COST

VOLUME
PROFIT
ANALYSIS
ROMNICK E. BONTIGAO, CPA, CTT, MRITax, MBA (o.g.)
SLIDE TITE
CVP analysis is a planning tool that
management uses to predict the volume
of activity, costs incurred, sales values,
and profits received.

SALES SALES
COST
VOLUME PRICE

PROFIT
 CVP ANALYSIS
A systematic examination of the relationships among
cost driver or activity level (or volume) and profit.

Useful for-profit planning by way of a systematic analysis of

the profit’s relationship with various costs and volume of
sales.
 INHERENT ASSUMPTIONS OF CVP ANALYSIS

• 1. All costs are classified as either variable or fixed.

• 2. Cost and revenue relationships are predictable and linear over a
relevant range of activity and a specified period of time.
• 3. Total Variable Costs change directly with the Cost Driver, but the
Variable Cost per Unit are constant over the relevant range.
• 4. Total Fixed Costs are constant over the relevant range, but Fixed
Cost per Unit vary inversely with the Cost Driver.
• 5. SPU and market conditions remain unchanged.
• 6. Production equals Sales.
• 7. IF the company sells multiple products, Sales Mix is constant.
• 8. Technology, as well as productive efficiency, is constant.
• 9. The time value of money is ignored.
 CVP ANALYSIS PURPOSES
• 1. Provides management with cost and profit data for profit
planning, policy formulating, and decision-making

• 2. Provides data in determining the optimal level and mix of output

to be produced with available resources.
 TOOLS IN CVP

1. Contribution Margin Income Statement (CMIS)

2. Break-Even Analysis
3. Margin of Safety (MOS)
4. Target Sales with Desired Profit
5. Operating Leverage
CONTRIBUTION
MARGIN
INCOME
STATEMENT
INTRODUCTION
A contribution margin income statement is an
income statement in which all variable expenses are
deducted from sales to arrive at a contribution margin.
Then, all fixed expenses are subtracted to arrive at the
net profit or net loss for the period.

- The arrangement of expenses in the income

statement corresponds to the nature of the expenses.
CMIS BOX APPROACH PRESENTATION
TRADITIONAL INCOME STATEMENT
CMIS VS TRADITIONAL INCOME STATEMENT
A contribution margin income statement varies from a normal
income statement in three ways.
1. Fixed production costs are aggregated lower in the income
statement, after the contribution margin.

2. Variable selling and administrative expenses are grouped

with variable production costs.

3. Gross margin is replaced in the statement by the contribution

margin
 CONTRIBUTION
MARGIN
INCOME
S TAT E M E N T

 helpful for management

accountants analyzing how
production costs change as
production levels increase.
 measure of risk in the
production process.
DIFFERENCE
• treatment of variable and fixed expenses

• Notice that a traditional income statement calculates gross profit and net
profit whereas a contribution margin income statement calculates gross
contribution margin, contribution margin and net profit.
DIFFERENCE OF USE

TRADITIONAL INCOME STATEMENT

• Prepared under a traditional absorption costing (full costing)
system and is used by both external parties and internal
management.
• As this statement fulfills the requirements of external parties to
great extent, companies are required to follow applicable
accounting standards such as Philippine Financial Reporting
Standards (PRFS) or Philippine Account Standards (PAS).
DIFFERENCE OF USE
CONTRIBUTION MARGINE INCOME STATEMENT
• a purely management oriented format of presenting revenues
and expenses that helps in various revenues and expense related
decision making processes.
• Companies are not required to present such statements to any
external party, so there is no need to follow PFRS or PAS.
 KDMX Company is a single
product company. The following
TRADITIONAL INCOME data is available for the month of
July 2021.
STATEMENT • Sale price per unit: $30
• Number of units manufactured
and sold during the month: 2,000
• Variable manufacturing cost per
unit: $12
• Variable selling and
administrative cost per unit: $4
• Fixed manufacturing cost per
month: $6,000
• Fixed marketing and
administrative cost per
month: $2,000
Company does not maintain
finished goods and work in process
inventory.
 KDX Company is a single
product company. The following
CONTRIBUTION MARGIN data is available for the month of
INCOME STATEMENT July 2021.
• Sale price per unit: $30
• Number of units manufactured
and sold during the month: 2,000
• Variable manufacturing cost per
unit: $12
• Variable selling and
administrative cost per unit: $4
• Fixed manufacturing cost per
month: $6,000
• Fixed marketing and
administrative cost per
month: $2,000
Company does not maintain
finished goods and work in process
inventory.
 M U LT I P R O D U C T C O M PA N Y
MAC company is a US based multi product company. The company is
currently manufacturing and selling four products successfully. The data
for the year 2021 is given below:
CONTRIBUTION MARGIN INCOME STATEMENT
CONTRIBUTION MARGIN INCOME STATEMENT
BREAK-EVEN
ANALYSIS
 Methods of Determining
BREAK-EVEN ANALYSIS the Break-Even Point:

