the ratio; it is given so that fixed cost can be worked out as contribution minus profit, that is one lakh fifty thousand rupees. Option B is wrong because thirty per cent would need a contribution of one lakh twenty thousand rupees. Option C is wrong because twenty per cent follows if the profit figure is wrongly divided by sales, the commonest mistake in this question. Option D is wrong because forty per cent would need a variable cost of two lakh forty thousand rupees.
Read the full article: Production, Cost and Revenue: Concepts and Formulas
Practice Questions
View allWhich of the following costs remains the same at every level of output in the short run?
- A.Total variable cost
- B.Total fixed cost
- C.Marginal cost
- D.Average cost
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Fixed cost is the payment for factors that cannot be varied in the short run, such as the rent of the factory building, insurance and the salary of permanent staff, and it has to be met even when output is zero, which is why it is also called supplementary or…
Read the full explanation →As the level of output increases, the average fixed cost of a firm
- A.remains constant
- B.rises continuously
- C.falls continuously but never becomes zero
- D.first falls and then rises
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Average fixed cost is total fixed cost divided by output; the numerator is unchanged, so a larger output spreads the same fixed cost over more units.
Read the full explanation →The marginal cost curve cuts the average cost curve at
- A.the minimum point of the average cost curve
- B.the maximum point of the average cost curve
- C.the point where average cost equals average fixed cost
- D.no point at all
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The reason is arithmetic rather than economic: so long as marginal cost is below average cost, each extra unit pulls the average down, and once marginal cost rises above average cost the average must rise, so the two can only be equal where the average is at its lowest.
Read the full explanation →The law of variable proportions operates in which situation?
- A.When all factors of production are increased in the same proportion
- B.When one factor is varied and the others are held fixed
- C.Only in the long run
- D.Only when the firm is in equilibrium
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This is the defining condition of the short run, where plant and machinery cannot be changed, so only the proportion between the variable factor and the fixed factor alters.
Read the full explanation →Under perfect competition, the average revenue of a firm is equal to
- A.total cost
- B.marginal cost only
- C.price and marginal revenue
- D.half the price
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A firm in perfect competition is a price taker because its output is a negligible part of the market, so it can sell any quantity at the ruling price.
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