COST-VOLUME-PROFIT ANALYSIS

PROFIT PLANNING is the process of anticipating profit under varying conditions and analyzing the
effects of variables affecting it. It directly relates to the normal operating activities and is short-term in
nature.
CONCEPTS TO RECALL:
• Cost Behavior
• Variable Costing System / Marginal Costing System / Contribution Margin Approach

LEVELS OF PROFIT PLANNING

A. Basic CVP Analysis
B. Multi-product CVP Analysis
C. CVP Sensitivity Analysis
D. Degree of Operating Leverage

A. BASIC CVP ANALYSIS

The basic CVP analysis covers the study on contribution margin, breakeven point, margin of safety, profit
setting, sales mix analysis, and degree of operating leverage analysis.
The contribution margin is the heart of variable costing analysis (marginal analysis, profitability analysis,
differential costing analysis). Its relevance is based on the premise that “an increase in contribution margin
means an increase in profit”.

Sample Problem 1 – The Contribution Margin, Breakeven Point, and Margin of Safety.

ALCORAN Company establishes the following information for its profit planning activities:

Unit sales price P200 Total fixed cost P400,000

 Unit variable costs P120 Units sold 8,000 units Determine the following for ALCORAN
Company’s profit planning analysis.
1. Unit contribution margin, contribution margin rate, and variable cost rate.
2. Breakeven point in units and in pesos.
3. Margin of safety in units and in pesos, and the margin of safety rate.
Sample Problem 2 – Estimating Sales with Profit.
ALIPAY Company determines its sales price and costs structure as follows:

Unit sales price P400

Unit variable costs P240
Total fixed costs P800,000
Tax rate 40% How much is the required sales, units and amount, if the
profit is targeted as follows:
1. Profit before tax of P400,000.
2. Profit after tax of P480,000.
3. Profit before tax is 20% of sales
4. Profit before tax is P25 per unit.
5. After-tax profit is 20% of sales.
6. Pre-tax profit is 20% of CMR.
7. Post-tax profit is 20% of CMR.

B. MULTI-PRODUCT CVP ANALYSIS

In many instances, businesses produce and sell more than one product, hence, the multi-product sales
situation. If there are two or more products to be considered, the composite breakeven point (CBEP) is
determined to establish the overall breakeven point situation of the enterprise.

Sample Problem 3 – Composite Breakeven Point Analysis (Multi-Product Sales)

BARTOLOME Corporation produces and sells three products and has provided you the following:

Products
X Y Z Total
P400 P600 P700
Unit sales price P100 P350 P500
Unit variable cost
P300 P250 P200
Unit contribution margin
CM Rate 75% 41.67% 28.57%
Budgeted sales in units 5,000 units 3,000 units 2,000 units 10,000 units
Budgeted sales in pesos P2,000,000 P1,800,000 P1,400,000 P5,200,000
Total fixed cost P795,000
Calculate the following:
1. Composite breakeven point (CBEP) in units and in pesos.
2. Allocated CBEP.
3. Sales per mix.
4. Composite sales profit before tax is P2,000,000.
C. CVP SENSITIVITY ANALYSIS
Sales prices change, as well as the variable costs rate, total fixed costs, sales volume and sales mix. The
process of considering the impact of these changes to profit and its related outcome is called as the CVP
Sensitivity Analysis. Not only is the effect of these changes in profit determined but also that of
contribution margin, margin of safety, breakeven point, and operating leverage.
Sample Problem 4 – CVP Sensitivity Analysis
CALIBOSO Enterprises produces and sells product Ivy and makes available to you the following data:
Unit sales price P80
Unit variable costs P50
Total fixed costs P600,000
Units sold 45,000 units
What would the new CMR, BEP (pesos), and operating profit be, if:
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%; and total fixed costs
increase by 5%.

Sample Problem 5 – CVP Sensitivity Analysis

CARIDAD Corporation, which is subject to a 40% income tax rate, had the following operating data for
the period just ended:
Selling price per unit P60
Variable cost per unit P22
Fixed costs P472,000
Management is contemplating to improve the quality of its product sold by:
1. Replacing a component that costs P3.50 with a higher-grade unit that costs P6.00; and
2. Acquiring P765,000 packing machine to be depreciated over a 10-year life.

The company wants to earn after-tax income of P172,800. The applicable income tax rate is 40%.
Compute the number of units the company must sell to maintain the same profit before the improvement.

Sample Problem 6 – The Profit Planning Graphs

CONSTANTINO Company expects to sell 200,000 units of its product TSwift Layla priced at P20 per
unit. The product’s variable cost per unit is P12 and its total fixed costs and expenses is P800,000. Given
the varying production levels, sales, costs and profit are estimated as follows:
Production Total Sales TFC TVC TC Profit/Loss
0 P0 P800,000 P0 P800,000 P (800,000)
100,000 P2,000,000 P800,000 P1,200,000 P2,000,000 P0
200,000 P4,000,000 P800,000 P2,400,000 P3,200,000 P800,000
300,000 P6,000,000 P800,000 P3,600,000 P4,400,000 P1,600,000
400,000 P8,000,000 P800,000 P4,800,000 P5,600,000 P2,400,000
Required:
1. The breakeven point graph.
 2. The CVP graph.

D. DEGREE OF OPERATING LEVERAGE

In physics, a lever is a small tool used to move a bigger object. The operating leverage of profit is the
contribution margin. The degree of operating leverage refers to the ability of the business to increase its
profit powered by its contribution margin. Profit, as used in this topic, means EBIT.

Sample Problem 7 – Operating Leverage

The DOL signifies the percentage change in EBIT given a certain percentage in net sales. To amplify this
premise, let us say:
Unit sales price P200
Unit variable costs P120
Total fixed costs 550,000
Units sold 10,000 units
What would happen to EBIT if sales increase by 40%?

Sample Problem 8 – Comprehensive Problem

CUNANAN Corporation based its profit planning on the following operating data: unit sales price, P400;
unit variable costs, P240; total fixed costs, P8 million; and sales volume, 80,000 units.
Required:
1. Based on the original data, determine the CMR, BEP in pesos, operating profit, MSR and the
DOL.
2. Based on the following changes in the variables of profit, determine the new CMR, BEP in pesos,
operating profit, MSR and DOL.
a. Unit sales price increases by 10%.
b. Unit variable costs decrease by 5%.
c. Total fixed costs and expenses increase by P500,000.
d. Quantity sold increases by 10,000.
e. Unit sales price decreases by P20, unit variable costs increase by 10%, total fixed costs
decrease by 5%, and units sold increases to 100,000.
3. Comment on the data determined in requirement 2.