Republic of the Philippines

NUEVA VIZCAYA STATE UNIVERSITY

Bambang, Nueva Vizcaya
INSTRUCTIONAL MODULE
IM No.: COOPELEC4-1STSEM-2024-2025

College: ARTS AND SCIENCES

Campus : BAMBANG CAMPUS

DEGREE PROGRAM BSCOOP COURSE NO. COOP ELEC 4

SPECIALIZATION COURSE TITLE MANAGERIAL ACCOUNTING
YEAR LEVEL 3 TIME FRAME 12 hrs WK NO. 10 - 12 IM NO. 04

I. UNIT TITLE/CHAPTER TITLE : COST VOLUME PROFIT ANALYSIS

II. LESSON TITLE :

I. Cost-Volume Profit Analysis
a. Elements Of CVP Analysis
b. Applications Of CVP Analysis
c. Components of CVP Analysis
d. CVP Analysis Setup
II. The Contribution Margin Income Statement
▪ Contribution Margin Income Statement
III. CM Ratio and Variable Expense Ratio
IV. Break-Even Point
V. Changes in Net Income (What-if Analysis)
VI. Margin of Safety
VII. Degree of Operating Leverage (DOL)
VIII. CVP Analysis and Decision Making
IX. Inherent Simplifying Assumptions· Of CVP Analysis
X. Break-even Point
XI. Methods Of Determining the Break-Even Point

III. LESSON OVERVIEW:

The CVP analysis is very much useful to management as it provides an insight into the effects and inter-
relationship of factors, which influence the profits of the firm. The relationship between cost, volume and profit
makes up the profit structure of an enterprise. Hence, the CVP relationship becomes essential for budgeting
and profit planning.

As a starting point in profit planning, it helps to determine the maximum sales volume to avoid losses, and
the sales volume at which the profit goal of the firm will be achieved. As an ultimate objective it helps
management to find the most profitable combination of costs and volume.

A dynamic management, therefore, uses CVP analysis to predict and evaluate the implications of its short
run decisions about fixed costs, marginal costs, sales volume and selling price for its profit plans on a
continuous basis.

This module discusses CVP or Cost-Volume-Profit Analysis

IV. DESIRED LEARNING OUTCOMES:

Upon completion of this module, the student should be able to:

a. Define CVP Analysis;

b. Identify the elements of CVP Analysis;
c. Enumerate the applications of CVP Analysis;
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 Republic of the Philippines
NUEVA VIZCAYA STATE UNIVERSITY
Bambang, Nueva Vizcaya
INSTRUCTIONAL MODULE
IM No.: COOPELEC4-1STSEM-2024-2025

d. Compute the break-even point, margin of safety and degree of operating leverage.

V. LESSON CONTENT:

COST-VOLUME PROFIT ANALYSIS - a systematic examination of the relationships among costs, cost
driver or activity level (or volume), and profit.

The cost-volume-profit analysis, also commonly known as breakeven analysis, looks to determine the
breakeven point for different sales volumes and cost structures, which can be useful for managers making
short-term business decisions. CVP analysis makes several assumptions, including that the sales price, fixed
and variable cost per unit are constant. Running a CVP analysis involves using several equations for price,
cost, and other variables, then plotting them out on an economic graph.

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; and
4. type of productive facilities to acquire

Components of CVP Analysis

There are several different components that together make up CVP analysis. These components involve
various calculations and ratios, which will be broken down in more detail in this guide.

The main components of CVP analysis are:

1. CM ratio and variable expense ratio

2. Break-even point (in units or dollars)
3. Margin of safety
4. Changes in net income
5. Degree of operating leverage

In order to properly implement CVP analysis, we must first take a look at the contribution margin format of
the income statement.

CVP Analysis Setup

The regular income statement follows the order of revenues minus cost of goods sold and gives gross margin,
while revenues minus expenses lead to net income. A contribution margin income statement follows a similar
concept but uses a different format by separating fixed and variable costs.

The contribution margin is the product’s selling price, less the variable costs associated with producing that
product. The value can be given in total dollars or per unit.

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. The format is as follows:

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for educational purposes only and not for commercial distribution”.
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 Republic of the Philippines
NUEVA VIZCAYA STATE UNIVERSITY
Bambang, Nueva Vizcaya
INSTRUCTIONAL MODULE
IM No.: COOPELEC4-1STSEM-2024-2025

CONTRIBUTION MARGIN INCOME STATEMENT

Sales (units x selling price) P xx

Less variable costs (units x variable cost per unit) xx
Contribution margin P xx
Less total fixed costs xx
Income before tax P xx

The contribution margin income statement is prepared for management's own use. The format facilitates
cost-volume-profit analysis.

