Significance:
The ratio reveals in percentage how much of sales is available for recouping fixed costs and higher the sustaining capacity of the firm to stay in the competitive market. It assists in determining the volume of production required for earning desired profit. This is why management aims to enhance the ratio. The following method can be used:
- By enhancing the selling price per unit.
- By decreasing per unit variable cost.
- By altering the sales mix to sell more profitable products where this ratio is more significant.