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MAS-02: COST-VOLUME-PROFIT (CVP) ANALYSTS

CVP analysis - is useful for profit planning by way of a systematic analysis of the profit's relationship with
various costs and volume of sales.

FACTORS AFFECTING PROFIT

1._S_-elling Price lncrease

2. Unit Variable Cost
3. Fixed Cost Decrease
I 4. Volume (Unit Se!qs)< _Ingreege _
In multi-proOuct companies, a cnang€ tn@es.mii;;t-aas";ffecrcompanv profit.

LtMIlA.[aAruS:LrdlStu*UP,TlO-!-\,1-S-otelPanalvsis
,/ Relevant range, time and linearity assumptions in MAS - 01 are also assumed in CVP analysis.
'/ Unless indicated otherwise, unit selling price is constant even if sales volume changes.
./ Inventories do not change significantly from period to period.
,/ In case of a multi-product company, sales mix is constant.
,. Labor productivity, production technology and market conditions remain stable.
TERMINOLOGIES USED IN CVP ANALYSE
Contribution Margin (CM) - is the difference between sales and variable cost. It is otherwise known
as margtnal income, profit contribution, contribution to fixed cost or incremental
contribution
. CM Ratio = CM - Sales = Unit CM + Unit Selling price
. CMRatio:ACM+ASales
NOTE: The sign'A'is used to mean change or difference.

Bfsek:Eys!-e9!!!-(g-EP) --a lgyel-qI aqtlvlty, in q41tq-(lr-eak-ev-en volume) or in p-esos (break-even

sales), at which total revenues equal total costs. At the break-even point, there
is neither a profit nor a loss.
r BEP units = Fixed Costs = CM per unit
. BEP peso sates : Fixed Costs = CM Ratio
. Unit Sales with Target profit = (Fixed Costs + profit*) = CM per unit
Fixed Costs
. Peso Sales with Target Return on Sales =
CM Ratio - Return on Sales
x Profit must be expressed before tax: Profit aftertax + (100o/o - tax rate)
Margin of Safety - the difference between actual sales and break-eve.n sales. It indicates the
maximum amount by wlrich sales could decline without incurring a loss.
. Margin of Safety = Sales - Breakeven Sales
. Margin of Safety Ratio = Margin of Safety Sales
=
Indifference Point - the level of volume at which two alternatives being analyzed would yield equal
amount of total costs or profits.
Alternativ_e_ A Alternative B
. (Unit CM x Q) - Fixed Cost (Unit CM x Q) - Fixed Cost
. Fixed cost + (Unit VC x Q) Fixed Cost + (Unt vc x Q)
NOTE: Q - number of units (indifference point)
Sales Mix - the relative combirration of quantities of sales of various products that make up
the total sales of a company.
' Over-all BEP un;15 = Fixed Costs + Weighted Average CM per unit
. Over-all BEP peso sales = Fixed Costs = Weighted Average CM Ratio
Degree of Operating Leverage (DoL) - measures how a percentage change in sales will affect
company profits. It indicates how sensitive the company is to sales volume
increases and decreases. It is also known. as operating leverage factor.
. DOL = Contribution Margin + Profit before tax
. A o/o sales x DOL = A Yo profit before tax

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COST-VOLU I,i E-PROFIT ANALYSIS

EXEf.elS--E5-.--Q-QSI:V-Qr.U!!{E-'_BBQ[-,T_Ai!/.!YS15

1.. EU Conrpany rnanlri'aclltres ancl seils a sinqle pr(/rjllct. "Ihe c<:nip;lnv's sales anrj expenses for a recent
rnonth follows:
Seir:s (J.,500 units) P 37,50r_1
i.e.ss: Variatrie Ci;sts -_ _f !p@_
Contrtbirtion t',i;::lirr l; iZ,iifCl
l-es-s: I--ixed Co:its _"1-5r-Q!.0
f,rofit P 2,500

REQUIRED:
1. Delermine the followirrg:
{st A) Unit seiling pricr:
|'-r B) Unit variable cos[
ltc\* C) Ccnlribution rnar-c;irr ratio (CIr4FLi
2. For profit plannirrg otirpcses, forn[rutl] tlie frillc.rnri,rq
i,[tt A)
Break-erlen pr-rirrt in t-rriits
rr/ r'
4') r. J B)
Break-even peso sales
ioi: , , 3. What unit sales are reclr-iireci to e.-.r:r p 9.4;ii(r t',rufri i'or lhe rlcntlr,)
dir-f oJu 4. What peso sale:; ai-e:'eouired to ea;'n arr aiter-tax;ir.:rii,+. of P 7,200 (assurnir;g tax rate tsZOa/o)?
t1'}',.*'lt 5. Assume that EU Co. is currently seirirrq SCIJ rrrrits piei rnontir and that the i+mpany president
believes that sales vvorr!rj increase if ::rlve:r-til;in-q wcr-t':r inci'ear;i:ri by P 6,000. Horr nrany urrits shourld
sales increase to Eive EU Co. the sairir: $r'oirt or l,::;s l:rrat il is Iui"rently earning?
(NOTE: although you know thdt 8CI0 i.:nits are being soitl at present, you rlc nat need this
information to soive the prsfilen1.)
What is the margin of safety of EU Co. ;rt rt:r present sales $ ? 37 ,S{JA?
EU Co. currently pays its'salespeoirle a lnonthly salary ol ? 4,$isrJ per month without any
commission. Ho,ruevei-, the comparr'7 r-:onsiders a plai'r whereiry Lhe salesi:eopie wttuld receive a
fu\ lo,.,li 10Yo conrmission, but the mcinthiy salary $rsuld fall to l] 2,500. lVhal saies le,./el will the conrpany
be indifferent between tlre ty,ro cr:rnpensaii4.ir-, Pl,lpr?
(.Adapier) anrl eclitetl: f4anageria{ Accaunting by t ouderback)

sorurroru curur .

