STEVE JOBS

Introducing the
first iPhone
 Cost-Volume
Profit Analysis
A systematic examination of the
relationships among the costs,
cost driver, and profit.
 • Planning and Decision Making

Applications • Product facilities to acquire

of CVP
• Type of product to produce
Analysis
• Marketing strategy to use
 Contribution Margin (CM) Income
statement

Sales (Units * SP) P xxxx

Variable Costs (Units * VC) (xxxx)

CM xxxx

TFC (xxxx)

Income before Income tax P xxxx

 EXAMPLE

Steve’s Co. has a

01
sales of P2M, VC of
P700K and fixed costs
of P500K. How much is
Given the same ex., if the CM?
the Co. sold 1000
units, how much is the
CM per unit?
02
 EXAMPLE

Steve’s Co. has a

03
sales of P2M, VC of
P700K and fixed costs
of P390K. How much is
If the sales of the Co. the CM ratio?
amounted to 2M and the
CM ratio is 30%, how
much should have been
the CM? 04
 EXAMPLE

If the sales of the Co.

amounted to 2M and the
CM ratio is 30%, how
05
much should have been
the vc?
 Simplifying assumptions in CVP
analysis

Changes in revenues and costs arise only

because of changes in the number of
product (or service) units sold.
 Simplifying assumptions in CVP
analysis

Total costs can be separated into two components:

fixed cost & variable costs

 Simplifying assumptions in CVP
analysis

When represented graphically, the behaviors

of total revenues and total costs are
linear
 Simplifying assumptions in CVP
analysis

Selling price, variable cost per unit, and

total fixed costs are known and constant.

(within a relevant range and time period)

 Limitations
CVP is only an estimation at its best.

In CVP analysis, it is assumed that total

sales and total costs are linear and can be
represented by straight lines. In some cases,
this assumption may not be found true.
 Limitations
CVP analysis assumes that costs can be accurately
divided into fixed and variable categories.

CVP analysis is performed within a relevant

range of operating activity and it is
assumed that productivity and efficiency of
operations will remain constant.
 Limitations
It assumes no change in inventories during the
period.

If prices, unit costs, sales-mix, operating

efficiency, or other relevant factors
change, then the overall CVP analysis and
relationships also must be modified.
Units Selling Sales F
or Price mix A
Volume C
T
Variable O
fixed R
Sales costs
costs S
per unit
 the sales volume level (in
Break-even pesos or in units) where total
revenues equals total costs,
Point that is, there is neither profit
nor loss.
 100

Methods for
determining BEP 75

• Graphical Method 50
• Contribution
Margin Method
(Formula Approach)
• Equation 25

0
April May June July
Single Product
Break-even
calculations
Selling Price $1,000/unit

$25,000
Fixed Cost

$500/unit
Variable Cost
BEP in Pesos
 $25,000

Breakeven
=
Revenues
$1,000/unit $500/unit

$1,000/unit

$25,000
=

.50

Breakeven
= $50,000
Revenues
BEP in Units
 $25,000

Breakeven in
=
Units $1,000/ $500/
unit unit

$25,000
=

$500

Breakeven in 500
=
Units units
 $25,000

Breakeven in
=
Units
$1,000/unit $500/unit

$25,000
=

$ 500

Breakeven in
= 50 units
Units
Target Operating Income
 Target Operating Income
P50,000

$25,000 + $50,000

Required Sales =

$1,000/unit $500/unit

$1,000/unit

$75,000
=

.50

Required Sales = $150,000

 Target Operating Income
P50,000

$25,000 + $50,000

Required Sales
=
in Units $1,000 $500/
/unit unit

$75,000
=

500/unit

Required Sales
= 150 units
in units
 Target NET Income

Net income is operating income plus nonoperating

revenues (such as interest revenue) minus
nonoperating costs (such as interest cost) minus
income taxes.
Target Operating INCOME GIVEN THE NET INCOME
 Required Sales in Required Sales
Single Product
Units in Pesos

To earn a desired
amount of profit RSU= (FxC + DP)/ CM per unit RSP= (FxC + DP ) / CMR
before tax

__NP__ __NP__

To earn a desired 1— TxR 1— TxR

RSU= FxC +_________ RSP= FxC +_________
amount of profit
CM/u CMR
after tax

To earn a desired
profit ratio RSU=___FxC____ RSP=__FxC____
(profit as % of CM/u-P/u CM/u-PR
sales)
 Legend:

