COST-VOLUME-PROFIT ANALYSIS

CVP ANALYSIS
• SHORT RUN MODEL THAT FOCUSES ON THE RELATIONSHIPS AMONG
SELLING PRICE, VARIABLE COSTS, FIXED COSTS, VOLUME AND PROFIT.
• HELPS MANAGERS IN ITS PLANNING FUNCTION BY ESTIMATING THE
LEVEL OF PRODUCTION AND SALES, BOTH IN UNITS AND IN
AMOUNTS, REQUIRED FOR THE COMPANY TO BREAKEVEN
• ALSO KNOWN AS BREAKEVEN ANALYSIS
UNDERLYING ASSUMPTIONS
• ALL COSTS ARE EITHER VARIABLE OR FIXED
• TOTAL COSTS AND TOTAL REVENUE ARE PREDICTABLE AND LINEAR
• FIXED COSTS REMAIN CONSTANT OVER THE RELEVANT RANGE
• UNIT VARIABLE COSTS REMAIN CONSTANT OVER THE RELEVANT
RANGE
• UNIT SELLING PRICE AND SALES MIX REMAIN CONSTANT OVER THE
RELEVANT RANGE
• FINISHED GOODS AND IN PROCESS INVENTORIES DO NOT CHANGE
SIGNIFICANTLY
• THE TIME VALUE OF MONEY IS IGNORED
CONTRIBUTION MARGIN
• TOTAL CONTRIBUTION MARGIN
• CONTRIBUTION MARGING PER UNIT
• CONTRIBUTION MARGIN RATIO

Example. Ray Company manufactures cell phones and sells them to

wireless service providers for $60. Ray Company’s variable cost is $35
per phone. Compute for the unit contribution margin, contribution
margin ratio and total contribution margin if the total units to be sold is
1,500.
PROBLEM 1
A retail company determines its selling price by marketing up variable
costs 60%. In addition, the company uses frequent selling price
markdowns to stimulate sales. If the markdown average 10%, what is
the company’s contribution margin ratio?
a. 27.5%
b. 30.6%
c. 37.5%
d. 41.7%
(CIA Adapted)
BREAKEVEN POINT
• The level of sales and production at which the company earns no
profit neither incurs any loss
• Breakeven Point in Units
• Breakeven Point in Sales Revenue

Example. Ray Company manufactures cell phones and sells them to

wireless service providers for $60. Ray Company’s variable cost is $35
per phone. The total amount of fixed costs amounted to $150,000.
Determine the BEP in Units and in Sales Revenue.
 PROBLEM 2
A company manufactures a single product. Estimated cost data regarding this
product and other information for the product and the company are as follows:

Sales per unit price $40

Total variable production cost per unit $22
Sales commission (on sales) 5%
Fixed cost and expenses:
Manufacturing overhead $5,598,720
General and administrative $3,732,480
Effective income tax rate 40%
The number of units the company must sell in the coming year to breakeven is:
a. 388,800 units
b. 518,400 units
c. 583,200 units
d. 972,000 units CIA Adapted
 PROBLEM 3
A company sells a single product at a price of $50 per unit. The company has budgeted to sell
600,000 units in the coming year. The company’s budgeted income statement for the coming
year is as follows:
Sales ($50 x 600,000) $30,000,000
Cost of sales 20,000,000
Gross profit $10,000,000
Sales, general and administrative expenses 7,500,000
Operating income $2,500,000

Cost of sales is 75% variable cost and 25% fixed cost. Sales, general and administrative expenses
is 40% variable cost and 60% fixed cost. Management wants to know on how sales volume can
go without the company suffering an operating loss.
Based on the budgeted information, what is the company’s breakeven points units?
a. 475,000 units
b. 449,910 units
c. 500,000 units
d. 300,000 units HOCK
PROBLEM 3 CONT.
What is the company’s breakeven point in revenue?
a. $25,000,000
b. $22,500,000
c. $28,500,000
d. 23,750,000
 PROBLEM 4
KJR Corp. has the following partial contribution income statement at a
sales volume of 900,000 units for its single product:
Sales revenue $81,000,000
Variable cost 56,700,000
Contribution margin $24,300,000

KJR’s controller has calculated that the company’s break-even point is

750,000 units. What are KJR’s total fixed costs?
a. $24,300,000
b. $4,050,000
c. $20,250,000
d. $18,225,000 HOCK
PROFIT REQUIREMENT
• TARGET PRE-TAX PROFIT
• TARGET VOLUME
• TARGET SALES REVENUE

Example. Assume the following: The selling price of a product is $4.00,

variable costs are $2.20, and fixed costs are $4,600, and the company
must achieve a minimum pre-tax profit of $5,000. What is the required
sales level to achieve the pre-tax profit?
Profit requirement
• Target pre-tax profit margin
• Target volume
• Target sales revenue

Example. Assume the same facts in the previous exercise: selling price
is $4.00, variable costs are $2.20, and the fixed costs are $4,600.
However, we will change the profit requirement to 35% of sales.
Same requirements.
Profit requirement
• Target after-tax profit
• Target volume
• Target sales revenue

Example. Assume the following: The selling price of a product is $4.00,

variable costs are $2.20, and fixed costs are $4,600, and the company
must achieve a minimum after-tax profit of $5,000. What is the
required sales level to achieve the target profit assuming there is 40%
tax rate?
Profit requirement
• Target after-tax profit margin
• Target volume
• Target sales revenue

Example. Assume the same facts in the previous exercise: selling price
is $4.00, variable costs are $2.20, and the fixed costs are $4,600.
However, we will change the profit requirement to 20% after-tax of
sales revenue.
Determine the required sales volume and sales revenue.