COST VOLUME PROFIT VARIABLE COST

-it is a cost that varies, in total, in direct proportion to changes in the level of
activity. (Table A)
Cost classification for predicting Cost Behavior
-is a constant per unit. (Table B)
COST BEHAVIOR

-refers to how a cost will react to changes in the level of activity.

Variable Cost
Table A Table B
CLASSIFICATION: Fixed Cost
Unit Variable Cost
Total Variable Cost
Mixed Cost

Quantity Quantity
FACTORS AFFECTING PROFIT:

1. Selling price per unit 4. Fixed Cost

2. Variable cost per unit 5. Sales Mix VARIABLE COST IN TOTAL VARIABLE COST IN UNIT
3. Volume or number of units
*upward slope, positive slope,
CLASSIFICATION OF COSTS: positively correlated w/ quantity.

1. Functional
 Manufacturing, selling and administrative.
2. Behavioral
 Variable, Fixed and Mixed.
3. Nature of Expense
 TFC
FIXED COST STEP FIXED COST
-Fixed cost that is constant at a given level or period but significantly
-It is a cost which is constant within the relevant rang increases beyond that level or period.

Q TFC

IN TOTAL

-Fixed Cost per unit changes inversely with the units

Q
produced. 1000 2000

o Downward slope or negative slope,

TFC
or negatively correlated with quantity.

BREAK-EVEN ANALYSIS
Q
IN UNITS I. METHOD OF COMPUTING BREAK-EVEN POINT

1. EQUATION METHODS OR ALGEBRAIC APPROACH

TOTAL COST Let:
X = sales units at BEP
PRICE SPU = Selling price per unit
TOTAL COST VCU = Variable cost per unit
FC = Total Fixed cost
VARIABLE COST Where
TR = SPU . X
TC = FC+ VCU . X
FIXED COST
Therefore BEP

UNTIS TR = TC
2. CONTRIBUTION MARGIN METHOD OR FORMULA APPROACH D. CONTRIBUTION MARGIN RATIO (CMR)

TOTAL FIXED COST CMU 1 - VCR

A. BEP in PESOS SPU
CMR
NPR
TOTAL SALES PESOS – MOS PESOS TCM MSR
TOTAL SALES PESOS
B. BEP in UNITS
TOTAL FIXED COST
CM/unit FIXED COST
BEP PESOS
TOTAL SALES UNITS – MOS UNITS

PROFIT
C. CONTRIBUTION MARGIN PER UNIT (CMU) MOS PESOS

SP / unit - VC / unit
CHANGE IN FC
CHANGE IN BEP PESOS
TCM
TOTAL SALES UNITS
E. FIXED COST
FIXED COST
BEP UNITS TCM - PROFIT BEP UNITS X CMU

PROFIT
TOTAL COST - TVC BEP PSOS X CMR
MOS units

CHANGE IN FC
CHANGE IN BEP UNITS
F. VARIABLE COST RATIO ( VCR)
VC / unit SENSITIVITY ANALYSIS
SP / unit -is very important in determining factors that will significantly affect profits.

% CHANGE IN OUTPUT
TVC
% CHANGE IN INPUT
TOTAL SALES

1-CMR
SALES MIX IN MULTI-PRODUCT COMPANIES
G. TOTAL SALES PESOS OR AMOUNT OF SALES TO EARN A DESIRED -The proportion of two or more products sold.
PROFIT
ASSUMPTIONS:

TOTAL FIXED COSTS + DESIRED PROFIT AFTER TAX (1-TAX RATE) 1. The proportion of sales mix must be predetermined.
2. The sales mix must not change within the relevant time period.
CMR

BEP PESOS + MOS SALES A. MIX BEP PESOS TOTAL FIXED COST
COMPOSITE CMR
H. TOTAL SALES UNITS OR NUMBER OF UNITS TO BE SOLD TO EARN A
DESIRED PROFIT B. MIX BEP UNITS
TOTAL FIXED COST
COMPOSITE CMU
TOTAL FIXED COSTS + DESIRED PROFIT AFTER TAX (1-TAX RATE)
C. COMPOSITE CMR
CMU (CMR a X Mix Ratio a) + (CMR b X Mix Ratio b) + (CMR nth X Mix Ration nth)

BEP units + MOS units D. COMPOSITE CMU

(CMU a X Mix Ratio a) + (CMR U X Mix Ratio b) + (CMU nth X Mix Ration
nth)
MARGIN OF SAFETY E. NET PROFIT RATION (NPR) OR ROS
-it indicates the amount by which actual or planned sales may be reduced
EBIT or OI
without incurring a loss.
TOTAL SALES PESOS
-the LOWER the MOS, the riskier the business is.

A. MARGIN OF SAFETY PESOS (MSP) MSR x CMR

TOTAL SALES PESOS – BEP PESOS

PROFIT / CMR

B. MSU DEGREE OF OPERATING LEVERAGE (DOL)

-is a financial ratio that measures the sensitivity of a company’s operating
TOTAL SALES UNITS – BEP UNITS
Income to its sales.
-it shows how a change in the company’s sales will affect its operating
PROFIT / CMU
income.
C. MSR -CONSTANT
MSP/ TOTAL SALES PESOS TCM
MSU/ TOTAL SALES UNTIS OPERATING PROFIT, if 1yr of operations is
presented
NPR / CMR
% CHANGE IN PROFIT
D. PROFIT % CHANGE IN SALES, if 2yrs
TOTAL REVENUES-TOTAL COST
CM
TCM- FC OI

MSUxCMU

MSPxCMR

TOTAL REVENUES x NPR

POINT OF INDIFFERENCE
- is the point at which total cost (fixed and variable) of two alternatives under
consideration is the same.

COST OF INDIFFERENCE POINT

DIFFERENTIAL FIXED COST

DIFFERENTIAL VC/unit

POI units CHANGE IN FC

CHANGE IN CMU

POI PESOS CHANGE IN FC

CHANGE IN CMR

SCENARIO ANALYSIS/ MULTIPLE DRIVERS

-assesses the effect of changing all of the variables at the same time.
-The difference from sensitivity analysis examines, is that sensitive only
assesses the effect of changing a single variable at a time.

BENEFITS:

 More proactive risk management

 Better decision-making
 A methodical approach to analyze the future may help companies to
find:
o Opportunities
o Risks they may have otherwise overlooked.