Cost volume profit analysis – a systematic examination of the relationships among cost,

cost drivers or activity level (or volume), and profit

ELEMENTS OF CVP ANALYSIS

1. Sales (Selling price, units or volume)

2. Total fixed cost
3. Variable costs per unit
4. Sales mix

APPLICATIONS OF CVP ANALYSIS

Planning and decision-making, which may involve choosing the:

1. Type of product to produce and sell
2. Pricing policy to follow
3. Marketing strategy to use, and
4. Type of productive facilities to acquire

THE CONTRIBUTION MARGIN INCOME STATEMENT

The cost and expenses in the contribution margin income statement are classified as to behaviour
(variable and fixed). The amount of contribution margin, which is the difference between sales and
variable costs, is shown. The format is as follows:

Sales (units x selling price) Pxx

Less: Variable costs (units x variable cost per unit) xx

Contribution Margin Pxx

Less: Total fixed costs xx

Pxx
Income before tax
The contribution margin income statement is prepared for management’s own
use. The format facilitates cost-volume-profit analysis.

INHERENT SIMPLIFYING ASSUMPTIONS OF CVP ANALYSIS

1. All costs are classified as either variable or fixed

2. Cost and revenue relationships are predictable and linear over relevant
range of activity and a specified period of time
3. Total variable costs change directly with the cost driver, but variable cost
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 or volume
5. Selling prices per unit and market conditions remain unchanged
6. Production equals sales, i.e., there is no change in inventory
7. If the company sells multiple products, sales mix is constant
8. Technology, as well as productive efficiency, is constant
9. The time value of money is ignored .

BREAK-EVEN ANALYSIS

Break-even point – the sales volume level (in pesos or in units) where total revenue
equals total costs, that is there is neither profit nor loss