Managerial Accounting

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Cost-Volume-Profit Analysis

Module 003: Cost-Volume-Profit (CVP) Analysis

Course Learning Outcomes:

At the end of this module, the student will be able to:
1. Know and understand Cost-Volume-Profit Analysis
2. Enumerate the underlying assumptions in the CVP relationships
3. Compute the requirements using the different CVP-related formulas

Cost-Volume-Profit Analysis
Cost-Volume-Profit (CVP) Analysis is a systematic analysis of the relationship of profit with
various costs and volume of sales.

Factors Affecting Profit

If there is an increase in… Then, profit tends to…

1. Selling price Increase
2. Unit variable cost Decrease
3. Fixed cost Decrease
4. Volume (Unit Sales) Increase

Elements of CVP Analysis

1. Sales
a. Selling price
b. Units or volume
2. Total fixed costs
3. Variable costs per unit
4. Sales mix

Applications of CVP Analysis

CVP Analysis is applied in 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

Course Module
Limitations and Assumptions of CVP Analysis
1. Relevant range, time and linearity assumptions in MAS-01 are also assumed in
CVP analysis.
2. Unless indicated otherwise, unit selling price is constant even if sales volume
changes.
3. Inventories do not change significantly from period to period.
4. There is only one product or a constant sales mix.
5. Labor productivity, production technology and market conditions remain
constant and stable.

The Contribution Margin Income Statement

The costs and expenses in the Contribution Margin Income Statement are classified
as to behavior (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: Fixed costs xx
Income before tax Pxx

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

CVP-Related Terminologies and Formulas

Contribution Margin (CM) – is the difference between sales and variable cost.
 CM Ratio = CM ÷ Sales
 CM Ratio = ∆ CM ÷ ∆ Sales

Break-Even Point (BEP) – a level of activity, in units (break-even volume) or in

pesos (break-even sales), at which total revenues equal total costs.
 BEP units = Fixed Costs ÷ CM per unit
 BEP peso sales = Fixed Costs ÷ CM Ratio
 Unit Sales with Target Profit = (Fixed Costs + Profit before tax) ÷ CM per unit

Fixed Costs
 Peso Sales with Target Return on Sales =
CM Ratio−Return on Sales

Margin of Safety – is the difference between actual sales and break-even sales.
 Margin of Safety = Sales – Break-even Sales
 Margin of Safety Ratio = Margin of Safety ÷ Sales
 Managerial Accounting
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Cost-Volume-Profit Analysis

Indifference Point – the level of volume at which two alternatives being analyzed
would yield equal amount of total costs or profits.
Alternative A Alternative B
 (Unit CM x Quantity) – Fixed Cost = (Unit CM x Quantity) – Fixed Cost
 Fixed Cost + (Unit VC x Quantity) = Fixed Cost + (Unit VC x Quantity)

Sales Mix – the relative combination of quantities of sales of various products that
make up the total sales of a company.
 Over-all BEP units = Fixed Costs ÷ Weighted Average CM per unit
 Over-all BEP peso sales = Fixed Costs ÷ Weighted Average CM ratio

Degree of Operating Leverage (DOL) – measures how a percentage change in sales

will affect company profits. It is also known as operating leverage factor (OLF).
 DOL = Contribution Margin ÷ Profit before tax
 ∆ % Sales x DOL = ∆ % Profit before tax

Illustrative Examples:
Illustrative Example 1:
JKL Company sells product A, B, and C. Data about the three products are as follows:
A B C Total
Selling price P 100 P 120 P 50
Variable costs per unit 60 90 40
Contribution margin
(units) P 40 P 30 P 10
Sales in units 1,000 2,000 5,000 8,000

Total fixed costs P101,680

1. The company’s break-even point in pesos is:

FxC P101,680
BEPp = = = P400,000
WaCMR 25.42%
Where:
BEPp = Break-even point in pesos
FxC = Fixed costs
WaCMR = Weighted-Average Contribution Margin Ratio

