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Cost Volume Profit Analysis

Intermediate Accounting (University of San Carlos)

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ACCTG 6: Cost Accounting and Control

COST-VOLUME-PROFIT (CVP) ANALYSIS

o CVP Analysis: about the relationships among the cost (variable and fixed), volume
(the units sold and produced), and profit (income)
o Sales−Variable Costs=Contribution Margin−¿ Cost =Profit
o In Variable Cost Income Statement, we focus on the nature of the cost which is the
VC and FC
 Variable costs (VC) consist of manufacturing costs (the product or
inventoriable cost) and selling & administration cost (period or operating
expenses). The same goes with the FC
o In Contribution Margin Income Statement, the cost and expenses are classified as to
behavior – variable and fixed costs
 The amount of contribution margin, which is the difference between sales and
variable costs (sales – variable costs), is shown as:
Sales (Units × Selling Price) xxx
Less: Variable Costs (Units × Variable Cost per Unit) xxx
Contribution Margin xxx
Less: Fixed Costs xxx
Income Before Tax xxx
o In CVP Analysis, it is important to know the following formulas:
 Breakeven Point: the units’ sale or peso sales in order for you to cover your
costs, which are the variable costs (VC) and fixed costs (FC). Hence, profit is
equal to zero (0)
 sales=variable costs+¿ costs (R = VC + FC)
 contribution margin=¿ costs (CM = FC)
 Lower breakeven point is better sell less to cover your costs
 How to lower breakeven point: in units, lower the fixed cost or
higher CM per unit
¿ Cost
 UNITS:
Contribution Margin per Unit
¿ Cost
 PESOS: ; where
Contribution Margin Ratio
Contribution Margin
Contribution Margin Ratio=
Sales
 Desired Profit: about the variation of the formulas of the breakeven point
 Remember that the desired profit in the formula refers to the
desired profit before tax
¿ Costs +Desired Profit
 UNITS:
Contribution Margin per Unit
¿ Cost + Desired Profit
 PESOS: ; where
Contribution Margin Ratio
Contribution Margin
Contribution Margin Ratio=
Sales
 Margin of Safety: the buffer in sales
 UNITS: Sales−Breakeven Sales
 Sales can be the actual, planned, or budgeted sales
 Kapag mas mataas, the better because it means namataasang sales
natin compared to the breakeven sales; higher profit
 PESOS: Sales−Breakeven Point
Margin of Safety
 RATIO:
Sales

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ACCTG 6: Cost Accounting and Control

 To compute for the margin of safety, dapatalamang formula ng
breakeven point
 Sensitivity Analysis: we change the variable and see the effect of it to the
profit
 Selling price
 Variable cost
 Fixed cost
 Volume (units produced or sold)
 Sales mix – applies when you have multiple products
 Products of A, B, and C on the average you sell 1:1:2

THEORY
1. The systematic examination of the relationships among selling price, volume of
sales and production, costs and profits is termed as CVP analysis
2. At breakeven point, fixed costs is always equal to contribution margin (CM)
3. CVP Analysis is a key factor in many decisions, including choice of products –
lines, pricing of products, marketing strategy, and utilization of product facilities.
A calculation used in CVP Analysis is the breakeven output. Once the breakeven
point has been reached, operating income will increase by contribution margin
per unit for each additional unit sold
 Once we reached the breakeven point, it means once we rover the fixed
costs. Ano na yung magiging effect sa profit? The effect to our profit is the
contribution margin (CM)
4. To reduce the breakeven point, the company may decrease fixed costs (FC)
and increase contribution margin (CM)
5. Assumption in CVP Analysis: (1) inventories are constant; (2) the total revenues
function is linear, which mean selling price is constant; (3) all costs are classified
as fixed or variable; (4) the units produced will equal the units sold – no
beginning or ending inventory; (5) sales mix is constant during the period
6. The margin of safety is a key concept of CVP Analysis. The margin of safety is the
difference between the budgeted sales and breakeven sales
7. The rate or amount that sales may decline before losses are incurred is called
margin of safety
 Once your sales is lower than the breakeven sales, then you have a loss
PROBLEMS
1. Pinnacle Company produces a product that has the following:
Unit Sales Price P400 per unit
Unit Variable Cost P260 per unit
Total Fixed Costs P7, 000,000
Units Sold 70,000 units
 Unit contribution margin, contribution margin ratio, and variable cost ratio

Unit Contribution Margin 400 – 260 140

140
Contribution Margin Ratio 0.35 or 35%
400
260
Variable Cost Ratio 0.65 or 65%
400
 Breakeven point in units and in pesos

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ACCTG 6: Cost Accounting and Control

7,000,000
Break Point in Units 50,000 units
140
7,000,000
Breakeven Point in Pesos P20,000,000
0.35
 Margin of safety in units, in pesos, and margin of safety ratio

Margin of Safety in Units 70,000 – 50,000 20,000

Margin of Safety in Pesos 28,000,000 – 20,000,000 8,000,000
20,000 8,000,000
Margin of Safety Ratio ∨ 0.2857 or 28.57%
70,000 28,000,000
 Net profit ratio

Net Profit (70,000 × 140)  7,000,000 2,800,000

2,800,000
Net Profit Ratio 0.10 or 10%
28,000,000
 If sales increase by P450,000, how much would you expect profit to increase
450,000 x 0.35 = 157,500
2. Modern Inc. sells a product to retailers for P200. The unit variable cost is P40 with
a selling commission of 10%. Fixed manufacturing costs total P1,000,000 per
month while fixed selling and administrative costs total P420,000. The income
tax rate is 30%. The target sales if after tax income is P123,200 would be
11,400 units

