CAC CHAPTER 4

Cost-Volume-Profit Relationships
Merchandising business general format
Total Per unit
Net sales P500,000 xx
COGS (P250,000) xx
Gross Profit P200,000 xx
Operating Exp. (P200,000) xx
Net Profit P50,00

Variable Costing Income Statement

Total Per unit
Net sales P500,000 xx
Variable Costs (P250,000) xx
Contribution Margin P200,000 xx
Fixed Costs (P200,000) xx
Net Profit P50,00

Significant difference between the two (base sa words ni Sir Lerry)

- COGS as well as Operating Expenses variable and fixed costs
was separated and placed to the corresponding part in the
contribution format of an income statement.
- Very important reminder! forget the formulas: they are not needed
if you understand the relationships among the elements.
 Relationships (based sa words ni Sir Lerry)
1. How many units must be manufactured? (Ilang units ang kaya
mamanufacture lalo na kapag may target ka na net income)

2. How many units must be exceeded so that profit will be earned

(break-even)? [Ilan yung units na kailangan maibenta para ma
sambot yung cost at mag break-even (no profit and no loss) or
NI = 0]

3. Should the selling price be changed? (Kailangan sagutin ng CVP

analysis kung magdudulot ba ng profit ang ang apg increase sa
selling price)

4. Should the company spend more in advertising? (Since advertising

doesn’t necessarily result to additional profit, so titingnan kung
sulit ba ang pag spend sa advertising using CVP analysis)

5. What profit will be realized in selling a given number of units.

(Titingan yung profit after makabenta ng certain amount of units)

6. Should the product be sold as is or processed further? (Para sa mga

product na nag undergo sa isang process at pwede na ibenta or
pwede pa siyang iundergo ulit sa isang process at pwede siya
ibenta at a higher price, titingan kung mas okay ba na ibenta agad
or iprocess further at dagdagan ng value added cost yung product)

7. How will profit be affected by proposed changes. (Yung mga

proposal na nagbabago sa cost structure so kailangan iexamine ang
magiging effect nya sa income by using CVP analysis)
 CVP Analysis for Break-even Planning
Understand first the following terms:

Contribution Margin (CM)

• The excess of sales over variable cost (S-VC)
• Maybe per unit or in total
• CM in total is the amount that can be used to contribute to
paying fixed expenses and providing return to owners.
• May be expressed as a ratio = CM / S

Breakeven point
• The level of sales where net income is zero.
• No profit; no loss
• Maybe expressed in sales volume (units) or in pesos

Example Problem 1:

Total Per unit %

Net Sales P500,000.00 P10.00 100%
VC (P300,000.00) P6.00 60%
CM P200,000.00 P4.00 40%
FC (P150,000.00)
Net Profit P50,000.00

Requirement 1: Give BEP In Units and Pesos with the alternative

solution

BEP in Units = 150,000 (FC) / P4.00 (CM Per unit)

= 37,500 Units
{Alt Solution} BEP in Units = P375,000 (BEP in Pesos)
P10.00 (Net Sales Per Unit)
= 37,500 Units
Requirement 2: Give BEP in Pesos with the alternative solution
BEP in Pesos = 37,500 (Units) x P10.00 (Net Sales Per Unit)
= P375,000
{Alt Solution} BEP in Pesos = P150,000 (FC)
40% (CMR)
= P375,000

(Pwede iextend yung line pababa and ang tawag sa part na nag reach
below sa P37,500 ay loss territory. However, if you extend the line
upwards it will be called profit territory).
[Sir Lerry: Mayroon akong video na inupload sa eLearning website
regarding sa creation nung Profit-Volume Graph]
Assumptions and Limitations (Explanations ay mostly words ni sir
Lerry during the video presentation).
1. The analysis is valid within a relevant range. (Relevant range,
yan yung interval of activity kung saan valid yung iyong
classification of fixed and variable cost. Limited lang ang validity
ng CVP analysis kase kapag lumagpas ka sa relevant range may
mga costs na nag increase na. Ex. Fixed costs na tataas ng P5,000
if yung production mo ay lumampas ng 10,000 units, so hindi na
valid yung CVP analysis doon kasi nag increased ang FC).
[Kapag lumagpas sa relevant range pwede mag increase ang FC,
VC, or pwedeng sabay sila mag increase. So iba na ang CVP
analysis mo at that point]

2. All costs can be categorized as fixed and variable. (Assumption

sa CVP analysis. Which is not true always kase may Mixed cost.
So kailangan mo isegregate yung mixed cost into fixed and
variable components using High-Low method and other methods
we have discussed).

