COST-VOLUME-PROFIT ANALYSIS

CVP Analysis – is useful for profit planning by

way of a systematic analysis of the profit’s
relationship with various costs and volume of
sales.

TERMS USED IN CVP ANALYSIS:

Contribution Margin – is the difference between

sales and variable cost.

Break-Even Point – a level of activity, in units or

in pesos, at which total revenues equal total
costs.

Margin of Safety – the difference between actual

sales and breakeven sales.

Indifference Point – the level of volume at which

two alternatives being analyzed would yield
equal amount of total costs or profits.

Sales Mix – the relative combination of

quantities of sales of various products that make
up the total sales of a company.

Degree of Operating Leverage – measures how

a percentage change in sales will affect
company profits.
Clean Company manufactures and sells a
single product. The company’s sales and
expenses for a recent month follows:

Sales (1,500 units) P 37,500

Less: VC P 15,000
Contribution Margin P 22,500
Less: FC P 15,000
Profit P 7,500

1. Determine the following:

a. Unit selling price
b. Unit variable cost
c. Contribution margin ratio
2. For profit planning purposes, compute
the following:
a. Break-even point in units
b. Break-even peso sales
3. What peso sales are required to earn an
after-tax profit of P 7,200 (assuming tax
rate is 20%)?
4. What is the margin of safety of Clean
Company at its present sales of P
37,500?
Mahjong Company produces and sells two products, tables
and chairs. Following is next month’s income budget:
Chairs Tables Total
Unit Sales 60u 15u 75u
Sales P 1,200 P 187.50 P 1,387.50
Variable Costs P 1,050 P 112.50 P 1,162.50
Contribution Margin P 150 P 75 P 225
Fixed Costs P 90_____
Profit P 135

Required:

1. How many units of chairs should be sold next

month to break-even?
2. How many units of tables should be sold to earn a
profit of P120?
Samsonyt sells one of its products, a piece of
soft-sided luggage, for P600. Variable cost per
unit is P340, and monthly fixed costs are P
600,000. A combination of changes in the way
Samsonyt produces and sells this product could
reduce variable cost per unit by P40 but
increase monthly fixed cost to P 1,000,000.

REQUIRED: Determine the indifference point of

the two alternatives.
Walker Company’s break-even sales are P
528,000. The variable cost ratio is 60% while the
profit ratio is 8%.

Required: Determine the following:

1. Fixed cost
2. Sales
3. Profit
4. Margin of safety
5. Margin of safety ratio

Snape Company has fixed expenses of P

60,000, a contribution margin ratio of 40% and a
margin of safety ratio of 25% for a quarter’s REQUIRED: Compute the company’s profit for
operations. the quarter.