Price / Cost per Unit;

Units Total Costs
Percentages
Sales 200
Variable Cost 40
Selling Commission (200 ×
20
0.10)
Contribution Margin 140 11,400 1,596,000
Fixed Costs 1,420,000
Income Before Tax 176,000
Income Tax 0.30
Income After Tax 0.70 123,200
3. First-Class Corp. has sales of P200,000, a contribution margin of 20% and a
margin of safety of P80,000. What is the First-Class Corp.’s fixed cost?24,000
Margin of Safety = Sales  Breakeven Point = Sales 
¿ Costs
Contribution Margin Ratio
¿ Costs
80,000 = 200,000  = 24,000
0.20
4. Basic Illustration Corp. produces and sells single product. The selling price is P25
and the variable cost is P15 per unit. The corporation’s fixed costs is P100,000
per month. Average monthly sales is 11,000 units:
a. Contribution Margin per Unit and as a Percent of Sales

Sales (11,000 x P25) 275,000

Variable Costs (11,000 x P15) 165,000
Contribution Margin 110,000
Fixed Costs 100,000
Income Before Tax 10,000
Contribution Margin per Unit: 25 – 15 = 10
Contribution Margin: 110,000 / 275,000 = 0.40 or
40%
[(25 – 15) / 25 ] = 0.40 or 40%

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ACCTG 6: Cost Accounting and Control

b. Corporation’s Breakeven Point

Sales 250,000
Variable Costs 150,000
Contribution Margin (10,000 x P10) 100,000
Fixed Costs 100,000
Income Before Tax 0
c. If the corporation desires to earn profit of P20,000 before tax, it must
generate sales of?

Sales 300,000
Variable Costs 180,000
Contribution Margin (12,000 x P10) 120,000
Fixed Costs 100,000
Income Before Tax 20,000
d. If the corporation pays corporate income tax rate of 30%, and it desires to
earn after tax profit of P21,000, it must generates sales of?

Sales 325,000
Variable Costs 195,000
Contribution Margin (13,000 x P10) 130,000
Fixed Costs 100,000
Income Before Tax 30,000
Income Tax Expense 9,000
Income After Tax 21,000

MULTIPLE BREAKEVEN CALCULATIONS

A company sells Products A, B and C. Data about the 3 products is as follows:

A B C TOTAL
Selling Price 100 120 50
Variable Cost per Unit 60 90 40
Contribution Margin Per Unit 40 30 10
Sales in Units 1,000 2,000 5,000 8,000
Total Fixed Costs 101,680
BREAKEVEN POINT IN PESOS
Total
¿ Costs ¿ , where
Weighted Average CM Ratio
Total Contribution Margin
Weighted Average CM Ratio=
Total Sales

A B C TOTAL
Contribution Margin 40,000 60,000 50,000 150,000
Sales 100,000 240,000 250,000 590,000
Contribution Margin Ratio 40% 25% 20%
Sales Mix Ratio in Pesos
16.95% 40.68% 42.37% 100.00%
(mix of products sold)
Weighted Average CM Ratio
6.78% 10.17% 8.47% 25.42%
per Product
P 150,000
Weighted Average CM Ratio =25.42 %
P 590,000
P 101,680
Breakeven Point in Pesos =P 400,000
0.2542
Breakeven Point in Pesos per
67,800 162,720 169,480 400,000
Product
o Contribution Margin = CM per Unit × Sales in Units

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ACCTG 6: Cost Accounting and Control

o Sales = Selling Price × Sales in Units
Contribution Margin
o Contribution Margin Ratio =
Selling Price
Total Sales of a Product
o Sales Mix Ratio in Pesos =
Total Sales of All Products
o Weighted Average CM Ratio per Product =
Sales Mix Ratio× Contribution Margin Ratio

Checking

A B C TOTAL
Sales Mix Ratio in Pesos 16.95% 40.68% 42.37%
Breakeven Point in Sales per
67,800 162,720 169,480 400,000
Product
Variable Costs 40,680 122,040 135,584 298,304
Contribution Margin 27,120 40,680 33,896 101,696
Fixed Costs 101,680
Profit 16
 Use the computed Breakeven Point in Pesos to calculate for the sales for each
product

Breakeven Point in UNITS

Total
¿ Costs ¿ , where
Weighted Average CM per Unit
Total Contribution Margin
Weighted Average CM per Unit=
Total Sales per unit

A B C TOTAL
Weighted Average CM per P150,000
=P 18.75
Unit 8,000units
P 101,680
Breakeven Point in Units =5,423
P 18.75
Contribution Margin per Unit 40 30 10
Sales Mix Rate in Units 12.50% 25% 62.50%
Weighted Average CM per
5.00 7.50 6.25 18.75
Unit for Each Product
Sales Units per Product
o Sales Mix in Units =
Total Sales Units
o Weighted average CM per Unit for Each Product = Sales Mix in Units × CM per Unit

Checking

A B C TOTAL
Sales Mix Ratio in Pesos 12.50% 25% 62.50%
Breakeven Point in Units per
678 1,356 3,389 5,423
Product
Contribution Margin per Unit 40 30 10
Contribution Margin 27,120 40,680 33,890 101,690
Fixed Costs 101,680
Profit 10

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