SOC

Strategic Cost
Management
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Cost-volume-profit
analysis
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Apply Multiproduct
Cost-volume-
cost-volume- Cost-volume-
profit analysis
profit analysis profit
analysis

- Assumptions of - Margin of - Weighted-

cost-volume safety average
profit - CVP for contribution
- CVP graph decision making margin
- Basic CVP - Changes in - Weighted-
Analysis cost structure average
- Profit equation - Degree of contribution
method operating margin ratio
- Unit leverage
contribution
margin method
- Contribution
SOC

Cost-volume-
profit analysis

- Is a decision-making tool that focuses on

the relationship among the volume and mix
of units sold, prices, variable costs, fixed
costs, and profit
- The CVP framework allows managers to
evaluate how changing one or more of
these key variables will impact profitability,
while holding everything else constant
SOC

Assumptions of Cost-Volume-Profit Analysis

Assumption Explanation
1. Linear cost and Will use a straight line to approximate the relationship
revenue function between total cost and sales volume, as well as total revenue
and sales volume.
2. All costs can be For mixed costs, the total fixed cost and variable costs must be
classified as either determined.
fixed or variable
3. Only volume Ignore other factors that can affect costs and revenue, such as
affects total cost employee learning curves, productivity gains etc.
4. Production This simplifies the analysis because some costs vary with
volume is equal to production while others vary with sales volume
sales volume
5. Constant For companies that sell multiple products and services, we
product mix assume that the relative proportion of units old or sales
revenue generated by each product or service line remains
constants
SOC

CVP Graph

- A cost-volume-profit graph, or CVP graph,

provides a visual presentation of the
relationship between total revenue, total
costs, volume and profit.
- Break-even point is the point at which the
total revenue and total cost lines cross
(leaving zero profit).
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Cost-Volume-Profit Graph
SOC

Basic CVP
Analysis

- Two types of CVP Analysis:

a. Break-even analysis
b. Target profit analysis

- Approaches or methods to model the

relationship between revenues, costs, profit
and volume:
a. Profit Equation Method
b. Unit Contribution Margin Method
c. Contribution Margin Ratio Method
SOC

Profit Equation Method

Total Sale - Total Variable - Total

Revenue Fixed
= Profit
Cost
Costs

Unit Price x - Unit VC x Qty. Total = Profit

-
Qty Fixed
Costs
SOC

Profit Equation Method

Break- Let us use Starbucks as example. The unit price is P2.50, the
Even unit variable cost is P1.00, and the total fixed costs are
Analysis P12,000. To find the break-even point in units, we simply set
the profit equation equal to zero and solve for the quantity

Unit Price x - Unit VC x Qty. Total = Profit

-
Qty Fixed
Costs
(P2.50 x Q) - (P1.00 x Q) - P12,000 = 0

(P2.50 – 1.00) x Q = 0

P12,000
Q =
÷ P1.50
Q = 8,000
SOC

Profit Equation Method

Let’s prove
this!

STARBUCKS COFFEE
Contribution Margin Income Statement
@ 8,000 units
Per Unit Units Total
Sales Revenue
P2.50 8,000 P20,00
Less: Variable Costs
1.00 8,000 0
8,000
Contribution margin
1.50 P12,00
Less: Fixed Costs
0
Net Operating
Income 12,000
0
SOC

Profit Equation Method

Target Let us use Starbucks as example. The unit price is P2.50, the
Profit unit variable cost is P1.00, and the total fixed costs are
Analysis P12,000. The manager wants to earn P18,000 in profit. How
much units of coffee must the store sell each month?

Unit Price x - Unit VC x Qty. Total = Profit

-
Qty Fixed
Costs
(P2.50 x Q) - (P1.00 x Q) - P12,000 = P18,0
00
P12,000
(P2.50 – 1.00) x Q = +
P18,000
P30,000
Q =
÷ P1.50
Q = 20,00
0
SOC

Profit Equation Method

Let’s prove
this!

STARBUCKS COFFEE
Contribution Margin Income Statement
@ 20,000 units
Per Unit Units Total
Sales Revenue
P2.50 20,000 P50,00
Less: Variable Costs 20,000 0
1.00
Contribution margin 20,000
1.50 P30,00
Less: Fixed Costs
0
Net Operating
Income 12,000
18,000
SOC

Unit Contribution Margin Method

Per Unit Units Total
Break-
Even Sales Revenue P2.50
Analysis Less: Variable Costs
1.00
Contribution margin
1.50 x Q = P12,00
Less: Fixed Costs
0
Net Operating
Income 12,000
0

