COST VOLUME PROFIT ANALYSIS

COST VOLUME PROFIT ANALYSIS

Management’s study of the relationship among costs, volume, and profit.
This study is used in planning, controlling, and evaluating the objectives
of the enterprise.

BREAK-EVEN ANALYSIS
DESIRED PROFIT
MARGIN OF SAFETY
SENSITIVTY ANALYSIS
DEGREE OF OPERATING LEVERAGE
UNDERLYING ASSUMPTIONS IN CVP
1. Costs are classified as variable and fixed
2. Variable Costs change at linear rate
3. Fixed costs remain unchanged over relevant range
4. Selling prices do not change as sales volume changes
5. For multi-products, the sales mix remains constant
6. Productive efficiency doesn’t change
7. Inventory levels remain constant, i.e., production equals sales
8. Volume is the only relevant factor affecting costs
9. Relevant range for which all other underlying assumptions and concepts are
valid
BREAKEVEN ANALYSIS
Indicates the point at which the company neither makes a profit nor suffers a loss, or
the point where sales less variable and fixed costs results in zero profit.
Sales=Variable Costs + Fixed Costs
CM=FC

BEP(p) = Fixed cost/Contribution margin ratio

BEP(u) = Fixed Costs/Contribution margin per unit
VARIABLE COSTING INCOME STATEMENT
Sales CMR=cm/sales
Less: Variable Costs
Contribution Margin
Less: Fixed Cost
Profit
DESIRED PROFIT

FC+desired profit
DESIRED PROFIT(Units)=
CM/unit

FC+desired profit
DESIRED PROFIT(pesos)=
CMR
MARGIN OF SAFETY

MARGIN OF SAFETY(units)=SALES(units) – BEP(units)

MARGIN OF SAFETY(pesos)=SALES(pesos) – BEP(pesos)

MARGIN OF SAFETY(ratio)=MS/SALES
SENSITIVITY ANALYSIS
Changing the Variables and see the effect on the profit
oSelling price
oVariable Costs
oVolume(units produced
oSales Mix(selling multiple products)
DEGREE OF OPERATING LEVERAGE
Measures how a percentage change in sales will affect profit. It is equal to
contribution margin divided by profit before tax. It is also equal to one divided by
the margin of safety percentage.

DOL = CM/ EBIT

DOL = % change in EBIT/% change in Sales
% change in EBIT = % change in Sales * Sales
 EXERCISES
Pinnacle Company produces a product that has the following data per annum:
 Unit Sales price P400 per unit
 Unit Variable Costs P260 per unit
 Total Fixed Cost P7,000,000
 Units Sold 70,000 units

A. UCM, CMR, VCR

B. BEP(u) and BEP(p)
C. MS(u), MS(p) AND MSR
D. NET PROFIT RATIO
E. If sales increase by P450,000, how much would you expect profit to increase
Pinnacle Company produces a product that has the
following data per annum:
Unit Sales price P400 per unit
Unit Variable Costs P260 per unit
Total Fixed Cost P7,000,000
Units Sold 70,000 units
A. UCM, CMR, VCR

UCM=Unit sales price – Unit variable cost = P140

CMR=CM(units)/Unit sales price = P140/P400=35%
VRC=Unit Variable cost/Unit sales price=P260/P400=65%]
Pinnacle Company produces a product that has the
following data per annum:
Unit Sales price P400 per unit
Unit Variable Costs P260 per unit
Total Fixed Cost P7,000,000
Units Sold 70,000 units
b. BEP(u) and BEP(p)
BEP(u) = Fixed Costs/Contribution margin per unit
=P7,000,000/P140=50,000 units
BEP(p) = Fixed cost/Contribution margin
ratio=P7,000,000/35%=P20,000,000
Pinnacle Company produces a product that has the
following data per annum:
Unit Sales price P400 per unit
Unit Variable Costs P260 per unit
Total Fixed Cost P7,000,000
Units Sold 70,000 units
c. MS(u), MS(p) and MSR
MARGIN OF SAFETY(units)=SALES(units) – BEP(units)=70,000 units – 50,000
units=20,000 units

MARGIN OF SAFETY(pesos)=SALES(pesos) – BEP(pesos)=(P400*70,000units)-

P20,000,000=P28,000,000-P20,000,000=PP8,000,000

MARGIN OF SAFETY(ratio)=MS/SALES=20,000 units/70,000 units=28.57%

MARGIN OF SAFETY(ratio)=MS/SALES=P8,000,000/P28,000,000=28.57%
Pinnacle Company produces a product that has the
following data per annum:
Unit Sales price P400 per unit
Unit Variable Costs P260 per unit
Total Fixed Cost P7,000,000
Units Sold 70,000 units
D. NET PROFIT RATIO = PROFIT/SALES=10%

Sales(P400*70,000) P28,000,000
Less: Variable Costs(P260*70,000) 18,200,000
Contribution Margin 9,800,000
Less: Fixed Cost 7,000,000
Profit 2,800,000
Pinnacle Company produces a product that has the
following data per annum:
Unit Sales price P400 per unit
Unit Variable Costs P260 per unit
Total Fixed Cost P7,000,000
Units Sold 70,000 units
E. If sales increase by P450,000, how much would you expect profit to
increase
CMR*additional profit=35%*P450,000=P157,500
EXERCISES
Beats, Inc. sells a product to retailers for P200. The unit variable cost is P40 with a
selling commission of 10%. Fixed manufacturing costs total P1,000,000 per month
while fixed selling and administrative costs total P420,000. The income tax rate is
30%. The target sales if after tax income is P123,200 would be?

FC+desired profit
Desired Profit(units)=
CM/unit

= (P1,420,000+176,000)/140
= 11,400 units
EXERCISES
Heats Corp. has sales of P200,000, a contribution margin of 20%, and a margin of
safety of P80,000. What is Heats Corp.’s fixed cost?
MS=SALES – BEP(pesos)
FC
P80,000 = P200,000 –
CMR
FC
P80,000 = P200,000 –
20%

P16,000 = P40,000 – FC
FC = P24,000