COST VOLUME PROFIT ANALYSIS REVIEW NOTES

Relevant range and its assumptions

1. Relevant range is the width of activities where the relationships
of costs and revenues are predictable because it is linear.
2. There are two related perspectives in predicting profit, namely
based on:
2.1. Basic assumptions perspective
2.2 Sensitivity analysis perspective
3.
Profit Variables Basic assumptions CVP Sensitivity analysis
Unit sales price ( USP ) Constant Changes
Variable cost rate ( VCR ) Constant Changes
Total fixed costs ( FC ) Constant Changes
Sales mix Constant Changes
Quantity sold Changes Changes
Work in process None None
inventory
Production and sales Equal Equal

4.
Sensitivity analysis involves predicting the outcome of a situation
after considering the effects of the changes in variables affecting
the outcome of the said situation. For example, what would
happen to profit if unit sales price increases by 12%. The change
in the sales price is the sensitivity, and its effect on profit involves
the sensitivity analysis.

Relevant formulas
1. Contribution Margin ( CM )
CM = Sales – Variable costs
CM = Sales x CMR
CM =Fixed costs + Profit
CM = Quantity sold x UCM

2. Contribution Margin Ratio ( CMR )

CMR =100% - VCR
CMR =CM/Sales
CMR =UCM/USP
CMR =NPR/MSR
CMR = IBIT/ Sales ( if Fixed costs remains the same )

where : IBIT is Income before Income Tax

3. Unit Contribution Margin ( UCM )

UCM =USP - UVC
UCM =FC / BEP ( units )
UCM =CM / Quantity sold
4.Profit
Profit =CM - FC
Profit =Sales x MSR x CMR
Profit =Sales x NPR
Profit = CM - FC
Profit = CM + FC

4. Breakeven Points ( BEP )

BEP ( units ) = FC/UCM
BEP ( pesos ) = FC/CMR
Composite BEP ( units ) = FC / Average UCM
Composite BEP ( pesos ) = FC / Average CMR
BEP ( units ) = Sales ( units ) x ( 1 – MSR )
BEP ( pesos ) = Sales ( pesos ) x ( 1 – MSR )

5. Fixed Costs ( FC )
FC = CM at BEP
FC = CM – Profit
FC = BEP ( units ) x UCM
FC = BEP ( pesos ) x CMR

6. Variable Cost Ratio ( VCR )

VCR = VC / Sales
 VCR = UVC / USP
VCR = 100% - CMR
VCR = Costs / Sales
VCR = Costs – in FC / Sales
VCR = Costs + in FC / Sales

7. Margin of Safety ( MS )
MS ( units ) = Budgeted Sales ( units ) – Breakeven Sales
( units )
MS ( pesos ) = Budgeted Sales ( pesos ) – Breakeven Sales
( pesos )
MS ( units ) = Sales ( units )x MSR
MS ( pesos ) = Sales ( pesos )x MSR

8. Margin of Safety Ratio ( MSR )

MSR = MS ( units ) / Sales ( units )
MSR = MS ( pesos ) / Sales ( pesos )
MSR = NPR / CMR
MSR = [ 1 – ( Breakeven Sales ( units ) / Budgeted Sales ( units
)]
MSR = [ 1 – ( Breakeven Sales ( pesos ) / Budgeted Sales
( pesos ) ]
MSR = 1/ DOL
 9. Profit Ratio ( PR )
PR = Unit Profit Margin / USP
PR = Profit / Sales
PR = MSR x CMR

10.Degree of Operating Leverage ( DOL )

DOL = CM / IBIT
DOL = 1 / MSR
DOL = % in IBIT / % in Sales

EXPRESSION OF PROFIT
 1. PROFIT BEFORE TAX
Sales ( units ) = ( FC + IBIT )
UCM
Sales ( pesos ) = ( FC + IBIT )
CMR IBIT is the same with PBIT ( Profit Before tax )
2. PROFIT AFTER TAX
Sales ( units ) = FC +( Profit After Tax / 1 – Tax Rate )
UCM
Sales ( pesos ) = FC +( Profit After Tax / 1 – Tax Rate )
CMR

3. PROFIT % BEFORE TAX

Sales ( pesos ) = FC / ( CMR – Profit Rate Before Tax)

4. PROFIT PER UNIT BEFORE TAX

Sales ( units ) = FC / ( UCM – Profit Per Unit )

5. PROFIT % AFTER TAX

Sales ( pesos ) = FC / [ CMR – ( Profit Rate Before Tax/ After Tax Rate ) ]

6. PROFIT % BASED ON CMR, BEFORE TAX

Sales ( pesos ) = FC / ( CMR – Profit Rate )