3. Revenues change proportionately with volume. (Assumption sa

CVP analysis is proportional ang pagtaas ng volume sa revenues.
So kapag yung pagtaas ng revenue sa sales volume hindi mo
pwede gaitin ang CVP analysis or pwede mo siys imodify).

4. Constant product mix. (Yung ratio ng products na naibebenta ay

constant Ex. A company sells product A and B at a Ratio of 1:2. So
we assume that the product mix will still be the same all
throughout. But in the real world it is not always the case since
your product mix may vary.)
5. Changes in volume alone causes changes in revenue and costs.
(Reason sa pagtaas at pagbaba ng cost ay yung changes in
production and sales volume which is not true in real life dahil may
ibang dahilan kung bakit nag babago ang revenue at costs).

6. There is no significant change in inventories (sales =

production). (Isa sa assumption under CVP analysis ay lahat ng
napoproduce ay naibebenta which is not true in real life dahil
minsan nag poproduce ka ng product at hindi lahat nabebenta. So
kapag ganyan may adjustments sa iyong CVP analysis).

7. Operation leverage questions can be dealt with. (Assuming na

pwede gamitin ang CVP analysis pang compute sa operation
leverage questions which again, is not always true).

8. Appropriate data can be found without difficulties. (Hindi

laging totoo na yung data na ginagasmit sa data from CVP analysis
can be found without difficulties kasi minsan may uncertainty in
the future like assuming nag CVP analysis ka ilang percent ang
increase sa labor so assumption lang yun using estimates di ka
talaga sure na iyun nga ang mangyayari na increase in the future).
 Example Problem 2: Manhattan Co. provided
Sales (100 units @P100) P10,000
COGS:
Direct Labor P1,500
Direct Materials P1,400
Variable OH P1,000
Fixed OH P500 (P4,400)
Gross Profit P5,600
Marketing expenses
Variable P600
Fixed P1,000 P1,600
Administrative Expense
Variable P500
Fixed P1,000 P1,500
Operating Income P2,500

- First, convert the Income statement to a variable costing format as

shown below to proceed with the problem
Total Per Unit %
Sales @100 units P10,000 P100 100%
Variable costs and P5,000 ? ?
expenses
Contribution P5,000 ? ?
Margin
Fixed costs and P2,500
expenses
Operating income P2,500

VC = P1,500 (Direct Labor) + P1,400 (Direct Materials) + P1,000

(Variable OH) + P600 (Variable Marketing Exp) +P500 (Variable
Admin Exp) = P5,000
FC = P500 (Fixed OH) + P1,000 (Fixed Marketing Exp) + P1,000
(Fixed Admin Exp) = P2,500

Requirement 1: VC and VCR

VC Per unit = P5,000 (Total VC) / 100 units (Sales volume)
= P50
VCR = P50 (VC Per unit) / P100 (SP per unit)
= 50%
Alt Solution: P5,000 (Total VC) / P10,000 (Total Sales) = 50%

Requirement 2: CM and CMR

CM per unit = P100 (SP per unit) – P50 (VC per unit) = P50
Alt Solution: P5,000 (Total CM) / 100 units (Sales volume) = P50

CMR = P50 (CM per unit) / P100 (SP per unit) = 50%
Alt Solution: P5,000 (Total CM) / P10,000 (Total Sales) = 50%
 Completed Manhattan Co. Income statement to be used for Break-even
Planning
Total Per Unit %
Sales @100 units P10,000 P100 100%
Variable costs and P5,000 P50 50%
expenses
Contribution P5,000 P50 50%
Margin
Fixed costs and P2,500
expenses
Operating income P2,500

Requirement 1: BEP in Units [FC / CM Per unit = BEP in Units]

BEP In Units = P2,500 (FC) / P50 (CM Per unit) = 50 units

Requirement 2: If sales increase +25%, Net income = (?)

NOTE – Sales, VC, and CM increase proportionately when using
CVP analysis (Meaning that +25% sales = 25% x CM)
[The new net income can be computed by adding the increase in CM to
the old net income]
New net income = P2,500 + (25% x P5,000) = P3,750 (New NI)

Requirement 3: If FCE + P1,700; BEP in Pesos = (?)

New FCE = P2,500 – P1,700 = P4,200
BEP in Pesos = (FC / CMR)
BEP in Pesos = P4,200 / 50% = P8,400
 Example Problem 3:
Total Per Unit %
Sales (100,000) ? P20 100%
Units
Variable costs and ? P14 ?
expenses
Contribution ? ? ?
Margin
Fixed costs and P792,000
expenses
Operating income ?

