Cost-Volume-

Profit (CVP)
Analysis
 Learning Objectives:
• Explain the important terms through definition and principles.
• Explain the concepts of Cost-Volume-Profit analysis.
• Determine the break even point in number of units and in total sales (Php/ US$).
• Determine the level of sales needed to achieve a desired target profit.
• Compute the Margin of Safety and explain its significance.
• Apply cost volume profit analysis in a multiple selling product setting
• Explain how changes in activity affect Contribution Margin and Net Operating
Income.
• Explain the impact of risk, uncertainty and changing variable on the cost volume
profit analysis
Cost Volume Profit Analysis
Outline
• Cost Volume Profit Relationships
• Break-Even Point
• Margin of Safety
• Target Net Profits
• Sales Mix*
• Sensitivity Analysis*
• Degree of Operating Leverage*
 What is CVP Analysis

• A tool for planning and decision making

• Addresses the following issues:
– The number of units that must be sold to break
even
– Impact of a given reduction in fixed costs on the
break-even point
– Impact of an increase in price on profit
 Elements of CVP Analysis
• Sales- any operation revenue that a company
earns through its business activities.
 Selling Price- market value or agreed exchange
value.
 Units or Volume- number of products
produced or sold in whatever case.

• Variable Cost- are costs that change directly and

proportionately with the level of activity.

• Fixed Cost- are costs that do not change with changing levels of
activity in a relevant range.

• Sales Mix- is the relative proportion of a business products.

General Assumptions in CVP
• Selling Price is constant. The price of a product
or service will not change as volume changes.
• Costs are linear and can be accurately divided
into variable and fixed elements.
• In multiproduct companies, the mix of
products sold remains constant.
• In manufacturing companies, inventories do
not change. The number of units produced
equals the number of units sold.
 CVP Analysis
• Contribution Margin- the total earnings available to pay for fixed
expenses and to generate a profit.

• Contribution Margin Income Statement

SALES XX
TOTAL VARIABLE COST (XX)
TOTAL CONTRIBUTION MARGIN XX
TOTAL FIXED COST (XX)
OPERATING INCOME XX

In terms of actual peso amount and can be expressed through percentage.

 CVP Analysis

Illustration: Contribution Margin Income Statement & BEP units

Information:
Whittier Company plans to sell 1,000 mowers at P400 each in the coming year. Product costs include:
Direct materials per mower P 180
Direct labor per mower 100
Variable factory overhead per mower 25
Total fixed factory overhead 15,000

Variable selling expense is a commission of P20 per mower; fixed selling and administrative expense totals P30,000.

Required:
1. Calculate the total variable expense per unit.
2. Calculate the total fixed expense for the year
3. Prepare a contribution margin income statement for Whittier for the coming year
 CVP Analysis

• Key Answers
3. Whittier Company
1. DM ₱180
Contribution Margin Income Statement
DL 100
For the Period Ended August 31, 20xx
Variable Factory OH 25
Variabble Selling Exp 20
amount per unit
₱325
Sales ( P400X 1,000 mowers) ₱400,000 ₱400
Total Variable Expenses( P325 X 1,000) 325,000 325
Total Contribution Margin 75,000 ₱75
2. Fixed Factory OH ₱15,000
Total Fixed Expenses 45,000
Fixed Selling & Admin 30,000
Operating income ₱30,000
₱45,000
 Break-Even Point

Break-Even Point- Level of sales at which the company’s profit is zero.

- “how much would we have to sell to avoid incurring a loss?”

Two approaches being used to calculate break-even point.

 Equation Method
 Formula Method
 Break-Even Point

+Equation Method
Profit = Unit CM x Q – Fixed Expense
Where; Profit is ZERO
Q is quantity or volume of sales
Wherefore, Q multiplied by the Selling Price is equal to Peso Sales to Break-Even

+Formula Method
Peso Sales to BE = Fixed Expenses in Peso
CM Ratio (%)

Volume Sales to BE = Fixed Expenses in Peso

CM per unit
 Break-Even Point

Illustration:
Ms. Sevee P. a small-time entrepreneur sells coin purses. She sells the said item at P20.
She incurs P14 variable cost for every two pieces coin purse she makes and pays P3,000
monthly for her rental and utilities expenses. What is the BEP of Ms. Sevee P. using both
methods?
 Break-Even Point
• Key Answers Given: Selling Price P20 / purse
Variable Cost P14 / for every 2
Using Equation method where the profit is ZERO, we may plot Fixed Expense P3,000 monthly
the given information as follow;

Profit = Unit CM x Q – Fixed Expense

P0 = (P20 – P7) x Q – P3,000
P13 x Q = 0 + P3,000
Q = P3,000 / P13
Q (Volume Sales to BE) = 230.77 pcs.
Peso Sales to BE = Q x SP
= 230.77 x P20
= P4,615.40
 Break-Even Point
Solving the CM and CM ratio as follows;
Using Formula Method, we may solve the CM = SP – TVC
following; CM =P20 – P7
Peso Sales to BE = Fixed Expenses in Peso CM = P13
CM Ratio (%) CM Ratio = CM / SP
= P3,000 CM Ratio = P13 / P20
65% CM Ratio = 65%
= P4,615.40

Volume Sales to BE = Fixed Expense in Peso

CM/unit
=P3,000
P13
=230.77 pcs.
 Margin of Safety

Margin of Safety- Is the excess of budgeted or actual sales peso over the
break-even volume of sales peso.
-The higher the margin of safety, the lower the risk of not
breaking-even and incurring loss.

