COST VOLUME

PROFIT ANALYSIS Presented by:

MAGNAYE, CC. | BITUIN, PAL | MACAYAN, JFV. |
BS ACCOUNTANCY 2 - GROUP
MONTENEGRO, 1
JID.
COST VOLUME PROFIT
ANALYSIS

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 factors:

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COST VOLUME PROFIT
ANALYSIS

Five factors:
1.Selling prices 4. Total fixed costs
2.Sales Volume 5. Product mix
3.Variable cost per unit

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 BREAK-EVEN
ANALYSIS

A break-even analysis is a financial calculation that compares the

costs of starting a new business, service, or product to the unit
sell price to determine when you will break even. Break-even
point indicates the point when you will have sold enough units to
cover all of your expenses.

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At break-even point,
TOTAL FIXED COSTS = TOTAL CONTRIBUTION
MARGIN
or TOTAL SALES = TOTAL COSTS
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CONTRIBUTION
MARGIN

The contribution margin is the difference between the entity’s

sales and total variable costs.

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 assuming 10,000 units sold

Contribution Margin = Sales - Variable Costs

CM per unit = Selling price per unit - Variable cost per unit
CM ratio = Contribution margin per unit / Selling price per unit

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FORMULA FOR BEP

Fixed Cost
BEP in units
Contribution margin per unit
=

Fixed Cost
BEP in sales =
Contribution margin ratio

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 PROBLEM

Tiddy 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? CM ratio?

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?
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 SOLUTION

1.

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 SOLUTION

2.

3.

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 MULTIPLE PRODUCT
BREAK EVEN ANALYSIS

When using a pre-determined sales mix, the CVP

Analysis can depict it by assuming average revenues and
average variable costs for the given sales mix. However,
it must be assumed that the sales mix remains constant.

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 FORMULA

Total fixed costs

Break-even point in batches =
Contribution per batch

Total fixed costs

Break-even point in revenue =
Cs ratio for the batch

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The following budget information refers to the two
products of a company:
X Y
Sales price per unit 100 120
Variable cost per unit (75) (111)
Contribution per unit 25 9
Sales volume 15,000 5,000
Sales mix 3 1
CS ratio 0.25 0.075
Fixed costs 315,000

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 EXAMPLE
UNITS
Batches X Y
(3 per (1 per
batch) batch)
Breakeven 3,750 11,250 3,750
Revenue per unit Rs.100 Rs.120
Revenue 1,125,00 450,000 =
0 1,575,000

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 MULTIPLE PRODUCT
BREAK EVEN ANALYSIS

In multi-product situations, a weighted average C/S ratio is calculated

by using the formula:
[ Weighted average C/S ratio = Total contribution / Total revenue ]
The weighted average C/S ratio is useful in its own right, as it tells us
what percentage each $ of sales revenue contributes towards fixed
costs.
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 EXAMPLE
UNITS
Revenue X Y
(300/420 (120/420
) )
Breakeven 1,575,000 Rs. Rs.
1,125,000 450,000
Revenue per unit ÷Rs.120
Revenue 11,250 3,750 = 15,000
units

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MARGIN OF SAFETY

When making decisions about business opportunities and changes in sales mix,
managers often consider the margin of safety (MS), which is the excess of
budgeted or actual sales over break-even sales. The MS is the amount that sales
can drop before reaching the BEP and, thus, provides a measure of the amount of
“cushion” against losses.
For Multi-product margin of safety, the break-even point can be compared to the
budgeted activity level using batches, units or revenue.

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 FORMULA

Actual Sales (units) - BE Sales (units)

Margin of Safety (units) =

Margin of safety (units)

Margin of Safety % =
Actual sales (units)

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 FORMULA

Actual Sales (peso) - BE Sales (peso)

Margin of Safety (peso) =

Margin of safety (peso)

Margin of Safety % =
Actual sales (peso)

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 EXAMPLE

Sesame Company’s Margin of Safety

In units: 600,000 actual - 400,000 BEP = 200,000

In peso: Php 24,000,000 actual sales - Php 16,000,000 BEP sales = Php 8,000,000

As a percentage: 200,000/ 600,000 = 33.33 %

or
Php 8,000,000 / Php 24,000,000 = 33.33%

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 EXAMPLE

Reynaldo’s break even sales are Php 528,000. The variable cost ratio is 60% which
the profit ratio is 8 %.

Required:
a. Fixed Costs
b. Sales
c. Profit
d. Margin of Safety
e. Margin of Safety Ratio

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 EXAMPLE

Reynaldo’s break even sales are Php 528,000. The variable cost ratio is 60% which
the profit ratio is 8 %.

Required:
a. Fixed Costs = 211,200
b. Sales = 660,000
c. Profit = 52,800
d. Margin of Safety = 132,000
e. Margin of Safety Ratio = 20 %

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MARGIN OF SAFETY

MS calculations allow management to determine how close to a “danger level” the

company is operating and, as such, provide an indication of risk. The lower the
MS, the more carefully management must watch revenue and control cost to avoid
operating losses. At low margins of safety, managers are less likely to take
advantage of opportunities that, if incorrectly analyzed or forecasted, could send
the company into a loss position.

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 OPERATING
LEVERAGE

Operating leverage describes how responsive

operating incomes is to change in sales volume.

Fixed cost are the item that impacts the operating

leverage

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 OPERATING
LEVERAGE

The lower the operating leverage,

the lower the income
The higher the operating
leverage, the higher the income

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 FORMULA

Contribution Margin
Degree of Operating Leverage (DOL)=
Operating Income

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 EXAMPLE

FINMAN Company manufactures tires for all-terrain

vehicles. The tires sells for P60 and variable cost per
tire is P30. Monthly fixed cost is P450,000

a. If the company is currently selling 20,000 tires monthly, What

is the degree of operating leverage?
b. If the company can increase the sale volume by 15% above
the current level, what will be the increase in operating income?
c. What will be the new operating income?

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 EXAMPLE

a. If the company is currently selling 20,000 tires monthly,

What is the degree of operating leverage?

Degree of Operating Leverage = Contribution Margin

Operating
Income
= 600,000 ÷
150,000
= 4 times
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 EXAMPLE
b. If the company can increase the sale volume by 15% above the
current level, what will be the increase in operating income?

% Change in Profit = % Change in Sales x DOL

= 15% x 4 times
= 60 %

Increase in Operating Income = 60% x 150,000

= 90,000

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 EXAMPLE (c)

c. What will be the new operating income? Prepare comparative

Income Statement

Old New
Sales 1,200,000 1,380,000
Variable Cost (600,000) (640,000)
Contribution Margin 600,000 690,000
Fixed Cost (450,000) (450,000)
Operating Income 150,000 240,000

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THANK YOU!