Total Sales = P20 (Total Price per unit) x 100,000 units = P2,000,000
VCR = P14 (Total VCE price per unit) / P20 (Total SP per unit)
= 70%
VCR Alt Solution = P1,400,000 (Total VCE) / P2,000,000 (Total Sales)
= 70%
Total VCE = P2,000,000 (Total Sales) x 70% (VCR) = P1,400,000
Total CM = P2,000,000 (Total sales) – P1,400,000 (Total VCE)
= P600,000
Total CM Alt Solution = P2,000,000 (Total Sales) x 30% (CMR)
= P600,000
Total CM per unit = P20 (Total SP per unit) – P14 (Total VCE per
unit) = P6
CM per unit Alt Solution = P600,000 (Total CM) / 100,000 units
= P6
 CMR = P6 (CM per unit) / P20 (Total SP per unit) = 30%

CMR Alt Solution = P600,000 (Total CM) / P2,000,000 (Total Sales)

= 30%
Operating Income = P600,000 (Total CM) – P792,000 (Total FCE)
= -P192,000

Completed variable costing Income statement

Total Per Unit %
Sales (100,000) P2,000,000 P20 100%
Units
Variable costs and P1,400,000 P14 70%
expenses
Contribution P600,000 P6 30%
Margin
Fixed costs and P792,000
expenses
Operating income -P192,000

CVP Analysis with Changes in Cost structure

Req 1: BEP in units and in pesos
BEP in units = P792,000 (Total FC) / P6 (CM per unit) = P132,000
units
BEP in pesos = P792,000 / 30 % (Total CMR) = P2,640,000
Alt Solution:
BEP in units = P2,640,000 (BEP in pesos) / P20 (Total SP per unit)
= P132,000 units
BEP in pesos = P132,000 (BEP in units) x P20 (Total SP per unit)
= P2,640,000

Req 2: Sales volume to earn pretax income of P60,000

[Sales volume = Target total CM / CM per unit]
[Need target total CM to proceed]
[Target total CM = Target pretax income + FCE]
Target total CM = P60,000 + P792,000 = P852,000
Sales volume = P852,000 (Target total CM) / P6 (CM per unit)
= P142,000

Req 3: Sales volume to earn after-tax income of P90,000. Tax is 40%

[Need pretax income to proceed]
[Pretax income = Target after-tax income / (100% - x%)
Pretax income = 100% - 40% = 60%
= P90,000 / 60% = P150,000
Sales volume = P150,000 (Pretax income) + P792,000 (Total FCE)
= P942,000
= P942,000 / 6 = P157,000
Req 4: Labor costs = 50% of VC and 20% of fixed costs. If wages and
salaries increase +10%, what is BEP in units?

New VC per unit = P14 + (50% x P14 x P10%)

= P14.70
New CM per unit = P20 (Total SP per unit) – P14.70 (New VC per unit)
= P5.30
New Total FC = P792,000 + (20% +P792,000 x 10%)
= P807,840
BEP in units = P807,840 (New Total FC) / P5.30 (New CM per unit)
= P152,423
Example Problem 4:
CVP Analysis for a Multi-Product firm that sells two products A & B.
These account for 60% and 40% of the total sales in pesos. Variable
costs as % of sales are 60% for A and 85% for B. Fixed costs is
P150,000.
Req 1: The weighted CMR
A = (60% x 40% [100% Total sales – 60% VC for A = 40%])
= 0.24
B = (40% x 15% [100% Total sales – 85% VC for B = 15%])
= 0.06
Weighted CMR = 0.24 + 0.06
= 30%
Req 2: BEP in pesos
BEP in pesos = P150,000 (FC) / 30% (CMR)
= P500,000
Req 3: If FC +130% and target NI = P9,000 target sales = (?)
[Need target CM to proceed, Target CM = Total FC + NI]
= P150,000 x 130% = P195,000
= P195,000 (FC + 130%) + P9,000 (NI)
Target CM = P204,000
Target sales = P204,000 (Target CM) / 30% (CMR)
= P680,000

Example Problem 5:
A firm sells two products, D and W at a rate of 2 units and 3 units
respectively. The following data are available:
D W
Unit selling price P10 P5
Unit variable cost P6 P3
Total fixed cost P420,000

Req 1: Weighted CM per unit

Weighted CM per unit D = (P4 [CM from P10 – P6] x 2/5 [At a rate of 2
units for D from the given will serve as the numerator and the total units
for both D an W will become the denominator which is 5]
W = (P2 x 3/5)
Weighted CM per unit = P1.60 (from P4 x 2/5) + P1.20 (from P2 x 3/5)
 = P2.80
Req 2: BEP in units combined
BEP in units = P420,000 (FC) / P2.80 (CM per unit) = 150,000 units