Course Module
 Computation of Weighted-Average Contribution Margin Ratio
A B C Total
Sales in units
(units x selling price) P 100,000 P 240,000 P 250,000 P 590,000
Variable costs
(units x variable
costs per unit) 60,000 180,000 200,000 440,000
Contribution
margin P 40,000 P 60,000 P 50,000 P 150,000

Total CM P150,000
WaCMR = = = 25.42%
Total Sales P590,000

or
A B C
CMR (CM ÷ Sales) (40/100) 40.00% (60/240) 25.00% (50/250) 20.00%
x Sales Mix Ratio* (100/590) 16.95% (240/590) 40.68% (250/590) 42.37%
WaCMR 6.78% 10.17% 8.47%

WaCMR: Product A 6.78%

Product B 10.17%
Product C 8.47%
25.42%

 Note: For purposes of computing the WaCMR, the sales mix ratio (sales mix
percentage) is determined using the sales volume in pesos.

Breakdown of the Break-Even Sales

Total A B C
(16.95%) (40.68%) (42.37%)
Break-even Sales
(Total BES x Sales Mix Ratio) P400,000 P67,800 P162,720 P169,480

2. The company’s break-even point in units is:

FxC P101,680
BEPu = = = 5,422.93 units
WaUCM P18.75

Where:
BEPu = Break-even point in units
FxC = Fixed costs
WaUCM = Weighted-average unit contribution margin

Computation of Weighted-Average Unit Contribution Margin

Total CM P150,000
WaUCM = = = P18.75
Total Units P8,000
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Cost-Volume-Profit Analysis

A B C
CMR per unit P40 P30 P10
x Sales Mix Ratio* (1K/8K) 12.5% (2K/8K) 25% (5K/8K) 62.5%
WaUCM P 5.00 P 7.5 P 6.25

* Sales Mix Ratio = Sales in units ÷ Total sales in units

WaUCM: Product A P5.00

Product B 7.50
Product C 6.25
P18.75

 Note: For purposes of computing the WaUCM, the sales mix ratio (sales mix
percentage) is determined using the sales in units.

Breakdown of the Break-Even Sales:

Total A B C
(12.5%) (25%) (62.5%)
Break-even Sales 5,422.93 677.87 1,355.73 3,389.33

or

Total A B C
Break-even peso sales P67,800 P162,720 P169,480
÷ Selling Price P100 P120 P50
Break-even Peso Sales 5,423 678 1,356 3,389

Illustrative Example 2:

Following is the company’s result of operations from its present sales level of 10,000 units:

Sales (10,000 units @ P5) P50,000

Variable costs (10,000 units @ P3) 30,000
Contribution margin P20,000
Fixed costs 12,000
Profit before tax P 8,000

Course Module
 Based on the above data:

1. The company has an operating leverage factor (OLF) or degree of operating leverage
(DOL) of 2.5.
Total CM P20,000
OLF or DOL = = = 2.5
Profit before tax P8,000

2. If the company’s sales would increase by 10%, its profit before tax would increase by
25%.

∆ % Profit before tax = ∆ % Sales x OLF = 10% x 2.5 = 25%

References and Supplementary Materials

Books and Journals
1. Rodelio S. Roque (2016). Management Advisory Services. CM Recto, Manila. GIC
Enterprises and Co., Inc.
2. Leonardo E. Aliling, Ma. Flordeliza L. Anastacio (2015). Management Accounting 1. 856
Nicanor Reyes, Sr. St., CM Recto Avenue, Manila. Rex Book Store, Inc.
3. Franklin T. Agamata (2019). Management Services. Certs Publications. Agdao, Davao
City, Philippines
4. Ray H. Garrison, Eric W. Noreen, Peter C. Brewer, 16th ed. Managerial Accounting. The
McGraw-Hill Companies, Inc., 1221 Avenue of the Americas, New York

Online Supplementary Reading Materials

1. http://www.baruch.cuny.edu/sacc/documents/CVP-2203workshop.ppt
2. https://saylordotorg.github.io/text_managerial-accounting/s10-01-cost-volume-
profit-analysis-fo.html