CVP Analysis

CVP Analysis

 CVP Analysis- is used for profit planning by way of systematic analysis of the
profit’s relationship with various cost and volume of sales
 Factors Affecting Profit
If there is an increase in.. Then profit tends to..
1. Selling Price Increase
2. Unit Variable Cost Decrease
3. Fixed Cost Decrease
4. Volume (Unit Sales) Increase
Terminologies in CVP Analysis

1. Contribution Margin (CM)- is the difference between sales and variable cost. It
is otherwise known as marginal income, profit contribution, contribution to fixed
cost or incremental contribution.

 Contribution Margin per unit= Sales per unit – Variable Cost per unit
 Contribution Margin= Total Sales- Total Variable Cost
CVP Graph
450,000

400,000

350,000 Total Sales

300,000

250,000
Total Expenses
200,000

150,000
Fixed Expenses
100,000

50,000

-
- 100 200 300 400 500 600 700 800

Units
2. Break-Even Point (BEP)- a level of activity, in units (break-even volume) or in
pesos (break-even sales, at which total revenues equal total cost. At the break-
even point, there is neither profit nor loss.

𝐹𝑖𝑥𝑒𝑑 𝐶𝑜𝑠𝑡
 𝐵𝐸𝑃 𝑢𝑛𝑖𝑡𝑠 = 𝐶𝑀 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡
𝐹𝑖𝑥𝑒𝑑 𝐶𝑜𝑠𝑡
 𝐵𝐸𝑃 𝑝𝑒𝑠𝑜 𝑠𝑎𝑙𝑒𝑠 = 𝐶𝑀 𝑅𝑎𝑡𝑖𝑜
 𝐶𝑀
 𝐶𝑀 𝑅𝑎𝑡𝑖𝑜 = 𝑆𝑎𝑙𝑒𝑠

(𝐹𝑖𝑥𝑒𝑑 𝐶𝑜𝑠𝑡+𝑃𝑟𝑜𝑓𝑖𝑡∗)
 𝑈𝑛𝑖𝑡 𝑆𝑎𝑙𝑒𝑠 𝑤𝑖𝑡ℎ 𝑇𝑎𝑟𝑔𝑒𝑡 𝑃𝑟𝑜𝑓𝑖𝑡 = 𝐶𝑀 𝑝𝑒𝑟 𝑈𝑛𝑖𝑡

𝑃𝑟𝑜𝑓𝑖𝑡 𝑎𝑓𝑡𝑒𝑟 𝑡𝑎𝑥

 ∗ 𝑃𝑟𝑜𝑓𝑖𝑡 𝑚𝑢𝑠𝑡 𝑏𝑒 𝑒𝑥𝑝𝑟𝑒𝑠𝑠𝑒𝑑 𝑏𝑒𝑓𝑜𝑟𝑒 𝑡𝑎𝑐 = (100%−𝑇𝑎𝑥 𝑟𝑎𝑡𝑒)
3. Margin of Safety – the difference between actual sales and breakeven sales. It
indicated the maximum amount by which sales could decline without incurring a
loss

 Margin of Safety = Sales- Break-Even Sales

 Margin of Safety Ratio= Margin of Safety / Sales
Refresh

Sales(1,000 units) 40,000.00

Less: Variable Cost 15,000.00
Contribution Margin 25,000.00
Less: Fixed Cost 15,000.00
Profit 10,000.00
 Sales Mix- the relative combination of quantities of sales of various products
that make up the total sales of the company

 Over-all BEP units =Fixed Cost/ Weighted Average CM per unit

 Over-all BEP peso sales= Fixed Cost/ Weighted Average CM Ratio
 1. Maria Company produces and sells two products, tables and chairs.
Following is next month's income budget

Chairs Tables TOTAL

Unit Sales 60.00 15.00 75.00

Sales 1,200.00 187.50 1,387.50

Variable Cost 1,050.00 112.50 1,162.50
Contribution Margin 150.00 75.00 225.00
Fixed Costs 90.00
Profit 135.00

 Requirement:
a) How many units of chair should be sold next month to break-even?
b) How many units of tables should be should to earn a profit of Php 150?
 Indifference point- The level of volume at which two alternatives being
analyzed would yield equal amount of total cost or profit

 (Unit CM x Q) – Fixed Cost = (Unit CM x Q) – Fixed Cost

 Fixed Cost + (Unit VC x Q) = Fixed Cost + (unit VC x Q)