APPLICATION OF QUANTITATIVE

TECHNIQUES IN PLANNING
CONTROL AND DECISION MAKING
Module 1
Adapted from Cabrera, et al (2017)

Sharilyn D. Penales, CPA, MBA

Teacher
Cost-Volume-Profit/Break-Even
Analysis
 Learning Objectives:
1. Be able to describe the concept and importance of
CVP relationship.
2. Compute and explain the meaning of Contribution
Margin, BEP, and Margine of Safety.
3. Apply CVP analysis in decision making.
4. Examine the sensitivity of profits to changes in sales
by using either Margin of Safety or Operating
Leverage.
COST-VOLUME-PROFIT
RELATIONSHIPS
 Break-Even Analysis
- is the simplest quantitative model used by decision
maker which is also referred to as cost-volume-profit
analysis.
- its major concerns are interrelationship of cost, volume
and profit.
- is the determination of the number of units that must be
produced and sold to equate total sales with total cost.
 Break-Even Point (BEP)

- is the volume of sales for which total sales equals total

costs where profit is equal to zero.

- it also useful in determining volume sales required to

generate desired profit.
 Components Break-Even Analysis
1. Volume. The level of production by a company, which
is expressed as the number of units(quantity) produced
and sold.
2. Profit. The difference between total sales and total
costs of the income generated by the sale of a product.
3. Cost. The usual number of different costs that must be
taken into account in order to determine profit.
 Fixed and Variable Costs

1. Fixed Cost. It is a cost that is independent of the

volume of units produced. It will remain the same
regardlesss of the volume of sales(e.g., rental,
management salaries,property taxes & etc.)

2. Variable Cost. It is a cost that is determined on a per-

unit basis.
cont...

- It grows in direct proportion to the volumme of sales in

other words, it increases in the same amount for each
additional unit sold fall into this category(e.g. material
costs, direct labor costs in manufacturing, utilities directly
affecting production,etc.)
 The following notation will be used for Break-
even analysis:
x=volume of output or sales in units
P=Profit VC=Variable costs
SP=Selling price per unit FC=Fixed costs
TC=Total costs(for x units)
TR=Total revenue(from the sale of x units)
BEQ=Break-even quantity
Among the most frequently asked questions taht require
cost estimates and short-run decisions are:

1. How any units will be manufactured?

2. What s the company’s break-even sales?
3. Should the selling price be changed?
4. Should the company spend more on advertising?
5. What profit contribution can be realized if the
organization performs as expected for the period?
cont...

6. Should the product be sold as is or should it be

processed further?
7. What would be the effects of the following changes in
the next period?
a. Increase or decrease in the cost of materials?
b. Increase or decrease in the efficiency of
production?
 Five Element of CVP

1. Prices of products
2. Volume or level of activity within the relevant range
3. Variable costs per unit
4. Total fixed costs
5. Mix of products sold
Contribution Margin=Net sales - variable costs
Contribution Margin per unit or marginal income per unit
- this is the excess of unit selling price over unit
variable costs and the amount each unit sold contributes
toward covering fixed costs and providing operating
profits.
Formula:
CM per unit = Unit selling price - unit variable costs
Contribution Margin ratio
- this is the percentage of contribution margin to total
sales.
- this is very useful in that it shows how the contribution
margin will be affected by a given peso change in total
sales.

Formula:
CM Ratio = Contribution Margin divided by Sales
 CVP Analysis for Break-even Planning

1. Break-even point(units)=Total fixed costs divided by

Contribution margin per unit

2. Break-even point(pesos)=Total fixed costs divided by 1

minus Variable costs divided by Sales
3. a. Break-even sales for multi-products firm(combined
units) = Total Fixed costs Divided by Weighted Average
Contribution Margin

b. Weighted contribution margin per unit=

Unit CM x No. of units per Mix (Product A)+ Unit CM
x No. of units per Mix(Product B) divided by Total
number of units per Sales Mix
4. a. Break-even sales for multi-products firm(combined
pesos) = Total Fixed costs Divided by Weighted CM Ratio

b. Weighted CM Ratio =Total Weighted CM(P) divided by

Total Weighted Sales(P)
 CVP Analysis for Revenue and Cost Planning
1. Sales(units)=Total fixed costs + Desired Profit divided
by Contribution margin per unit

2. Sales(pesos)=Total fixed costs + Desired Profit divided

by CM ratio
For example: Break even analysis
The Glass Company, a manufacturing company located
in Digos, produces slippers for export to Japan. The
company sells these slippers to major retail chains for
P125 each, which does not include shipping costs of P20
per slippers. These slippers are then marked up to a retail-
selling price in Japan of P560 per slippers. The workers in
the factory are paid, on the average, the equivalent of P420
per day, and it is estimated that the average daily output
cont..
per worker is 70 slippers. The cost of the material is
estimated at P44 per slippers. Fixed costs for this operation
are estimated to be P6M a year.
Required:
a. What is the BEP of the company, in terms of the number
of slippers per year?
b. If the company sold 150k slippers last year, how much
profit(loss) did it have for the year?
 Sensitivity Analysis of CVP Results

To examine the sensitivity of profits to change in sales,

either of the measures may be used: The margin of safety
or operating leverage
 Margin of Safety
- it measures the potential effect of the risk that sales will
fall short of planned levels.
- this is the excess of actual or budgeted sales over break-
even sales and indicates the amount by which sales could
decrease before losses are incurred.

Margin of Safety = Budgeted Sales - Breakeven Sales

 Margin of Safety Ratio
- it is useful for comparing the risk of two alternative
products, or for assessing the riskiness in any given
product.
- the product with a relatively low margin of safety ratio
is the riskier of the two products and therefore usually
requires more of management’s attention.
 Operating Leverage
- is the ratio of the contribution margin to profit.
- it will measure the potential effect of the risk that sales
will fall short of planned levels as influenced by the
relative proportion of fixed to variable manufacturing
costs.
- a higher value of operating leverage indicates a higher
risk in the sense that a given change in sales will have a
relatively greater impact on profit.
Operating Leverage=CM/Prof. or Net Operating Inc.
Thanks!

GOD BLESS