Pretest

1. What are the elements of CVP Analysis?

2. Sales less Variable costs is equal to ___________.
3. What is the formula to get the break-even point in units?
4. What is the formula to get the break-even point in pesos?

A company produces and sells a single product. The selling price is P25
and the variable costs is P15 per unit. The corporation’s fixed costs is
P100,000 per month. Average monthly sales is 11,000 units.
5. What is the contribution margin per unit and as a percent of sales?
6. The corporation’s break-even point ________
Cost-Volume Profit Analysis
Cost-volume profit analysis
 Systematic examination of the relationships among costs,
cost driver, and profit

Elements:
a. Sales – selling price and units
b. Total fixed costs
c. Variable costs per unit
d. Sales mix
Applications of CVP Analysis
 Planning and decision-making
 Type of product to produce and sell;
 Pricing policy to follow;
 Marketing strategy to use; and
 Type of productive facilities to acquire
Assumptions and Limitations of CVP
Analysis
 The analysis is valid for a limited range of values and a limited
period of time.
 All costs can be categorized as fixed or variable.
 Revenues change proportionately with volumes and selling price
remaining constant.
 There is a constant product mix
 Changes in volume alone are responsible for changes in costs and
revenues
Assumptions and Limitations of CVP
Analysis
 Changes in volume alone are responsible for changes in costs and
revenues.
 There is no significant change in inventories (i.e., in physical units,
sales volume equals production volume)
 Operationleverage questions can be dealt with in the CVP
framework.
 The analysis is deterministic and appropriate data can be found
Contribution Margin per unit
 Excess of unit selling price over unit variable costs and
each unit sold contributes toward covering fixed costs and
providing operating profits

CM per unit = SPU - VCU

Contribution margin ratio

  Percentage of contribution margin to total sales

CM ratio =
Break-even

  Levelof sales volume where total revenues and expenses
are equal
 No profit nor loss

BEP (units) =
BEP (pesos) =
Break-even point
a.   Break even sales for multi-products (units)


Weighted CM per unit =

Break-even point
a.   Break even sales for multi-products (pesos)


Weighted CM ratio =
Revenue and Cost Planning
 
Sales (units) =


Sales (pesos) =
Sales (units) =
Sales (pesos) =
Margin of safety

  Amount of peso-sales or the number of units by which
actual or budgeted sales may be decreased without
resulting into a loss

MS = Sales – BEP
MSR =
Operating Leverage
 Extent to which a company uses fixed costs in its cost
structure

 Leverage is achieved by increasing fixed costs while

lowering variable costs
Operating Leverage Factor

  Ratio of the contribution margin to profit

OL =

OL =
The Income Statement for a company’s product shows:
Sales (100 units at P100 a unit)………………..10,000
Cost of goods sold:
Direct labor ………………..1,500 Required:
Direct materials used…….1,400 1. Compute the break-even
Var. factory OH ……………1,000 point in units.
Fixed factory OH …………… 500 4,400 2. If sales increase by 25%,
Gross profit 5,600 how much will be the
Marketing expense: new operating income?
Variable 600 3. Compute the new break-
Fixed 1,000 even point in pesos if
Administrative expense: fixed factory overhead
Variable 500 will increase by P1,700.
Fixed 1,000 3,100
Operating income 2,500
A company produces and sells a single product. The selling price is P25 and
the variable costs is P15 per unit. The corporation’s fixed costs is P100,000
per month. Average monthly sales is 11,000 units.

1. If the corporation desires to earn profit of P20,000 before tax, it must

generate sales of ________.
2. If the corporation pays corporate income tax at the rate of 30%, and it
desires to earn after-tax profit of P21,000, it must generate sales of
________.
3. How many units must be sold to earn profit of P2 per unit?
4. How much sales (in pesos) must be generated to earn profit that is 8% of
such sales?
A company produces and sells a single product. The selling price is P25 and
the variable costs is P15 per unit. The corporation’s fixed costs is P100,000
per month. Average monthly sales is 11,000 units.

1. With an average monthly sales of 11,000 units, the corporation’s margin

of safety is _________.
2. The margin of safety ratio (MSR) and the break-even sales ration (BESR)
are __________.
3. At the present average monthly sales level of 11,000 units, the
corporation’s operating leverage factor is _____.
A company produces and sells a single product. The selling price is P25 and the
variable costs is P15 per unit. The corporation’s fixed costs is P100,000 per month.
Average monthly sales is 11,000 units.

1. If fixed costs will increase by P20,000, the break-even point in units will
increase (decrease) by _________.
2. If variable costs per unit will go up by P5, the peso break-even sales will
increase (decrease) to ________.
3. If selling price will increase to P30, the break-even point in units will ________.
4. If sales increase from P800,000 to P900,000, and if the degree of operating
leverage is 5, one would expect profit to increase by ____.
A company sells two products, Product 1 and Product 2. Three units of
Product 1 are sold for every two units of Product 2. Fixed costs is P234,000
per year.

Product 1 is sold for P20 per unit and the variable costs identified with the
production and sale of each unit of the product amounts to P14. Product 2 is
sold for P24 per unit, and the variable costs identified with the production and
sale of each unit of the product amounts to P20.
1. The weighted average unit contribution margin is ___.
2. The break-even point in units:
Product 1 _______ Product 2 _______
Following information pertains to X Company’s two products:
Digicam Videocam
Break-even point – units 360 240
Selling price P4,500 P14,250
Variable costs 2,250 5,000

1. What is the weighted average contribution margin?

2. How much is total fixed costs?
3. How many units of each product should be sold if the company desires
to earn profit before tax of P1,515,000?
Antiporda, Inc. sells three products, A, B, and C. The company sells three
units of C for each unit of A and two units of B for each unit of C. Total
fixed costs amount to P760,000. Product A’s contribution margin per unit
is P2. Product B’s is 150% of A’s and Product C’s is twice as much as B’s.
How many units of each product must be sold to break-even?
The TS Company sells Product A for P60 each. Variable cost is P36 per
unit. Fixed costs are P375,000. How much sales (in units and in pesos)
must be reached to realize a
1. Net income of P102,000 before income taxes.
2. Net income of P97,500 after income taxes. Tax rate is 35%.
3. Net income of 15% of sales. Ignore income taxes.
4. 20% Return on sales. Ignore income taxes.
The Income Statement for Rocky Company for the past year is:
Sales (150,000 @P30)4,500,000
Cost of goods sold:
Materials 1,050,000
Labor 1,500,000
Var FOH 450,000
Fixed FOH 500,000
Gross Profit 1,000,000
Var marketing expense 135,000
Fixed marketing expense 185,000
Fixed manufacturing OH 180,000 500,000
Income before income taxes 500,000
Income tax 250,000
Net income 250,000
Rocky Company is preparing its budget for the coming year and has made
the following projections about cost increases: materials, 5%, labor 8%, and
all other costs (including fixed), 6%. Production capacity is 200,000 units.

The President had been offered various proposals by the division manager
as follows:
a. Maintain the present volume and sales price.
b. Produce and sell at capacity and reduce the 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.
Required: Recommendation based on quantification of alternatives.