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COST-VOLUME-PROFIT RELATIONSHIP

 Revenues – Costs = Profit
 Costs = Variable costs + Fixed costs

REVENUES
 Revenues = Selling Price X Sales Volume

COSTS
 Expanded Costs Equation
 Total Costs = Fixed Costs + Variable Costs
 Fixed Costs is fixed and does not change with production volume
 Variable Costs = Production volume x Unit Variable costs

ASSUMPTIONS
 Production Capacity: 10 units
 Production/Sales: 8 units
 Unit Selling Price: Php50
 Unit Variable cost: Php30
 Contribution Margin: Php20
 Fixed Costs: Php100

CONTRIBUTION MARGIN
 Contribution Margin = Selling Price – Variable Costs



TOTAL COST COMPONENTS
PRODN/ SALES TOTAL VARIABLE COST FIXED COST TOTAL COST
0 0 100 100
1 30 100 130
2 60 100 160
3 90 100 190
4 120 100 220
5 150 100 250
6 180 100 280
7 210 100 310
8 240 100 340




UNIT COST COMPONENTS

PRODN/SALES UNIT VARIABLE COST UNIT FIXED COST UNIT TOTAL COST
0 0 100 100
1 30 100 130
2 30 50 80
3 30 33 63
4 30 25 55
5 30 20 50
6 30 17 47
7 30 14 44
8 30 13 43





0
200
400
0 1 2 3 4 5 6 7 8 9
C
O
S
T

PRODUCTION
TOTAL COST COMPONENTS
TOTAL VARIABLE COST
FIXED COST
TOTAL COST
0
50
100
150
0 1 2 3 4 5 6 7 8 9 10
C
O
S
T

PRODUCTION
UNIT COST COMPONENTS
UNIT VARIABLE COST
UNIT FIXED COST
UNIT TOTAL COST
PRODN/SALES` REVENUES TOTAL VAR COST TOTAL CONTRIBUTION FIXED COST TOTAL COST PROFIT/LOSS
0 0 0 0 100 100 -100
1 50 30 20 100 130 -80
2 100 60 40 100 160 -60
3 150 90 60 100 190 -40
4 200 120 80 100 220 -20
5 250 150 100 100 250 0
6 300 180 120 100 280 20
7 350 210 140 100 310 40
8 400 240 160 100 340 60




USES OF CVP ANALYSIS
 Determine breakeven volume
 Get bearing as to the level of activity
 If below breakeven, cost reduction focus
 If way above breakeven, consider operating leverage
OPERATING LEVERAGE
 Trading variable costs for fixed costs
 Should increase profitability, but also risks

-200
-100
0
100
200
300
400
500
0 1 2 3 4 5 6 7 8 9 10
R
E
V
E
N
U
E
/
C
O
S
T
/
P
R
O
F
I
T

PRODUCTION/SALES
COST-VOLUME PROFIT CHART
REVENUES
TOTAL VAR COST
TOTAL CONTRIBUTION
FIXED COST
TOTAL COST
PROFIT/LOSS