CVP ANALYSIS
cost)
Cost-volume-profit Analysis
 Estimates how changes in costs (both variable
and fixed), sales volume, and price affect a
company’s profit
 Managers find it very useful in making wise
business decisions, predicting future conditions
(planning), as well as in explaining, evaluating,
and acting on results (controlling)
 Used by managers during times of economic
trouble to help them pinpoint problems and find
appropriate solution
 Used by companies to determine the Break-
even point – point of zero profit (no profit, no
loss)
 We classify cost according to their tendency to
vary with production (mixed, fixed, and
variable) instead of their functional
classification (manufacturing, selling, and
administrative)
 We only need fixed and variable so we have to
segregate the variable and fixed components of
mixed through high low point, scattergraph, or
method of least square
CVP Analysis helps managers answer questions such as:
 The # of units to be sold to break even
 The effect of changes in the fixed cost on the
BEP
 The effect of changes in the sales price on the
BEP
Break-even point
 Total revenue/sales = Total cost/expense
 Total CM = Total fixed cost
 Companies do not wish merely to “break even,”
but it is determined to serve as a point of
reference
 Knowing BEP, managers are better able to set
sales goals that should result in profits
 Affected by the 3 factors: selling price, variable
cost, and volume of sales
 ↓ in total FC or ↑ in CM = ↓ BEP
 ↑ in total FC or ↓ in CM = ↑ BEP
 ↑ selling price = ↑ CM = ↓ BEP (because each
unit with higher selling price will be able to
contribute more to the recovery of the fixed
Relevant range – the range of activity over which a
variable cost/unit remain constant or a fixed cost remains
fixed in total ; a company is assumed to be operating
within the relevant range of activity to determine the
revenue and cost information used
Revenue – revenue/unit are assumed to remain constant
on a per unit basis ; total revenue fluctuates in direct
proportion to the volume
Variable cost – assumed to remain constant on a per unit
basis ; total VC fluctuate in direct proportion to volume
Fixed cost – remain constant regardless of changes in
volume ; fixed cost per unit basis: ↓ volume ↑ fixed cost
and ↑ volume ↓ fixed cost
 Sometimes, FC can be traded off for VC
 ↓ VC = ↑ proportion for FC = greater increases
in profit as sales increase
Contribution margin – amount remaining after
deducting VC/unit from the selling price/unit
 Contribution per unit – amount contributed by
each unit to the recovery of the fixed cost
 Contribution margin statement – statement of
comprehensive income based on the separation
of costs into fixed and variable ; used under
direct costing and variable costing
o Formula: Net income = revenue – total
VC – total FC
 At the break-even sales, CM = FC. Any excess
of CM over FC is net income
Margin of safety – units sold or revenue earned above
the BEP volume ; # of units or amount of sales revenue
that the company can absorb before incurring a loss
 “Sales may decrease at a certain units, pesos, or
percent before the company will break even”
 ↑ MOS ↓ risk of loss
 ↓ MOS ↑ risk of loss
 ↓ break-even sales ↑ MOS
Sales mix – combination of products being marketed by
the company. The relative proportions in which a
company’s products are sold.] It is measured in terms of
units sold
Sales and units with desired profit – most companies
would not want to break-even only, the main objective is
to earn profit

Operating leverage – use of fixed cost to get higher %

changes in profit as sales changes ; concerned with the
relative mix of FC and VC in an organization ; measure
of how sensitive net income is to % change in sales

 ↑ Operating leverage ↓ Profit (sales decrease)

 FC > VC = Higher operating leverage
 The greater the operating leverage, the more that
changes in sales will affect operating income

Constant figures:

1. Sales price/unit
2. Variable cost/unit
3. Total fixed cost
4. CM/unit

Factors that are changing in CVP analysis (in terms of

problem solving)

1. Fixed cost may increase

2. Sales volume/# of units/activity level