To compute for Break-Even

Units (Q):
_ Total Fixed Costs____ = Break-Even Units
(Q)
Unit Contribution
_ P12,000____Margin
= 8,000 units
P1.50
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Unit Contribution Margin Method

Per Unit Units Total
Target
Profit Sales Revenue P2.50
Analysis Less: Variable Costs
1.00
Contribution margin
1.50 x Q = P30,00
Less: Fixed Costs
0
Net Operating
Income 12,000
P18,00
0
To determine number of units needed to earn a
target profit
Total Fixed Costs_+ Target Profit_ = Target Units (Q)
Unit Contribution Margin
_ P12,000_+ = 20,000 units
P18,000___
P1.50
SOC

Contribution Margin Ratio Method

Per Unit Percent of Sales
Sales Revenue P2.50 100%
Less: Variable Costs 1.00 40%
Contribution margin
1.50 60% (P1.50/P2.50
Break- )
Even
Analysis

To compute for Break-Even

Sales (P):
_ Total Fixed Costs____ = Break-Even Sales
Contribution Margin Ratio (P)
_ (%)
P12,000____ = P20,000
60%
SOC

Contribution Margin Ratio Method

Per Unit % of Total
Sales
P2.50 100% P20,00
Sales Revenue
1.00 40% 0
Less: Variable Costs
1.50 60% 8,000
P12,00
Contribution margin
Break- 0
Less: Fixed Costs
Even
Net Operating 12,000
0
Analysis
Income
To compute for Break-Even
Sales (P):
_ Total Fixed Costs____ = Break-Even Sales
Contribution Margin Ratio (P)
_ (%)
P12,000____ = P20,000
60%
SOC

Contribution Margin Ratio Method

Per Unit % of Total
Sales
P2.50 100% P50,00
Sales Revenue
1.00 40% 20,000
0
Less: Variable Costs
Contribution margin 1.50 60% 30,00
Target 0
Less: Fixed Costs
Profit
Net Operating 12,000
P18,00
Analysis
Income 0
To compute for Target Sales (P):

_ Total Fixed Costs____ = Target Sales (P)

Contribution Margin Ratio
_ (%)
P12,000 + = P50,000
P18,000____
60%
SOC

Margin of
Safety

- Is the difference between actual or

budgeted sales and the break-even point.

- This of the margin of safety as a buffer

zone that identifies how much sales can drop
before the business will suffer loss.

Margin of = Actual or Budgeted - Break-even

Safety Sales Sales
SOC

Margin of Safety
To apply the margin of Contribution Margin Income Statement
safety, let’s assume that @ 15,000 units
our Starbucks branch sold Per Unit Total
15,000 coffee drinks during
the most recent month Sales Revenue
P2.50 P37,50
(February) as shown in the Less: Variable Costs
1.00 0
following contribution
Contribution margin
margin income statement:
Less: Fixed Costs 1.50 15,000
P22,50
0
Net Operating
Income 12,000
10,500
Margin of = Actual or Budgeted - Break-even
Safety Sales Sales
P17,50 = P37,50 - 20,000
0 0
SOC

Margin of Safety
Margin of
Safety Ratio

Margin of = Actual or Budgeted - Break-even

Safety Sales Sales
P17,50 = P37,50 - 20,000
0 0
To compute for MOS Ratio

_ Margin of Safety____ = Margin of Safety Ratio

Actual or Budgeted Sales (%)
_ P17,500____ = 46.7%
P37,500
SOC
Contribution Margin

Exercis
e:
1. Baugh Company expects to sell 5,000 chairs for P10 per
unit. The contribution margin ratio is 30 percent and Baugh
will break even at this sales level. What are Baugh’s fixed
costs?

2. Whistler Co. sells one model of radio. Suppose its cost

per radio is P125 and its total fixed costs are P4,120. Each
radio sells for P195. How many radios must Whistler sell to
break even?
SOC
Contribution Margin

Exercis
e:
3. Recent information for Shady Co., which makes
automobile sunscreens: Selling price per screen-P18, total
fixed cost per month P1,225 and variable cost per screen-
P7. If Shady wants to earn P1,250 profit next month, how
many screen must it sell?

4. Various information for Happy Camper., which makes

sleeping bags: Selling price per bag P30, total fixed cost
per month P2,250, variable cost per bag P21, last month’s
profit P1,260. How many sleeping bags did the company
sell last month?
SOC
Contribution Margin

Exercis
e:
Unit Sales Price Unit Variable Unit Contribution
Costs Contribution Margin Ratio
Margin
P22.00 P10.00 ? ?
? 10.00 24.00 ?
50.00 ? ? 25%

6. Jasper Company has sales of P185,000 and a break-even

sales point of P120,000. Compute Jasper’s margin of safety
and its margin of safety ratio