COST-VOLUME-PROFIT ANALYSIS

Introduction to Cost-Volume-Profit (CVP) Analysis

Cost-Volume-Profit (CVP) analysis is a management accounting technique used to analyze

how changes in costs and sales volume affect a company's profit. It provides valuable
insights into the relationship between costs, volume, and profits, helping businesses make
informed decisions regarding pricing, production levels, and sales strategies.

Key Components of CVP Analysis

• Fixed Costs

- Fixed costs remain constant regardless of changes in production or sales volume.

- Examples include rent, salaries, and depreciation.

• Variable Costs
- Variable costs vary in direct proportion to changes in production or sales volume.
- Examples include raw materials, direct labor, and sales commissions.

• Contribution Margin
- Contribution margin is the difference between total sales revenue and total variable
costs.
- It represents the amount of revenue available to cover fixed costs and contribute to
profits.
- Contribution Margin = Total Sales Revenue - Total Variable Costs

• Break-Even Point
- The break-even point is the level of sales at which total revenue equals total costs,
resulting in neither profit nor loss.
- It indicates the minimum sales volume needed to cover all costs.
- Break-Even Point (in units) = Fixed Costs / Contribution Margin per Unit
- Break-Even Point (in sales) = Fixed Costs / Contribution Margin Ratio

• Cost-Volume-Profit (CVP) Graph

- A CVP graph depicts the behavior of total costs, total revenue, and profits over various
levels of activity.
- It helps identify the break-even point and assess the impact of changes in sales
volume on profitability.
A powerful tool that helps managers understand the relationships among cost, volume, and
profit. CVP analysis focuses on how profits are affected by the following five (5) factors:

✓ Selling prices
✓ Sales volume
✓ Variable cost per unit
✓ Total fixed costs
✓ Product mix

Key Assumptions in CVP Analysis

• Costs are classified as variable or fixed.

• Variable costs change at a linear rate.
• Fixed costs remains unchanged within the relevant range.
• Selling prices do not change as sales volume changes.
• For multiple product companies, sales mix usually remains constant.
• Inventory levels remain constant and is not focused too much in CVP analysis.
• Volume is the greatest factor affecting costs.

Operating Leverage

• Operating leverage represents the relationship between the entity's fixed costs and
variable costs.
• An entity with high fixed costs tends to have a high operating leverage, like airline
industries. Usually its fixed costs are higher than its variable costs.
• An entity with a high operating leverage can expect net income going up when sales
do increase, because fixed costs will still remain the same.
• Similarly, an entity with a high operating leverage can expect net income going down
when sales do decrease because it will still incur fixed costs, up until they suffer
losses.

Degree of Operating Leverage

The degree of operating leverage measures how well an entity generates profit using its fixed
costs.
 FORMULAS

Contribution Margin Approaches in CVP Analysis

▪︎ Sales in units x Contribution margin per unit = Total Contribution Margin

▪︎ Contribution margin / CM per unit = Number of units sold
▪︎ At break-even point, Fixed costs = Contribution margin
▪︎ Therefore, Fixed cost / CM per unit = Break-even point in units.

BEP in Units = Fixed cost BEP in sales = Fixed cost

Contribution margin per unit Contribution margin ratio

CVP Analysis with Target net income

Required units = Fixed cost + Target net income Required Sales = Fixed cost + Target net income

Contribution margin per unit Contribution margin ratio

Sales xx
Margin of Safety = Actual or Budgeted Sales –
Less: Variable Costs xx
Breakeven Sales
Contribution Margin xx
Degree of Operating Leverage = Contribution Less: Fixed Costs xx
margin ÷ Net income Net Income xx

PROBLEMS

Problem 1
ABC Company is a manufacturer of teddy bears which currently sells at P250 per unit.
Variable cost per unit includes P80 in materials, P50 in labor, P20 in variable overhead,
and P10 in variable selling and administrative expenses. Fixed costs per period amounts
to P90,000.

1. How much is the CM per unit? CMR?

2. How many units should the entity sell every month to break-even?
3. How much sales should the entity achieve every month to break-even?
4. Compute BEP through equation approach.
 Problem 2
Prepare the break-even graph for DEF Company based on the following information:
Total Per unit
Net sales P 500,000 P 10
Variable costs 300,000 6
Contribution Margin 200,000 4
Fixed Cost 150,000 3
Net Income 50,000 1

Units Sold 50,000 units

Problem 3
GHI Company is a manufacturer of teddy bears which currently sells at P250 per unit.
Variable cost per unit includes P80 in materials, P50 in labor, P20 in variable overhead,
and P10 in variable selling and administrative expenses. Fixed manufacturing costs per
period amounts to P90,000. The entity's desired net income is P270,000.

1. How many units should the entity sell every month to achieve the target net income?
2. How much sales should the entity achieve every month to achieve the target net
income?

Problem 4
JKL Manufacturing Company's budget for the coming year revealed the following unit
data:
Budgeted net income P 875,000
Unit costs:
Variable Fixed
Manufacturing P 14.00 P 12.00
Selling 2. 50 5.50
General 0.25 7.00
Unit Selling price P 50

Compute for the margin of safety in peso amount and percentage.

Problem 5
Calculate the break-even point in the following sales mix, both in units and peso sales.
Product A B C
Selling Price P 150 P 210 P 360
Variable cost per unit P 90 P 140 P 190
Sales mix percentage 20% 20% 60%
Total fixed cost P 400,000

ALMOJUELA | BERIN | MAGAS