FxC DP NP

Text Here

Required Total fixed Required Desired Desired

Sales in costs Sales in Profit before profit after
Units Pesos tax tax

RSu RSp
 Legend:

PU SP

Contribution Profit per Profit Ratio Selling Price

Margin Ratio unit

CMR PR
 Target Net Income
40,000 & ITR of 20%

$25,000 + (40000/.8)

Required Sales =
$1,000/ $500/
unit unit

$1,000/
unit

$75,000
=

.50

$150,00
Required Sales =
0
 Target Net Income
40,000 & ITR of 20%

$25,000 + (40000/.8)

Required Sales
=
in Units $1,000/ $500/
unit unit

$75,000
=

Required Sales 150

=
in Units units
 To earn a desired Profit
Ratio Given:

Total FC = 25,000

$25,000 SP= $1000

Required Sales
= VC= $500

in Units $500/ $250/

- unit
unit
Profit Ratio = 25%

$25,000
=
$250/
unit

Required Sales 100

=
in Units units
 To earn a desired Profit Ratio
Given:

Total FC = 25,000

$25,000

Required Sales CMR= .5

=
in Pesos
.50 - .25 Profit Ratio = 25%

$25,000
=

.25

Required Sales $100,00

= 100 units * $1,000
in Units 0
 Example
Steve’s Micro Co. manufactures and sells mobile
phones. Last year, the phones sold for $75 each and
the VC to manufacture them were 22.50 per unit. The
Co. needed to sell 20k phones to breakeven. The net
income last year was $50,400. The Co. expects the ff
for the coming year:
The SP of the phones will be $90

VC per unit will increase by 1/3

FC will increase by 10%

The ITR will remain unchanged.

 Example

For the Co. to break-even the coming year, the co.

should sell?
 FC ?
X
20000 UNITS = ——————
$75 - $22.5
X= 20000 * $52.5
X= $1,050,000
breakeven ( units & pesos)
$ 1,050,000
x= ——————
$90 - $30
X= 17500 units
X= $ 1,575,000
 Example
Romantic Baboy and Soban sell the same product in
the food industry. For that reason, they price their
primary offering (unli-samgyupsal) at the same rate
at 500/person.

Other data for the company are as follows:

Romantic Baboy Soban

Fixed Cost P140,000 P120,000

CM Ratio 50% 55%
 Example

Given the data, the company’s break-even points are:

P280,000 P218,182
 Example

The indifference point in terms of peso sales volume

where the peso profits of the companies are equal is

$140,000 + .40x = $120,000 + .45x

$140,000 - $120,000 = .45x - .40x
.05x = $20,000
x = $400,000
 Sales Mix
The quantities of various products that constitute a
company’s total unit sales.
 Standard relationship of products sold
in a given period of time

• Sales mix ratio is assumed to be constant

Sales Mix
• Composite Breakeven Point is used

• Average contribution margin is used.

 Contribution
No. of units in each Contribution
Margin of the
bundle Margin per unit
Bundle

GMAT Success 3 $80 $240

GRE Guarantee 2 30 60

Total $300

Breakeven in bundles = $4,500/$300

= 15 bundles
 No. of units in each Selling Price per Revenue of the
bundle unit Bundle

GMAT Success 3 $200 $600

GRE Guarantee 2 100 200

Total $800

Contribution Margin Percentage for the bundle

= $300/$800
= 37.50%
Breakeven in bundles = $4,500/0.375
= $12,000

$12,000/$800 = 15 bundles
 Breakeven Point in units
GMAT Success 15 3 45

GRE Guarantee 15 2 30

Total 75

Breakeven Point in dollars

GMAT Success 45 $200 $9,000

GRE Guarantee 30 100 3,000

Total $12,000
 Companies choose their sales mix to respond to demand changes.
For any given total quantity units sold, as the sales mix shifts toward units with
lower contribution margins, the lower operating income will be.
 SENSITIVITY
ANALYSIS
A “what-if” technique used to
examine how an outcome will
change if the original
predicted data are not
achieved or if an underlying
assumption changes.
Timoteo Enterprises $25,000
produces
+
and
[$62,500-(62,500*.20)]
sells
product KE and makes available to you the
following data: =
$1,000/ $500/
unit unit

