COST VOLUME PROFIT ANALYSIS

Definition  BEP in Sales

 A powerful tool that helps managers understand the
relationships among cost, volume and profit.
 Focuses on how profits are affected by the ff five factors:
 Selling price
 Sales volume  Contribution margin ratio = contribution margin / sales
 VC/unit
 Total fixed cost Graphing CVP Analysis
 Product mix

Break-even point

 Point where there is no profit or loss; enough sales to

cover cost.
 Determinant on how much sales/units to be sold in order
to at least cover operational costs.
Assumption of CVP Analysis

 Costs are classified as variable or fixed.

 Variable costs change at a liner rate.  x-axis – represents units produced and/or sold
 Higher volume = higher variable cost  y-axis – represents total sales
 Fixed cost remains unchanged within the relevant ranges.  total revenue starts at 0
 Selling prices do not change as sales volume changes.  depends on the total of units sold which starts at 0
 For multiple product companies, sales mix usually remains  total cost doesn’t start at 0
constant.  no matter the level of production, fixed cost remains
 Inventory levels remain constant and is not focused too constant
much in CVP analysis.  Area below BEP = loss
 Units sold are more relevant in CVP analysis.  Total cost > total revenue
 Volume is the greatest factor affecting costs in CVP  Area above BEP = profit
analysis.  Total revenue > total cost
 Sample graph
Contribution Margin

 Contribution Margin Income Statement

Sales P xxx
Less: Variable Cost xxx
Contribution Margin xxx
Less: Fixed Cost xxx
Net Income xxx
 At break-even point, net income is 0.
 Which means that fixed cost is equivalent to
contributed margin.
Contribution Margin Approaches in CVP Analysis CVP Analysis with Target Net Income
 Break-even point (BEP) in units  Target net income needs to be the computed amount
before tax.
 In cases where the target net income is totaled after
tax, compute the amount before tax before
proceeding to compute for the required units or sales.
 Formula for required units to achieve target net income.

 Formula for required sales to achieve target net income.

 Sample Problem

 The higher margin of safety the better.

Sales Mix and Weighted Average Contribution Margin

 Refers to the relative proportion in which a company’s

products are sold.
 The idea is to achieve the combination or mix that will
yield the greatest amount of profits.
 Computation for weight average contribution margin:

Applying CVP Analysis through Margin of Safety

 Margin of safety measures the potential effect of the risk

that sales will fall short of planned sales.
 The level wherein an entity is safe from going below
the BEP.
 the difference between actual or budgeted sales over
break-even sales.

 Computation for BEP in units for the whole company

 Sample problem:
 Allocate BEP in units to the sales mix then compute for
the peso sales.