Indicates the point at which the a. Graphical Method

company neither makes a profit
nor suffers a loss, or the point b. Break-Even Analysis
where sales less total cost Formula (Single Product)
(variable and fixed cost) results in
zero profit. c. Break-Even Analysis
Formula (Multiple
Product)
 GRAPHICAL METHOD

Graph Analysis
1. Break-even point is the point where the sales line meets the line of total cost
(variable and fixed cost). Profit = zero or Sales = TC
2. At zero point of sales, fixed cost is already existing at a certain amount.
3. Total variable cost is dependent on the cost driver. In general, the cost driver is
the quantity of production. In CVP, units produced is equals to units sold.
4. The portion below the break-even point is loss.
5. The portion above the break-even point is profit.
BREAK-EVEN ANALYSIS FORMULA (SINGLE PRODUCT)

BEP analysis for companies selling single or one product only. A single
product company can compute its break-even point using the following
formula:

1. Break-even sales in Pesos (BESP)

• BESP= VC + FC where Profit = zero
• BESP = FC/CMR where CMR = Contribution Margin Ratio
CMR = CM/Sales
• BESP = (FC*Sales)/CM

2. Break-even sales in Units (BESU)

a. BESU= FC/CMU
BREAK-EVEN ANALYSIS FORMULA (SINGLE PRODUCT)
BREAK-EVEN ANALYSIS FORMULA (SINGLE PRODUCT)
 LOGIC ON BREAK-EVEN ANALYSIS
Based on the illustration 3-2, we identified that, when the activity level is at
75,000 units or P3,000,000 sales, the company will earn no profit. This point
is called break-even. From this data, we can say that, in order to have a profit,
we must produce and sell more than 75,000 units. 1 unit increase in activity
level from the break-even point, will give you a profit before tax equal to the
contribution margin in unit (CMU) or P16, and so on. Likewise, 1 unit
decrease in activity level from the break-even point, will give you a loss equal
to CMU of P16 also, and so on
BREAK-EVEN ANALYSIS FORMULA (MULTIPLE PRODUCT)
A multi-product company means a company that sells two or more products.
The procedure of computing break-even point of a multi product company is a
little more complicated than that of a single product company.
TOTAL APPROACH
TOTAL APPROACH
TOTAL APPROACH
THE SMR (SALES MIX RATIO) APPROACH
This technique is very useful in solving problems when the given data are CMU, CMR, SMRU,
SMRP and units produced only.
THE SMR (SALES MIX RATIO) APPROACH
MARGIN OF
SAFETY
 MARGIN OF SAFETY
Margin of safety is the amount of sales in
pesos or number of sales in units by which
actual or budgeted sales may be decreased
without resulting into a loss. MOS is an
important figure for any business because it
tells management how much reduction in
revenue will result in break-even. A higher
MOS reduces the risk of business losses.
Generally, the higher the margin of safety,
the better it is.
SLIDE TITE
The equations for MOS problem are given below:

