UNIVERSITY OF SAINT LOUIS-TUGUEGARAO

School of Business Administration and Accountancy, 2013-2014

Junior Philippine Institute of Accountants
MEMORY AID IN MANAGEMENT ADVISORY SERVICES
Any form of reproduction of this copy is strictly prohibited!!!

CHAPTER 4:
CVP Analysis and Marginal Costing

☛COST-VOLUME PROFIT ANALYSIS 4. Total fixed costs are constant over the
relevant range, but fixed costs per unit vary
 Cost-volume profit analysis is a systematic inversely with the cost driver or volume
examination of the relationships among 5. Selling prices per unit and market
costs, cost driver, and profit. conditions remain unchanged
6. Production equals sales, i.e., there is no
☛ELEMENTS OF CVP ANALYSIS change in inventory
7. If the company sells multiple products, sales
1. Sales
mix is constant
a. Selling Price
8. Technology, as well as productive efficiency,
b. Units of Volume
is constant
2. Total fixed cost
9. The time value of money is ignored
3. Variable cost per unit
4. Sales mix ☛BASIC ASSUMPTIONS WITHIN THE RELEVANT
RANGE
☛APPLICATIONS OF CVP ANALYSIS
Linearity – the behaviour of sales and costs is linear.
Planning and decision-making, which may involve
choosing the: Behaviour of sales, costs and expenses:

1. Type of product to produce and sell;  Sales – it changes directly in relation to the
2. Pricing policy to follow; level of units sold.
3. Marketing strategy to use; and  Fixed costs – total fixed cost is constant
4. Type of productive facilities to acquire without regard to the change in the level of
units of production and sales; unit fixed
☛INHERENT SIMPLIFYING ASSUMPTIONS OF CVP cost changes
ANALYSIS  Variable costs – total variable costs change
in direct proportion with the level of units
1. All costs are classifiable as either variable or
produced and sold; unit variable cost is
fixed
constant
2. Cost and revenue relationships are
predictable and linear over a relevant range Selling price – assumed to be constant
of activity and a specified period of time
3. Total variable costs change directly with the WIP inventory – disregarded, there is no WIP
cost driver, but variable costs per unit are inventory
constant over the relevant range
FG inventory – no change in the FG inventory

Management Advisory Services (MAS) Committee: Hazeleen Martinez; Jimmy Joe Miranda; Cliff Mark Confidente;
14 Corina Bariuan; Kristina Gaddon; Rizalyn Taguibao ;Niῆo Rey Mangupag; Marjhon Maramag; Leo Jay Labasan
Adviser: Mary Queen Ramos, CPA
 UNIVERSITY OF SAINT LOUIS-TUGUEGARAO
School of Business Administration and Accountancy, 2013-2014
Junior Philippine Institute of Accountants
MEMORY AID IN MANAGEMENT ADVISORY SERVICES
Any form of reproduction of this copy is strictly prohibited!!!

Profit = Sales x NPRatio

Products and sales mix: ∆ Profit = ∆CM - ↑ in FC
-There is only one product, or ∆ Profit = ∆CM + ↓ in FC
-If there are 2 or more products produced BEP
and sold, the sales mix is assumed to be constant BEP (units) = FC / UCMargin
FORMULAS USED IN CVP ANALYSIS BEP (pesos) = FC / CMRatio
Contribution Margin Comp. BEP (units) = FC / Average UCM
Sales – Variable costs Comp. BEP (pesos) = FC / Average CMR
CM = Sales x CMR BEP (units) = Actual sales x (1 –
CM = Fixed costs + IBIT MSRatio)
CM = Quantity sold x UCM At BEP: Profit (loss) = 0
CMR Sales = Total cost
CMR = 100% -VCRatio CM = Total fixed cost
CMR = UCM / USP Fixed Cost
CMR = ∆EBIT / ∆Sales (if FC FC = CM (at BEP)
remains the same) FC = CM= Profit
CMR = CM / Sales FC = BEP (units) x UCM
CMR = NPR / MSR VCRatio
UCM VCRatio = VC / Sales
UCM = USP – UVC VCRatio = UVC / USP
UCM = FC / BEP (units) VCRatio = 100% -CMR
UCM = CM / Quantity sold VCRatio = ∆Costs / ∆Sales
Profit VCRatio = (∆Costs - ↑ in FC) /
Profit = CM – Fixed costs ∆Sales
Profit = Sales x MSRatio x VCRatio = (∆Costs + ↓ in FC) /
CMRatio ∆Sales