Actual Relationship between Margin of Safety and Break-Even Analysis;

MOS% = 1 – BE% or BE% = 1 – MOS%
 Margin of Safety

• -MOS general formula;

Margin of Safety (units)= Actual Volume of Sales – Volume to Break-Even

Margin of Safety (peso) = Actual Peso Sales – Peso Sales to Break-Even

Margin of Safety (percentage) = Margin of Safety in Peso

Actual Peso Sales
 Margin of Safety

Illustration:
Ms. Sevee P. a small-time entrepreneur sells coin purses. She sells the said item
at P20. She incurs P14 variable cost for every two pieces coin purse she makes
and pays P3,000 monthly for her rental and utilities expenses. For the current
month, she gets to raise total sales of P7,000. What is the MOS in units, peso
and percentage of Ms. Sevee P.?
 Margin of Safety
• Key Answers Given: Selling Price P20 / purse
Variable Cost P14 / for every 2
Fixed Expense P3,000 monthly
-Actual Volume of Sales is equal to P7,000 actual sales Actual Sales P7,000
divided by P20 selling price equaling to 350
-Computing the Break-Even in peso and Volume sales to
BE (using formula method),
Break-Even Point = P3,000
65%
= P4,615.38;
Volume Sales to BE = P3,000
P13
=230.77
 Margin of Safety
We may now compute the Margin of Safety;

Margin of Safety (units)= Actual Volume of Sales – Volume to Break-Even

= 350 – 230.77
=119.23
Margin of Safety (peso) = Actual Peso Sales – Peso Sales to Break-Even
=P7,000 – P4,615.38
=P2,384.62
Margin of Safety (percentage) = Margin of Safety in Peso
Actual Peso Sales
=P2,384.62
P7,000.00
=34.07%
 Target Net Profit

Target Net Profits- Helps determine the level of sales needed to achieve a desired
target profit.
-Uses the same two approaches as discussed in the Break-Even point method.

Uses the same two approaches as discussed in the Break-Even point method.
Equation Method
Formula Method
 Target Net Profit

Illustration
Ms. Sevee P. a small-time entrepreneur sells coin purses. She sells the said item at
P20. She incurs P14 variable cost for every two pieces coin purse she makes and pays
P3,000 monthly for her rental and utilities expenses. She needs to earn P10,000 a
month for her savings. What is Ms. Sevee P’s unit and peso sales to attain her target
profit using both methods?
 Target Net Profit
Using Equation method where the target profit is Given: Selling Price P20
P10,000, we may plot the given information as follow; Variable Cost P14 / 2 pcs.
Fixed Expense P3,000
Profit = Unit CM x Q – Fixed Expense Target Profit P10,000
P10,000 = (P20 – P7) x Q – P3,000
P13 x Q = P10,000 + P3,000
Q = P13,000 / P13
Q (Volume Sales to BE) = 1,000
Peso Sales to attain TP = Q x SP
= 1,000 x P20
= P20,000
 Target Net Profit

Using Formula Method, we may solve the problem as CM = SP – TVC

follows; CM = P20 – P7
CM = P13
Peso Sales to BE = Fixed Expenses + Target Profit CM Ratio = CM / SP
CM Ratio (%) CM Ratio = P13 / P20
= P3,000 + P10,000 CM Ratio = 65%
65%
= P20,000
Volume Sales to BE = Fixed Expenses + Target Profit
CM per unit
= P3,000 + P10,000
P13
= 1,000 units
 What is Sales Mix?

• The relative proportion in which a company’s

products are sold
• Based on the premise that different products have
different selling prices, cost structures, and
contribution margins
 Sales Mix
• Two ways to express
>Unit sales mix >Revenue sales mix
 Sales Mix

• Sales Mix

Product Sales Mix Revenue

Sales mix
Mulching Mower
Riding Mower
 Multiproduct Analysis

Break-Even Units for a Multiple-Product Firm

 Determine the unit contribution margin for each
product
 Determine the unit sales mix
 Set up a profit equation that uses these two
components as:
(CM1)(SM1)x + (CM2)(SM2)x – TFC = 0
Where CM = contribution margin, and SM = sales mix
 Multiproduct Analysis

Product CM ratio Revenue Sales WA CM

mix ratio

Mulching Mower

Riding Mower

Total 44%
 Multiproduct Analysis
Sales
Product CM BEP CM/U
Mix
WA CM Units nit CM
Mulching
Mower 75 60% 45 462 75 34,650
Riding
Mower 200 40% 80 308 200 61,600