Req 3: Weighted CM ratio

[Need both the sales in pesos per mix to proceed]
[Need both sales rate to proceed]
[CMR also needed to proceed]
Sales in pesos per mix = (2 x P10) + (3 x 5)
= 20 (D) + 15 (W)
= 35
[P10 and P5 are the total unit SP]
[2 and 3 are the rate of units of product D and W respectively]
Sales rate of D = 20 / 35 (Total sales in pesos per mix)
= 57.14%
Sales rate of W = 15 / 35
= 42.86%
CMR of D = P10 (Unit SP) – P6 (Unit VC)
= 4 (CM) / P10 (Unit SP)
= 40%
CMR of W = P5 (Unit SP) – P3 (Unit VC)
= 2 (CM) / P5 (Unit SP)
= 40%
Weighted CMR ratio of D = 57.14% x 40%
= 22.8560
Weighted CMR ratio of W = 42.86 x 40%
= 17.1440
Weighted CMR = 22.8560 + 17.1440
= 40%
Req 4: Combined BEP in peso sales
BEP in pesos = P420,000 (Total FC) / 40% (Weighted CMR)
= P1,050,000
Req 5: BEP in peso sales per product
Product D = P1,050,000 x 57.14%
= P599,970
Product W = P1,050,000 x 42.86%
= P450,030
Alt solution:
- The ratio of unit sales for D and W is 2:3.
- Assuming that the two products are sold as a package.
- Each package will contain 2 units of D and 3 units of W.
D (2 units) W (3 units) Package
Unit selling P20 P15 P35
price
Unit variable P12 P9 P21
costs
CM P8 P6 P14

For reference:
D W
Unit selling price P10 P5
Unit variable cost P6 P3
Total fixed cost P420,000

[Very important assumption for the alt solution, both D and W will be
sold as a package]
Req 2: BEP in units combined and per product
BEP in package = FC / Package CM
= P420,000 / P14
= 30,000 packages
BEP in product D = 30,000 x 2
= 60,000 units
BEP in product W = 30,000 x 3
 = 90,000 units
[Req 2] BEP in combined units = 60,000 (D) + 90,000 (W)
= 150,000 units
[Req 3] Weighted CMR = P14 / P35 = 40%
[Req 4] Combined BEP in sales
Product D = 60,000 x P10 = P600,000
Product W = 90,000 x P5 = P450,000
Combined = 600,000 + 450,000 = P1,050,000
[Req 5] BEP in peso sales for product
Product D = 60,000 x P10 = P600,000
Product W = 90,000 x P5 = P450,000
CVP in Decision making
Problem 8: Results for the past year follows
Next year’s forecast of increases: materials – 5%, labor – 8%, all other
costs including fixed costs – 6%. Capacity is 200,000 units.
Alternatives available
A. Maintain the present volume and sales price.
B. Produce and sell at capacity and reduce unit price to P28.
C. Raise the unit price to P32, spend an extra P300,000 on
advertising, and produce and sell 180,000 units.
Sensitivity analysis
Margin of Safety (MOS)
- The excess of actual or planned sales over BEP
MOS Ratio
= MOS / Actual or planned sales

Problem 9: Budgeted for next year

Req 1: Budgeted sales in units

= Budgeted NI/ Profit per unit
= P875,000 / (P50 – P16.75 – P24.50)
= 100,000 units
Req 2: MOS in pesos and in percentage
CM @ BEP = Total FC x Budgeted sales in units
= (P24.50 x 100,000) = P2,450,000
BEP in units = P2,450,000 / (P50 [Total SP] – P16.75 [Total VC])
= 73,685 units
MOS in units = 100,000 [Budgeted sales in units] – 73,685
= 26,315
MOS in pesos = 26,315 x P50 = P1,315,750
MOS ratio = P1,315,750 / (P50 [Total SP] x 100,000) = 26.32%

Operating leverage
- The ratio of CM to profit

- Measures the impact of change in sales to net income or profit

Problem 10: Assume the following information:

Computation for Degree of operating leverage (DOL)
Company A = 40,000 / 10,000 = 4
Company B = 70,000 / 10,000 = 7
Company B will have a bigger percentage increase in profit given the
same percentage in sales. Let us assume a 10% increase in sales and see
what happens.

Company A registered a 40% increase in profit

Company B registered a 70% increase
The percentage increase in profit may be computed using:
% Of increase in sales x DOL
Company A = 10% (increase in sales) x 4 = 40%
Company B = 10% x 7 = 70%