Multiple-Product/ Service Break-even Calculations

where: BEPP= Break-even Point in Pesos

BEPP= FC/WaCMR
WaCMR = Weighted Average Contribution Margin Ratio

WaCMR= CMR(Product 1) x SMRP CMR= Contribution Margin Ratio per Product

+ CMR(Product2) x SMRP…

SMRP= Total Sales in Pesos of a Single Product

Total Sales in Pesos SMRP= Peso Sales Mix Ratio

Management Advisory Services (MAS) Committee: Hazeleen Martinez; Jimmy Joe Miranda; Cliff Mark Confidente;
15 Corina Bariuan; Kristina Gaddon; Rizalyn Taguibao ;Niῆo Rey Mangupag; Marjhon Maramag; Leo Jay Labasan
Adviser: Mary Queen Ramos, CPA
 UNIVERSITY OF SAINT LOUIS-TUGUEGARAO
School of Business Administration and Accountancy, 2013-2014
Junior Philippine Institute of Accountants
MEMORY AID IN MANAGEMENT ADVISORY SERVICES
Any form of reproduction of this copy is strictly prohibited!!!

where: BEPU = Break-even Point in Units

BEPU= FC/WaUCM WaUCM= Weighted Average Unit Contribution Margin

WaUCM = UCM(Product 1) x SMRU

UCM= Unit Contribution Margin per Product
+ UCM(Product 2) x SMRU….

SMRU= Total Sales in Units of a Single Product

Total Sales in Units SMRU = Unit Sales mix ratio

RISKS AND UNCERTAINTY:

☛MARGIN OF SAFETY

 indicates the amount by which actual or planned sales may be reduced without incurring a loss. It is the
difference between actual or planned sales volume and break even sales

☛OPERATING LEVERAGE
 a measure of extent to which fixed costs are being used in an organization. The greater the fixed costs in
relation to variable cost, the greater is the operating leverage available and the greater is the sensitivity of
income to changes in sales.

☛DEGREE OF OPERATING LEVERAGE (DOL)

 a measure of the sensitivity of profit changes to changes in sales volume. DOL measures the percentage of
change in profit that results from a percentage of change in sales
Margin of Safety
MS = Actual sales – Actual break- where:
even sales
MS = Budgeted sales – Budgeted MS= margin of Safety
break-even sales MSR= Margin of Safety Ratio
MS = Sales x MSRatio NPR= Net Profit Ratio
MSR = MS / Actual (or Budgeted) CM/R= Contribution Margin/Ratio
sales BE= Break-even
MSR = NPR / CMR USP= Unit Selling Price
MSR = [1 – (BESales / Actual Sales)] DOL= Degree of Operating Leverage
NPRatio EBIT= Earnings Before Interests and
NPRatio = Unit Profit Margin / USP Taxes
NPRatio = MSR x CMR
Degree of operating leverage
DOL = CM/ EBIT
DOL = %∆ in EBIT / % ∆in Sales
Management Advisory Services (MAS) Committee: Hazeleen Martinez; Jimmy Joe Miranda; Cliff Mark Confidente;
16 Corina Bariuan; Kristina Gaddon; Rizalyn Taguibao ;Niῆo Rey Mangupag; Marjhon Maramag; Leo Jay Labasan
Adviser: Mary Queen Ramos, CPA
 UNIVERSITY OF SAINT LOUIS-TUGUEGARAO
School of Business Administration and Accountancy, 2013-2014
Junior Philippine Institute of Accountants
MEMORY AID IN MANAGEMENT ADVISORY SERVICES
Any form of reproduction of this copy is strictly prohibited!!!

