Cost Volume

profit analysis
 TABLE OF CONTENTS
01 03
THE BASICS OF MARGIN OF SAFETY
CVP ANALYSIS

02 04
BREAK-EVEN OPERATING
ANALYSIS LEVERAGE
 01
THE BASICS OF
CVP ANALYSIS
COST-VOLUME-PROFIT ANALYSIS
● It is a systematic examination of the relationships among cost, cost
drive and profit.
● It is one of the most powerful tools that manager have at their
command.
● It helps them understand the interrelationship between the cost,
volume and profit in an organization by focusing on interactions
between the following five elements:
1. Prices of Products
2. Volume of level of activity within the relevant range
3. Variable costs per unit
4. Total fixed costs
5. Mix of products sold
 Elements of CVP ANALYSIS
1. Sales
a. Selling price
b. units or volume
2. Total fixed costs
3. Variable costs per unit
4. Sales mix

Applications of CVP analysis

Planning and decision-making, which may involve choosing the:
1. Type of product to produce and sell;
2. Pricing policy to follow
3. Marketing strategy to use
4. Type of productive facilities to require
The contribution margin income statement
The costs and expenses in the Contribution Margin Income Statement are classified as to
behavior (variable and fixed). The amount of contribution margin, which is the difference
between sales and variable costs is shown.

Contribution Margin Income Statement

Sales (units x selling price) xx
Less: variable costs (units x variable cost per unit) xx
Contribution margin xx
Less: total fixed costs xx
Income before tax xx
 Break-even analysis
Break-even point is the level of sales volume where total revenues and total expenses are
equal, that is neither profit or loss. This point can be determined by using CVP analysis.

1. Single Product Break-even

Break-even point (units) = Total Fixed costs
Contribution Margin per unit

Break-even point (peso) = Total Fixed costs______

1 – (Variable costs/Sales)
 SALES mix
Sales mix refers to the relative proportions in which a company’s products are sold. The
idea is to achieve the combination, or mix that will yield the greatest amount profits.

2. Multi Product Break-even

Break-even sales for multi products = Total fixed costs
(combined units) Weighted Average CM units

Weighted CM per unit = (Unit CM x No. of units per mix) + (Unit CM x No. of units per mix)
Total no. of units per Sales Mix

Break-even sales for multi products = Total Fixed Costs

(combined pesos) Weighted CM Ratio

Weighted CM ratio = Total Weighted CM (P)

Total Weighted Sales (P)
 CVP Analysis for revenue and cost
planning
CVP analysis can be used to determine the level of sales needed to achieve a
desired level of profit. In revenue planning, CVP analysis assists managers in
determining the revenue required to achieve a desired profit level.

Sales (units) = Total Fixed costs + Desired profit

Contribution Margin per unit

Sales (pesos) = Total Fixed costs + Desired profit

Contribution Margin Ratio
 MARGIN OF SAFETY
Margin of safety measures the potential effect of the risk that sales
will 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 ratio = Margin of Safety

Actual or Planned Sales
 Operating leverage
● Operating leverage is the ratio of the contribution margin to profit.
● A higher value of operating leverage indicates a higher risk in the
sense that a given change in sales will have a greater impact on
profit.
● It is desirable to have a high level of leverage if the sales volume
is strong but when sales begin to fall a lower level or leverage is
preferable.

Operating Leverage = Contribution Margin

Net Income
Illustrative
problems
MNO Corporation provided the following
information:
Total Per Unit
Net sales 500,000 10
Variable cost 300,000 6
Contribution Margin 200,000 4
Fixed Costs 150,000 3
Net Profit 50,000 1
● Required:
compute for break-even point in units and in pesos

1. Break-even point (units) = 150,000 = 37,500 units

4

2. Break-even point (pesos) = 150,000 = P 375,000

40%
Amflor Manufacturing Company’s budget for the coming year revealed the following
unit data:

Budgeted net income for the year P 875,000

Unit costs:
Variable Fixed
Manufacturing cost 14.00 12.00
Selling cost 2.50 5.50
General cost 0.25 7.00
Total 16.75 24.50

Unit selling price P 50

Required:
1. Determine the budgeted sales volume in units
2. Determine the margin of safety in peso amount and percentage
THANKS!