Contribution Margin (CM) Income Statement Example:

Consider the following example in order to calculate the five important components listed above.
XYZ Company has the following contribution margin income statement:

❖ CM Ratio and Variable Expense Ratio

CM ratios and variable expense ratios are numbers that companies generally want to see to get an idea of
how significant variable costs are.

CM Ratio = Contribution Margin / Sales

Variable Expense Ratio = Total Variable Costs / Sales

A high CM ratio and a low variable expense ratio indicate low levels of variable costs incurred.

❖ Break-Even Point
The break-even point (BEP), in units, is the number of products the company must sell to cover all production
costs. Similarly, the break-even point in dollars is the amount of sales the company must generate to cover
all production costs (variable and fixed costs).

The formula for break-even point (BEP) is:

BEP =Total Fixed Costs / CM per Unit

The BEP, in units, would be equal to 240,000/15 = 16,000 units. Therefore, if the company sells 16,000 units,
the profit will be zero and the company will “break-even” and only cover its production costs.

❖ Changes in Net Income (What-if Analysis)

It is quite common for companies to want to estimate how their net income will change with changes in sales
behavior. For example, companies can use sales performance targets or net income targets to determine
their effect on each other.

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for educational purposes only and not for commercial distribution”.
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 Republic of the Philippines
NUEVA VIZCAYA STATE UNIVERSITY
Bambang, Nueva Vizcaya
INSTRUCTIONAL MODULE
IM No.: COOPELEC4-1STSEM-2024-2025

In this example, if management wants to earn a profit of at least $100,000, how many units must the company
sell?

We can apply the appropriate what-if formula below:

No. of units = (Fixed Costs + Target Profit) / CM Ratio

Therefore, to earn at least $100,000 in net income, the company must sell at least 22,666 units.

❖ Margin of Safety
In addition, companies may also want to calculate the margin of safety. This is commonly referred to as the
company’s “wiggle room” and shows by how much sales can drop and yet still break even.

The formula for the margin of safety is:

Margin of Safety = Actual Sales – Break-even Sales

The margin of safety in this example is:

Actual Sales – Break-even Sales = $1,200,000 – 16,000*$60 = $240,000

This margin can also be calculated as a percentage in relation to actual sales: 240,000/1,200,000 = 20%.

Therefore, sales can drop by $240,000, or 20%, and the company is still not losing any money.

❖ Degree of Operating Leverage (DOL)

Finally, the degree of operating leverage (DOL) can be calculated using the following formula:

DOL = CM / Net Income

So, the DOL in this example is $300,000 / 60,000 = 5.

The DOL number is an important number because it tells companies how net income changes in relation to
changes in sales numbers. More specifically, the number 5 means that a 1% change in sales will cause a
magnified 5% change in net income.

Many might think that the higher the DOL, the better for companies. However, the higher the number, the
higher the risk, because a higher DOL also means that a 1% decrease in sales will cause a magnified, larger
decrease in net income, ultimately decreasing its profitability.

❖ CVP Analysis and Decision Making

Putting all the pieces together and conducting the CVP analysis, companies can then make decisions on
whether to invest in certain technologies that will alter their cost structures, and determine the effects on
sales and profitability much quicker.

For example, let’s say that XYZ Company from the previous example was considering investing in new
equipment that would increase variable costs by $3 per unit but could decrease fixed costs by $30,000. In
this decision-making scenario, companies can easily use the numbers from the CVP analysis to determine
the best answer.

The hardest part in these situations involves determining how these changes will affect sales patterns – will
sales remain relatively similar, will they go up, or will they go down? Once sales estimates become somewhat
reasonable, it then becomes just a matter of number crunching and optimizing the company’s profitability.