Unit sales price: P80

Unit variable costs: P50
Total fixed cost: = P600,000
$75,000

Units sold: 45,000

150
=
units
 Question
Contribution
Margin Ratio

CMR = 30/80 = 37.50%

Breakeven BEP = 600,000/37.50% = P1,600,000

Point
OP = (45,000 x 30) – 600,000 = P750,000

Operating
Profit
 Case A: Unit sales price increases by 20%.
Case B: Unit variable costs increase by 10%.
Case C: Total fixed costs decrease to P450,000.
Case D: Units sold increase by 20%.
Case E: Unit sales price increases to P100; Unit variable costs
increase by 15%; Total fixed costs increase by 5%.
Case Adjusted Data CMR BEP Profit

SP P96

A UVC 50
47.92% P1,252,087 P1,470,000
UCM 46

SP P80

B UVC 55
31.25 1,920,000 525,000
UCM 25

C FC P450,000 37.50 1,200,000 900,000

D 54,000 units 37.50 1,600,000 1,020,000

SP P100

E UVC 57.5

42.50 1,482,353 1,282,500

UCM 42.5

FC 630,000
 Indifference Point

Level of volume at which total costs and profits are

the same under two alternative cost structures.
Genevieve Co. and Odessa Co. sell the same product
in a competitive industry. Thus, the selling price
of the product for each company is the same. Other
data about the two companies are as follows:

Genevieve Co. Odessa Co.

Fixed Costs P50,000 P70,000

Contribution
Margin Ratio 40% 52%
 Question
Breakeven
Point VCR

GC = 60%
BEP
OC = 48%
Sales P166,666.67 P166,666.67
Indifference Contribution Margin 66,666.67
GC BEP = 50,000/40% = P125,000 86,666.67
Point Fixed 50,000
Costs + 0.60x 50,000.00 50,000.00
= 70,000 + 0.48x
Profit P16,666.67 P16,666.67
OC BEP = 70,000/52% = P134,615.38
0.12x = 20,000

Operating X = P166,666.67
Profit
 Margin of Safety
The amount of peso-sales or the number of units by which actual/
budgeted sales may be decreased without resulting into a loss.
 • = Budgeted/Actual Revenues – Breakeven Revenues

MARGIN OF SAFETY • = Budgeted/Actual Quantity – Breakeven Quantity

• = Margin of Safety/Budgeted Revenues

 EXAMPLE
Budgeted
Selling Price Sold Units Revenues
$200 40 $8,000

Variable Cost Breakeven Breakeven

Fixed Costs
per unit Quantity Revenues
$2,000
$120 25 units $5,000
 Margin of Safety = $8,000 - $5,000
$25,000 + [$62,500-(62,500*.20)]

=
= $3,000
= 40 – 25
$1,000/ $500/
unit unit
= 15 units

Margin of Safety Percentage$75,000

= $3,000/$8,000
=
= 37.5%

150
=
units
 Operating Leverage
Describes the effects that fixed costs have on changes
in operating income as changes occur in units sold and
contribution margin.

= Total Contribution Margin/Profit before Tax

= %Δ in Profit before Tax/%Δ in Sales

Present sales level: 10,000 units
Selling Price/unit: P5
Variable Cost/unit: P3
Fixed Costs: P12,000
 Q
Profit before
Tax
U
E
S
T
I
Contribution Degree of
Operating
O
Margin
Leverage N
S
Sales (10,000@P5) P50,000
Variable Costs (10,000@P3) 30,000
Contribution Margin 20,000
Fixed Costs 12,000
Profit before Tax P8,000

DOL = 20,000/8,000
= 2.5
Sales (11,000@P5) P55,000
Variable Costs (11,000@P3) 33,000
Contribution Margin 22,000
Fixed Costs 12,000
Profit before Tax P10,000
References:

Roque, R. (2016). Reviewer in Management Advisory Services

Agamata, F. (2014). Management Services

Horngren, C., et. al. (2014). Cost Accounting: A Managerial Emphasis

Guglielmo, C. (n.d.). 10 years ago today: Remembering Steve Jobs make iPhone history. Retrieved from
https://www.cnet.com/news/iphone-at-10-apple-steve-jobs-make-iphone-history-remembering/

Suzuki, S. (2018, February 20). Apple Park Visitor Center. Retrieved from https://www.flickr.com/photos/
shinyasuzuki/25502154867