L2,J.1-_0110 lniLs_ [,lJ a-6!S_uolts (IIB00_units

Sales
Less; Varebb_eqsLg
Contribution Margin
4eSs-Iued teSE
Profit (Loss)
RequiremetilleJ
'/ Monthly fixed cost rnili decreast, lsy ? i,500 rrnrjer the pronosal (p 4.000 + p 2,500)
'/ Unit variable cost increases by P 2.50 (10uri; of tr 25)
Baseel cr_rLc_os!- fuaEllB n lY. :_s__.1 bX'_
Costs (old) = Costs (nelv) 1",:"rf.r0 = .2.5 X
15,000 + 10X = 13,500 + 12.5 X X -, 600 units
?-. PROVING:
lr
:nargin ratio x rnargin cf s;rfety ratln: = ne.t ,;;"*;;l l'. f r

!
Wlrere: Contribution margirt ratic = Conir,butio ; il.r.,irilin -, Sap:s l,:,
Margin of safety ratlo = Margin of :;afciv ;- S;rk:s
Net profit ratio = Profit -- Sraler:

3 UK's break-even sales are P 528,000. Tht': variable cust ratlo is rt)'ir: r.;i-rile thc profil ratio is goA
REQUIRED : Determine tfe lolloyriirrc
1. FixedCosts -L -':
:

2.' Sales t1l t ,

: ,W,I'U
3. Profit 'i ,-' :
,,
,

4. Marqin of Safety go} ?*iir$

5. I{argin of Safety Ratio ' ,( il, Iii.'i oi
h%"rr- rff{i
r),. . .';"'?r,li
\l--I
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 77"- (r,.;-, ,./...r"1 A.*-..-*^*,
l-ffi"fl-
.osr-voLUME-PRoFrr ANALYSTS
MAS-02
I company produces and setrs two products, tables and chairs. Following is next month,s income
) ^ ff,id:i:
ctrairs lables Total
Unit sales 60 u 15 u 75u
Sales p375 1Z,7ZS
PZ,4OO.
Variable Costs _2-1!A _2ZS 1,3-25
Contribution Margin p 300 p 150 p 450
Fixed Cosfs Z4o
Profit p 210
REQUIRED:
1. How many units of chairs should be sold next month to break-even?
2. How many units of tables should be sold to earn a profit of p 360?
(Adapted: Managerial Accounting by Garrison, et.at.)
SOLUTION GUIDE

Chairs Tables
Contribution Margin (CM) per unit P5 P10
Sales Mix (6O:15 ) BOo/o:2Ao/o BOa/o 20o/o
Weighted Average CM per unit:
5' Ms' Rita has recently opened the UBE Fitness Gym being'offered exclusively for malnourished individuals.
The results for the gym's,first year of operations are presented as follows:
Sales p 250,000
Variabte Costs ("100,000)*
Contribution Margin -p 150,000
Fixed Costs (12W00)
profir - p- 30_.Qqa

Ms' Rita is unhappy about the results of his gym's first year of operations. She observed that
despite the
high contribution margin, profit was still low because of the high fixed costs. She concludes
increase in sales would not yield a satisfactory increase in profit.
that an

REQUIRED:
1' -ExplainroMs. Rrta that hrs conclusion is not right by computing the
opJating leverage factor.
2' If sales increase by !oo/o,
then how -uny pu.a-unt would profit increase, ceteris paribus?
(NoTE: determine the percentage A in profit by using the operating ieverage
factor.)
(Adapted: Managerial Accounting by Garrison, et.at.)
W RA P- U P_ EXEBEISES]f8UL@
1. At the break-even point, total contribution margin is
a" Zero c. Equal to total costs
b. Equal to total fixed costs d. Equal to total variable costs
2. An increase in contribution margin ratio reduces the break-even point.
3. An increase in the income tax rate
a. Raises the break-even point
b, Lowers the break-even point
c. Increases sales required to earn a particurar after-tax profit
d. Decreases sares required to earn a pafticurar after-tax profit
4. A company that has a negative margin of safety necessarily
operates at a loss.
5. under cVP analysis, which of the foilowing is Nor to be constant?
a. Unit variable cost c."ssumed
Unit selling price
b. Unit fixed cost d. Sales mix
5. A Yo change in pre-tax profit can be quickly computed by
multiplyi ng a o/o change in peso sales try the
a. Sales mix c. Indifference point
b. Margin of safety d, Degree of operating leverage
7. The operating leverage factor is equal to
a. Gross marg'in + profit after tax c. Contribution margin + profit after tax
b. Gross margin + profit before tax d.
8. If inventories are expected to change, the type ofContribution margin + profit before tax
costing that provides the best information for
breakeven analysis is
a. Job*order costing c. loint costing
b. Variable costing d. Absorption costing

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