a. MOSP (Margin of safety in Pesos) =

ASP (Actual Sales in Pesos) - BESP

b. MOSU (Margin of safety in Units) =

ASU (Actual Sales in Units) - BESU

C. MOSR (Margin of safety Ratio) =

MOSP/ASP or MOSU/ASU
ILLUSTRATION 3-3

The following data relates to Cerezo Enterprises for the Month of June: 
Sales (3,500 units @ P20/unit) 70,000 
Contribution Margin per Unit 12
Fixed Cost 15,000
There was no opening and closing finished inventory in stock.
Required: Calculate MOSP. MOSU, MOSR and EBIT (Earnings before Interest
and Taxes) using the above data.
ILLUSTRATION 3-5
Solution:
a. MOSP =ASP-BESP*
MOSP =P70,000 - P25,000
MOSP =P45,000
*where BESP =FC/CMR = P15,000/(12/20) = P25,000

b. MOSU =ASU - BESU*

MOSU =3,500 - 1,250
MOSP =2,250 units
*where BESU =FC/CMU = 15,000/12 = 1,250 units

Analysis: Based on our answers on letter a and b, the company can reduce
its present sales up to P45,000 or its production up to 2,250 units without
incurring any losses.
ILLUSTRATION 3-5
Solution:
c. MOSR = P45,000/P70,000
MOSR = 64.29%

d. EBIT = MOSU X CMU

EBIT = 2,250units x P12
EBIT = P27,000

CMIS Box-Approach to check letter (d)

S 70,000
VC 28,000
CM CMR = 60% x P70,000 42,000
FC 15,000
EBIT 27,000
TARGET SALES
WITH DESIRED
PROFIT
TARGET SALES WITH DESIRED PROFIT
CVP can also be used to project sales depending on your desired profit. The
equation is similar also in the break-even analysis, however, the desired profit
(before or after tax) is added in the fixed cost to determine the budgeted sales.

Formula to be used:
a. TSBTP = (FC+ NIBT) / CMR TSBTU = divisor is CMU
b. TSATP = (FC + {NIAT/1-TR)) / CMR TSATU = divisor is CMU
c. CMIS Approach

where:
TSBTP = Target Sales Before Tax in Pesos
TSBTU = Target Sales Before Tax in Units
TSATP = Target Sales After Tax in Pesos
TSATU = Target Sales After Tax in Units
ILLUSTRATION 3-8
Suppose that Aguilar Umbrellas Co. is targeting an operating income of P100,000
before tax for the month of July 2016. Annual Fixed Cost is P1,200,000 and
Variable cost per unit is P20. Compute the projected sales in pesos and in units)
of the company, assuming its sales price per unit is at P100.
Solution:

TSBTP = (FC + NIBT) / CMR

= (P100,000 + P100,000) / 80%
= P250,000

TSBTU = (FC + NIBT / CMU

= (P100,000 + P100,000) / P80
= 2,500 units or;

TSBTU = P250,000 / P100

=2,500 units
ILLUSTRATION 3-8
To continue the illustration, assuming the company is targeting an operating
income of P100,000 after 30% tax for the month of July 2016. Compute the
projected sales (in pesos and in units) of the company.
Solution:

TSATP = (FC + NIAT) / CMR

= (P100,000 + (P100,000/0.70)) / 80%
= (P100,000 + P142,857)/80%
= P303,571

TSATU = (FC+ NIAT)/CMU

= (P100,000 + P142,857)/P80
= 3,036 units or;

TSBTU = P303,571/P100
=3,036 units
ILLUSTRATION 3-8
 SAMPLE
PROBLEM
 PROBLEM 1
Capacio Inc. sold 50,000 units of its product at P24 per unit. Variable
costs are P13.2 per unit (manufacturing costs of P10 and selling costs
of P3.20). Fixed costs are incurred uniformly throughout the year and
amount to P594,000 (manufacturing costs of P400,000 and selling costs
of P194,000). There are no beginning and ending inventories.

1. Compute the break-even point in units and peso sales.

2. Compute the number of units that must be sold to realize a net
income of P75,060 before taxes.
3. If the income tax is 35%, compute the number of units that must be
sold to realize a net income of P68,900 after taxes.