CONTRIBUTION MARGIN INCOME STATEMENT

Sales-Variable Cost= CM

KEY ASSUMPTION OF CVP ANALYSIS

1. All costs are classifiable as either variable or fixed

2. Cost and revenue relationships are predictable and linear over a relevant range of activity and a
specified period of time.
3. Total variable costs change directly with the cost driver, but variable costs per unit are constant
over the relevant range
4. Total fixed costs are constant over the relevant range, but fixed costs per unit vary inversely with
the cost driver
5. Selling prices per unit and market condition remain unchanged
6. Production equal sales (when there is no change in inventory)
7. The time value of money is ignored.

BREAK-EVEN ANALYSIS

Break-even point- neither profit nor loss

A. Single-Product
FC
1. BEP ( Pesos ) =
CMR

FC
2. BEP ( Units )=
CMu

B. Multiple Products
FC
1. BEP ( Pesos ) =
WaCMR

Total CM
a. WaCMR=
Total Sales

b. WaCMR=∑ of [ ( CMR∗Sales Mix Ratio ) per product ]

 Sales∈Pesos
* Sales Mix Ratio=
Total Sales∈Pesos

FC
2. BEP ( Units )=
WaCMu

Total CM
a. WaCMu=
Total Units

b. WaCMu=∑ of [ ( CMu∗Sales Mix Ratio ) per product ]

Sales∈Units
* Sales Mix Ratio=
Total Sales∈Units

MARGIN OF SAFETY

- Amount of peso-sales/ number of units by which actual or budgeted sales may be decreased without
resulting into a loss

1. MOS ( Pesos ) =Sales∈Pesos−BEP ∈Pesos

2. MOS ( Units )=Sales∈Units−BEP ∈Units
MOS ( Pesos )
MOS ( Units )=
Selling Price
MOS ( Pesos )
3. MOS Ratio=
Sales∈ Pesos

MGMT GOALS Required Sales Required Sales (PESOS)

(QUANTITY)
To earn desired profit FC + DP FC + DP
before tax (DP) CMU CMR

To earn desired profit

before tax (DP) MOS ( Units )∗CMU MOS ( Pesos )∗CMR
 To earn Desired Profit DP DP
after Tax [ (
FC +
1−tax rate )] [ (
FC+
1−tax rate )]
CMU CMR
To earn desired profit FC + DP FC+ DP
ratio (Profit as % of CMU−PU CMR−PR
sales)

OPERATING LEVERAGE

-extent to which a company uses fixed cost in its cost structure

- used to calculate a company’s break-even point and help set appropriate selling prices to cover all
costs and generate a profit.

OPERATING LEVERAGE FACTOR (OLF) or DEGREE OF OPERATING LEVERAGE (DOL)

-used to measure the extent of the change in EBIT resulting from the change in sales

Total CM
1. DOL∨OLF =
EBIT

% ∆∈EBIT
2. DOL∨OLF =
% ∆∈Sales

3. % ∆∈Profit=% ∆∈Sales∗DOL