☛SENSITIVITY ANALYSIS
 a “what-if” technique that examines the impact of changes on an answer. For example,
computer spreadsheets are used to analyze changes in prices, variable costs, and fixed costs on
expected profits.

COMPREHENSIVE PROBLEM: Solution:

Farm Land makes small plant stands that sell for P25
each. The company’s annual level of production and
sales is 120,000 units. In addition to P430,500 of
fixed manufacturing overhead and P159, 050 of fixed
administrative expenses, the following per-unit costs
have been determined for each plant stand.
Direct Material P 6.00
Direct Labor
Variable Manufacturing
Overhead
Variable Selling Expense
Total Variable Cost P 12.00
Required:
a. Calculate the unit CM in dollars and the CM
ratio for the plant stand
b. Determine the break-even point in number
of plant stands
c. Calculate the dollar break-even point in
number of plant stands
d. Determine Farm Land’s margin of safety in
units, in sales dollars, and as a percentage
e. Compute the company’s degree of
operating leverage. If the sales increase by
25%, by what percentage will before-tax
income increase?
f. How many plant stands must the company
sell to earn P999,450 in before income tax?
g. If the company wants to earn P675,800
after tax and is subject to a 20% tax rate,
how many units must be sold?
h. How many plant stands must be sold to
break-even if Farm Land’s fixed
manufacturing cost increases by P7,865?
a. CM = SP – VC = P25 – P12 = P13 per unit
CM% = CM ÷ SP = P13 ÷ P25 = 52%
b. BEP = FC ÷ CM = P589,550 ÷ P13 = 45,350
plant stands
c. BEP = FC ÷ CM% = P589,550 ÷ 0.52 =
P1,133,750 plant stands
d. MSunits = Current unit Sales – BEP units
sales = 120,000 – 45,350 = 74,650 plant
3.00 stands
0.80 MSPesos = Current sales in pesos – BEP
sales in pesos = P3,000,000 – P1,133,750 =
2.20 P1, 866,250
MS% = MS in units ÷ Current units sales =
74,650 ÷ 120,000 = 62%
e. DOL = Current CM ÷ Current Pre-tax Income
= P1, 560,000 ÷ P970,450 = 1.61
Increase in Income = DOL x % Increase in
Sales = 1.61 x 0.25 = 40.25 percent
f. P13X = P589,550 + P996,450
X = P1,586, 000 ÷ P13
X = 122, 000 plant stands
g. PBT = PAT ÷ (1 – tax rate) = P657, 800 ÷ (1 –
0.20) = P657, 800 ÷ 0.80 = P822, 250
P13X = P589, 550 + P822, 250
X = P1,411,800 ÷ P13
X = 108,600 plant stands
h. X = Increase in FC ÷ CM
X = P7,865 ÷ P13
X = 605 units over BEP
New BEP = 45, 350 + 605 = 45, 955 plant
stands

Management Advisory Services (MAS) Committee: Hazeleen Martinez; Jimmy Joe Miranda; Cliff Mark Confidente;
17 Corina Bariuan; Kristina Gaddon; Rizalyn Taguibao ;Niῆo Rey Mangupag; Marjhon Maramag; Leo Jay Labasan
Adviser: Mary Queen Ramos, CPA
 UNIVERSITY OF SAINT LOUIS-TUGUEGARAO
School of Business Administration and Accountancy, 2013-2014
Junior Philippine Institute of Accountants
MEMORY AID IN MANAGEMENT ADVISORY SERVICES
Any form of reproduction of this copy is strictly prohibited!!!

Management Advisory Services (MAS) Committee: Hazeleen Martinez; Jimmy Joe Miranda; Cliff Mark Confidente;
18 Corina Bariuan; Kristina Gaddon; Rizalyn Taguibao ;Niῆo Rey Mangupag; Marjhon Maramag; Leo Jay Labasan
Adviser: Mary Queen Ramos, CPA