“In accordance with Section 185, Fair Use of Copyrighted Work of Republic Act 8293, the copyrighted works included in this material may be reproduced
for educational purposes only and not for commercial distribution”.
NVSU-FR-ICD-05-00 (081220) Page 4 of 10
 Republic of the Philippines
NUEVA VIZCAYA STATE UNIVERSITY
Bambang, Nueva Vizcaya
INSTRUCTIONAL MODULE
IM No.: COOPELEC4-1STSEM-2024-2025

INHERENTSIMPLIFYING ASSUMPTIONS· OF CVP ANALYSIS

1. All costs are classifiable as either variable or fixed.
2. Cost and revenue relationships are predictable and linear over a relevant range of activity and a
specified period of time.
3. Total variable costs change directly with the cost driver, but variable costs per unit are constant over
the relevant range.
4. Total fixed costs are constant over the relevant range, but fixed costs per unit vary inversely with the
cost driver or volume.
5. Selling prices per unit and market conditions remain unchanged.
6. Production equals sales, i.e., there is no change in inventory.
7. If the company sells multiple products, sales mix is constant.
8. Technology, as well as productive efficiency, is constant.
9. The time value of money is ignored.

BREAK-EVEN POINT- the sales volume level (in pesos or in units) where total revenues equal total costs,
that is, there is neither profit nor loss

METHODS OF DETERMINING THE BREAK-EVEN POINT

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for educational purposes only and not for commercial distribution”.
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 Republic of the Philippines
NUEVA VIZCAYA STATE UNIVERSITY
Bambang, Nueva Vizcaya
INSTRUCTIONAL MODULE
IM No.: COOPELEC4-1STSEM-2024-2025

“In accordance with Section 185, Fair Use of Copyrighted Work of Republic Act 8293, the copyrighted works included in this material may be reproduced
for educational purposes only and not for commercial distribution”.
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 Republic of the Philippines
NUEVA VIZCAYA STATE UNIVERSITY
Bambang, Nueva Vizcaya
INSTRUCTIONAL MODULE
IM No.: COOPELEC4-1STSEM-2024-2025

“In accordance with Section 185, Fair Use of Copyrighted Work of Republic Act 8293, the copyrighted works included in this material may be reproduced
for educational purposes only and not for commercial distribution”.
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 Republic of the Philippines
NUEVA VIZCAYA STATE UNIVERSITY
Bambang, Nueva Vizcaya
INSTRUCTIONAL MODULE
IM No.: COOPELEC4-1STSEM-2024-2025

“In accordance with Section 185, Fair Use of Copyrighted Work of Republic Act 8293, the copyrighted works included in this material may be reproduced
for educational purposes only and not for commercial distribution”.
NVSU-FR-ICD-05-00 (081220) Page 8 of 10
 Republic of the Philippines
NUEVA VIZCAYA STATE UNIVERSITY
Bambang, Nueva Vizcaya
INSTRUCTIONAL MODULE
IM No.: COOPELEC4-1STSEM-2024-2025

VI. EVALUATION:

Basic Illustration Corp. produces and sells a 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.
Compute for the following:

1. What is the corporation’s contribution margin per unit and a percent of sales?
2. What is the corporation’s break-even point?
3. If the corporation desires to earn profit of P20,000 before tax, it must generate sales of ________
units.
4. If the corporation desires to earn profit of P20,000 before tax, it must generate sales of
P____________.
5. How much sales (in pesos) must be generated to earn profit that is 8% of such sales?
6. How many units must be sold to earn profit of P2 per unit?
7. With an average monthly sale of 11,000 units, the corporation’s margin of safety is
_______________
8. What is the margin of safety ratio? What is the break-even sales ratio?
“In accordance with Section 185, Fair Use of Copyrighted Work of Republic Act 8293, the copyrighted works included in this material may be reproduced
for educational purposes only and not for commercial distribution”.
NVSU-FR-ICD-05-00 (081220) Page 9 of 10
 Republic of the Philippines
NUEVA VIZCAYA STATE UNIVERSITY
Bambang, Nueva Vizcaya
INSTRUCTIONAL MODULE
IM No.: COOPELEC4-1STSEM-2024-2025

9. At the present average monthly sales level of 11,000 units, the corporation’s operating leverage
factor (OLF) is _____________.
10. If fixed cost will increase by P20,000, the break-even point in units will increase (decrease) by
_____________.

VII. REFERENCES:

1. Roque, Rodelio S., Management Advisory Services, Roque Press Inc., Malabon City, 2020

▪ https://www.investopedia.com/terms/c/cost-volume-profit-analysis.asp
▪ https://corporatefinanceinstitute.com/resources/knowledge/finance/cvp-analysis-guide/
▪ https://www.yourarticlelibrary.com/cost-accounting/cvp-analysis/cost-volume-profit-cvp-analysis-
concept-and-its-importance/62507

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for educational purposes only and not for commercial distribution”.
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