7. PROFIT % BASED ON CMR, AFTER TAX

Sales ( pesos ) = FC / [ CMR – ( Profit Rate Before Tax/ After Tax Rate ) ]
NOTE FOR NUMBERS 6 AND 7..
The PROFIT RATE BEFORE AND AFTER TAX IS BASED ON THE CONTRIBUTION MARGIN RATIO
6. EX. Profit is 20% of CMR, before tax and the CMR is 30%.
Profit Rate = 20% x 30% ( CMR )
Profit Rate = 6%
7. EX. Profit is 20% of CMR, after tax of 30% and the CMR is 40%.
Profit Rate = ( 20% / 70% ( After Tax rate ) ) x 40% ( CMR )
Profit Rate = 28.57% x 40 %
Profit Rate = 11.43%

COST VOLUME PROFIT ANALYSIS REVIEW PROBLEMS

 1. BASIC CVP RELATIONSHIPS ( Activity )
ABC Inc. produces a product that has the following data.

Unit sales price P80.00 per unit

Unit variable costs P 48.00 per unit
Total fixed costs P640,000 per annum
Units sold for the current year 25,000 units

Required:
a. UCM , CMR, and VCR.
b. BEP ( units ) and BEP ( pesos ).
c. MS ( units ), MS ( pesos ), and MSR.
d. PR
e. The amount of profit using the MS.
a.
Units Unit Price Amount Rate
Sales 25,000 P80.00 P2,000,000 100.00%
Less: Variable Costs 25,000 P48.00 P1,200,000 60.00%
Contribution Margin 25,000 P32.00 P800,000 40.00%
Less: Fixed Costs P640,000
Profit before Tax P160,000

UCM = P32.00 ; CMR = 40.0% ; VCR = 60.0%

b. BEP (units) = FC/UCM = P640,000 / P32 = 20,000 units

 BEP (pesos) = FC/CMR = P640,000/ 40% = P1.6 M

To prove:
Contribution margin (P1.6 M x 40%) P640,000
Less: Fixed costs 640,000
Profit 0
c.
Amount Units Rate
Actual sales P2,000,000 25,000 100.00%
Less: Breakeven sales P1,600,000 20,000 80.00%
Margin of safety P400,000 5,000 20.00%

d. NPR = MSR x CMR = 40% x 20% = 8%

e. Profit = MS x CMR = P400,000 x 8% = P160,000

2.SALES WITH PROFIT ( Activity )

 XYZ Inc. sells a product with the following related data.

Unit contribution margin P40.00 per unit

Variable cost ratio 75%
Total fixed costs P200,000

Required: What would be the sales in pesos and in units if:

a. Profit before tax is P300,000.
b. Profit after tax of 40% is P300,000.
c. Profit rate before tax is 20% of sales.
d. Unit profit margin before tax is P8.00.
e. Profit is 20% of sales, after tax of 40%.
CHANGE LETTER E. TO Profit is 5% of sales, after tax of 40%.

f. Profit rate before tax is 10% of CMR.

g. Profit is 20% of CMR, after tax of 40%.

a. Sales (units) = (P200,000 + P300,000) / P40 =12,500 units

Sales (pesos) = (P200,000 + P300,000) / 25% = P2,000,000
b. Sales (units) = P200,000 + [P300,000 / (1-40%)] / P40]
= 17,500 units
Sales (pesos) = P200,000 + [P300,000 / (1-40%)] / 25%]
= P2.8 M
c.
Sales (units) = P4M / (P40 / 25% )
= P4,000,000 /P160=25,000units
Sales (pesos) = P200,000 / (25% - 20%) = P4,000,000
d.
Sales (units) = P200,000 / ( P40 – P8 )
= P200,000 / P32=6,250units
Sales (pesos) = 6,250 units x P160 = P1,000,000
e.
Sales (units) = P1200,000 / P160 = 7,500 units
Sales (pesos) = P 200,000 / ( 25% - 8.33% ) = P1,200,000
TO CHECK
SALES P1,200,000
VARIABLE COSTS(P1,200,000 x 75% )( P900,000)
CONTRIBUTION MARGIN P300,000
FIXED COSTS (P200,000)
PROFIT BEFORE TAX P100,000
Profit is 5% of sales, after tax of 40%.
Yung profit ay 5% ng sales na P1,200,000 after mabawasan ng tax na 40%
Profit before tax computed natin ay P100,000 , pag babawasan natin siya ng tax na 40% magiging profit natin
net of tax ay P60,000.. Tama ba na 5% siya ng sales na P1,200,00 after mabawasan ng 40% tax?
P1,200,000 x 5% = P 60,000

f.
Sales (units) = P889,000 / P160 = 5,556 units
Sales (pesos) = P200,000 / (25% - 2.5%) = P888,889
g.
Sales (units) = P1200,000 / P160 = 7,500 units
Sales (pesos) = P 200,000 / ( 25% - 8.33% ) = P1,200,000
TO CHECK
SALES P1,200,000
VARIABLE COSTS(P1,200,000 x 75% )( P900,000)
CONTRIBUTION MARGIN P300,000
FIXED COSTS (P200,000)
PROFIT BEFORE TAX P100,000
Profit is 20% of CMR, after tax of 40%.
Yung profit ay 20% ng Contribution Margin na P300,000 after mabawasan ng tax na 40%
Profit before tax computed natin ay P100,000 , pag babawasan natin siya ng tax na 40% magiging profit natin
net of tax ay P60,000.. Tama ba na 20% siya ng Contribution Margin na P300,00 after mabawasan ng 40% tax?
P300,000 x 20% = P 60,000

3.MULTI PRODUCT SALES MIX BASED IN UNITS

EFG Inc. produces three products, A, B, and C, with the
following related data.