Total 125 770 96,250

BEP units Fixed cost CM
770 = 96,250 / 125
 Multiproduct Analysis

Break-Even Sales (Php) for a Multiple-Product Firm

 Determine the unit contribution margin ratio for each product
 Calculate the revenue sales mix
 Set up a profit equation that uses these two components as:
(CM1)(SM1)x + (CM2)(SM2)x – TFC = 0
Where CM = contribution margin, and SM = sales mix
 Multiproduct Analysis

Revenue Sales
Product CM ratio
mix
Mulching Mower 19% 43%
Riding Mower 25% 57%
Total 44% 100%
 Multiproduct Analysis

CM Revenue WA CM VC
Product
ratio Sales mix ratio BEP Sales ratio VC CM
Mulching
Mower 19% 43% 8.0% 184,800 81% 150,150 34,650

Riding Mower 25% 57% 14.3% 246,400 75% 184,800 61,600

Total 44% 100% 22.3% 431,200 334,950 96,250

BEP Sales Fixed cost CM
431,200 = 96,250 / 22.3%
 Operating Leverage

• Refers to the ability of the business to increase its

profit in relation to its contribution margin
• The extent to which company uses fixed cost in its
cost structure.
• predicts the effects that fixed costs will have on
changes in operating income when sales volume
changes.
 Operating Leverage
• The degree of operating leverage (DOL) can be measured
by dividing the contribution margin by the operating
income.
DOL= CONTRIBUTION MARGIN
OPERATING INCOME OR

DOL= % in PROFIT
% in SALES
 Operating Leverage
Illustration
COMPANY A COMPANY B
Sales (10k *P 5) = 50,000 Sales (10k *P 5) = 50,000
VC 12,000 VC 30,000
CM 38,000 CM 20,000
FC 30,000 FC 12,000
Net Profit 8,000 Net Profit 8,000

Higher degree of operating leverage indicates

higher proportion of fixed costs and higher risk.
 Operating Leverage

With an operating leverage of 4.75, if Company A increases its

sales by 10%, net income would increase by 47.5% .

% increase in Sales 10%

DOL 4.75
% increase in Profit 47.5%
 Sensitivity Analysis

• Sensitivity analysis is a “what if” technique that estimates

profit or loss results if sales price, cost, volume, or underlying
assumptions change.
ELEMENTS OF CVP BASIC SENSITIVITY
ASSUMPTIONS ANALYSIS
SALE VOLUME CHANGES CHANGES
UNIT SALES PRICE CONSTANT CHANGES
UNIT VARIABLE COSTS CONSTANT CHANGES
TOTAL FIXED COST CONSTANT CHANGES
SALES MIX CONSTANT CHANGES
 Sensitivity Analysis

• shows how the cost-volume-profit model will change

with changes in any of its variables.
• The focus is typically on how changes in variables will
alter profit .
• also used to determine the impact of changes in
variables on the break-even point and target profit.
 Sensitivity Analysis
Illustration :
• Case A. Unit price increase by 20%
• Case B. Unit VC increace by 10%
• Case C. FC decreased to 450,000
• Case D. Unit Sold increase by 20%
• Case E. Unit sales price increase to 100; unit variable cost incease by 15%; and
total fixed cost increase by 5%
 Sensitivity Analysis
Given: Sales ( P 80*45k) 3,600M
Unit Sales Price P 80 VC ( P 50*45k) 2,250M
Unit VC 50 CM 1,350M
Total FC 600,000 FC 600K
Unit Sold 45,000 Income 750K

CM= 3600-2250= 1350

CMR= 1350/3600 = 37.5%
BEp = 600/37.5% = 1,600m
Case Adjusted Data CMR BEP in Pesos Income

A USP (80*1.20) P96 CMR= 46/96 BEP = 600K/47.92% CM (45K * 46) P 2,070,000
UVC 50 = 47.92% FC 600,000
UCM P 46
=1,252,087 Income P 1, 470,000

B USP P80 CMR= 25/80 BEP = CM (45K * 25) P 1,125,000

UVC (P50*1.10) 55 = 31.25% FC 600,000
UCM P 25 600K/31.25% Income P 525,000
=1,920M
CMR= 30/80 CM (45K * 30) P 1,350,000
C FC 450,000 BEP= 450K/37.50% FC 450,000
= 37.50%
= 1,200 M Income P 900,000

D Unit sold: CMR =37.50% BEP= 600K/37.50% CM (54K * 30) P 1,620,000

FC 600,000
(45K * 1.20) = 54,000 = 1,600 M Income P 1,020,000

E USP P100 CMR BEP= 630K/42.50% CM (45K * 42.50) P 1912,500

UVC(P 50* 1.15) 57.50 =42.50/100 FC 630,000
UCM P 42.50 = 42.50%
= 1,482,353 M Income P 1,282,500

FC (600*1.05%) =630 K
 Sensitivity Analysis

CHANGES CMR BEP INCOME

Sales price / unit increase increase decrease increase
Sales price / unit decrease decrease increase decrease
VC / unit increase decrease increase decrease
VC / unit decrease increase decrease increase
Total FC increase No effect increase decrease
Total FC decrease No effect decrease increase
Unit sold increase No effect No effect increase
Unit sold decrease No effect No effect decrease
 THE END!! THANK YOU!!

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