A B C
Unit sales price P200 P50 P120
Unit variable costs P120 P20 P90
Sales mix in units 2 5 3
Total fixed costs P800,000

Required:
a. Weighted average unit contribution margin.
b. Composite BEP in units
c. The number of units to be sold if the firm wants a profit of
P40,000.

a.

Product UCM Sales Mix WUCM

Ratio in Units
A P80 2/10 P16
B P30 5/10 P15
C P30 3/10 P9
WAUCM P40

b. Composite BEP in units = FC / WAUCM = P800,000/ P40 =

20,000 units
 Allocation of Composite BEP ( units )
A 20,000 units x 2/10 4,000 units
B 20,000 units x 5/10 10,000 units
C 20,000 units x 3/10 6,000 units
Total 20,000 units

d.Composite Sales = FC t Profit / WAUCM = ( P800,000 =

P40,000 ) / P 40 = 21,000 units

Product USP Sales Mix WUSP

Ratio in Units
A P200 2/10 P40
B P50 5/10 P25
C P120 3/10 P36
WAUSP P101
Weighted Average Contribution Margin Ratio = Weighted Average Unit Contribution Margin / Weighted Average Unit Selling Price

WACMR = WAUCM / WAUSP

WACMR = P40 / P101
WACMR = 39.60%

A B C TOTAL
SALES P200 x 2 P50 x 5 P120 x 3 P1,010,000
VARIABLE COSTS P120 x 2 P20 x 5 P 90 x 3 P610,000
CONTRIBUTION P80 x 2 P30 x 5 P30 x 3 P400,000
MARGIN
Let us assume na sa 10 products produced 2 ang kay A, 5 kay B at
3 kay C.
WACMR = Total Contribution Margin
Total Sales
WACMR = P400,000
P1,010,000
WACMR = 39.60%

CMR SALES MIX RATIO IN AVERAGE CMR

PESOS ( CMR x SALES MIX
RATIO IN UNITS )
A 40% P400K/P1,010K 15.8416%
B 60% P250K/P1,010K 14.8515%
C 25% P360K/P1,010K 8.9109%
39.60%

WAUCM = Total Contribution Margin

Total Units in the Sales Mix
WAUCM = P400,000
10 units
WAUCM = P40

UCM SALES MIX UCM x SALES MIX

A P80 2 P160
B P30 5 P150
C P30 3 P90
 COMPOSITE UCM P400

SALES PER MIX = FIXED COSTS / COMPOSITE UNIT CONTRIBUTION MARGIN

SALES PER MIX = P800,000 / P400
SALES PER MIX = 2,000 units

SALES PER MIX NO. OF SALES MIX ALLOCATED

COMPOSITE BEP
(SALES PER MIX x NO.
OF SALES MIX )
A 2,000 2 4,000
B 2,000 5 10,000
C 2,000 3 6,000
COMPOSITE BEP 20,000
( UNITS )

Total A B C
Breakeven P2,020,000 P800,000 P500,000 P720,000
Sales in Pesos

Total A B C
Breakeven 20,000 4,000 10,000 6,000
Sales in Units

The given sales mix 2:5:3 is derived based on the relationships of the budgeted sales
in units, ( i.e., 200, 500, and 300 ang budgeted sales in units ng products A, B and C,
respectively) . The sales mix also means that when there are 10 products produced ,
2 would be A, 5 would be B and 3 would be C. If there are 30 products produced in a
given production run, 6 would be A ( 2/10 x 30 units ), 15 would be B ( 5/10 x 30 units
), and 9 would be C ( 3/10 x 30 units ).
4.MULTI PRODUCT SALES MIX BASED IN PESOS
EFG Inc. produces three products, A, B, and C, with the
following related data.

A B C
Sales P200 P50 P120
CMR 50% 40% 30%
Total fixed costs P1,480,000
Tax rate 40%

Required:
a. Weighted average contribution margin ratio.
b. Composite BEP in pesos.
c. Composite sales in pesos if the firm wants a profit of
P3,000,000 net of tax.
a.
Product CMR Sales Mix in WCMR
Pesos
A 50% 4/20 10%
B 40% 6/20 125
C 30% 10/20 15%
WACMR 37%

b. Composite BEP in pesos = FC / WACMR = P1,480,000 /

37% = P4,000,000

c. Composite Sales = FC t Profit / WACMR = ( P1,480,000 + P

5,000,000 ) / 37% = P17,513,513