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    Cost-Volume Profit Analysis

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    Clarizza
    Here are the key steps to quantify and compare the alternatives: 1) Project next year's costs based on given increases 2) Calculate contribution margin, break-even, and profit for each alternative based on relevant volumes, prices, costs and fixed expenses 3) Recommend the alternative that maximizes profit

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    © All Rights Reserved
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    Cost-Volume Profit Analysis

    Uploaded by

    Clarizza
    3K views26 pages
    Here are the key steps to quantify and compare the alternatives: 1) Project next year's costs based on given increases 2) Calculate contribution margin, break-even, and profit for each alternative based on relevant volumes, prices, costs and fixed expenses 3) Recommend the alternative that maximizes profit

    Original Title

    Cost-Volume_Profit_Analysis

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    Here are the key steps to quantify and compare the alternatives: 1) Project next year's costs based on given increases 2) Calculate contribution margin, break-even, and profit for each alternative based on relevant volumes, prices, costs and fixed expenses 3) Recommend the alternative that maximizes profit

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    3K views26 pages

    Cost-Volume Profit Analysis

    Uploaded by

    Clarizza
    Here are the key steps to quantify and compare the alternatives: 1) Project next year's costs based on given increases 2) Calculate contribution margin, break-even, and profit for each alternative based on relevant volumes, prices, costs and fixed expenses 3) Recommend the alternative that maximizes profit

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    of 26

    Pretest

    1. What are the elements of CVP Analysis?


    2. Sales less Variable costs is equal to ___________.
    3. What is the formula to get the break-even point in units?
    4. What is the formula to get the break-even point in pesos?

    A company produces and sells a single product. The selling price is P25
    and the variable costs is P15 per unit. The corporation’s fixed costs is
    P100,000 per month. Average monthly sales is 11,000 units.
    5. What is the contribution margin per unit and as a percent of sales?
    6. The corporation’s break-even point ________
    Cost-Volume Profit Analysis
    Cost-volume profit analysis
     Systematic examination of the relationships among costs,
    cost driver, and profit

    Elements:
    a. Sales – selling price and units
    b. Total fixed costs
    c. Variable costs per unit
    d. Sales mix
    Applications of CVP Analysis
     Planning and decision-making
     Type of product to produce and sell;
     Pricing policy to follow;
     Marketing strategy to use; and
     Type of productive facilities to acquire
    Assumptions and Limitations of CVP
    Analysis
     The analysis is valid for a limited range of values and a limited
    period of time.
     All costs can be categorized as fixed or variable.
     Revenues change proportionately with volumes and selling price
    remaining constant.
     There is a constant product mix
     Changes in volume alone are responsible for changes in costs and
    revenues
    Assumptions and Limitations of CVP
    Analysis
     Changes in volume alone are responsible for changes in costs and
    revenues.
     There is no significant change in inventories (i.e., in physical units,
    sales volume equals production volume)
     Operationleverage questions can be dealt with in the CVP
    framework.
     The analysis is deterministic and appropriate data can be found
    Contribution Margin per unit
     Excess of unit selling price over unit variable costs and
    each unit sold contributes toward covering fixed costs and
    providing operating profits

    CM per unit = SPU - VCU


    Contribution margin ratio

      Percentage of contribution margin to total sales

    CM ratio =
    Break-even

      Levelof sales volume where total revenues and expenses
    are equal
     No profit nor loss

    BEP (units) =
    BEP (pesos) =
    Break-even point
    a.   Break even sales for multi-products (units)

    Weighted CM per unit =


    Break-even point
    a.   Break even sales for multi-products (pesos)

    Weighted CM ratio =
    Revenue and Cost Planning
     
    Sales (units) =

    Sales (pesos) =
    Sales (units) =
    Sales (pesos) =
    Margin of safety

      Amount of peso-sales or the number of units by which
    actual or budgeted sales may be decreased without
    resulting into a loss

    MS = Sales – BEP
    MSR =
    Operating Leverage
     Extent to which a company uses fixed costs in its cost
    structure

     Leverage is achieved by increasing fixed costs while


    lowering variable costs
    Operating Leverage Factor

      Ratio of the contribution margin to profit

    OL =

    OL =
    The Income Statement for a company’s product shows:
    Sales (100 units at P100 a unit)………………..10,000
    Cost of goods sold:
    Direct labor ………………..1,500 Required:
    Direct materials used…….1,400 1. Compute the break-even
    Var. factory OH ……………1,000 point in units.
    Fixed factory OH …………… 500 4,400 2. If sales increase by 25%,
    Gross profit 5,600 how much will be the
    Marketing expense: new operating income?
    Variable 600 3. Compute the new break-
    Fixed 1,000 even point in pesos if
    Administrative expense: fixed factory overhead
    Variable 500 will increase by P1,700.
    Fixed 1,000 3,100
    Operating income 2,500
    A company produces and sells a single product. The selling price is P25 and
    the variable costs is P15 per unit. The corporation’s fixed costs is P100,000
    per month. Average monthly sales is 11,000 units.

    1. If the corporation desires to earn profit of P20,000 before tax, it must


    generate sales of ________.
    2. If the corporation pays corporate income tax at the rate of 30%, and it
    desires to earn after-tax profit of P21,000, it must generate sales of
    ________.
    3. How many units must be sold to earn profit of P2 per unit?
    4. How much sales (in pesos) must be generated to earn profit that is 8% of
    such sales?
    A company produces and sells a single product. The selling price is P25 and
    the variable costs is P15 per unit. The corporation’s fixed costs is P100,000
    per month. Average monthly sales is 11,000 units.

    1. With an average monthly sales of 11,000 units, the corporation’s margin


    of safety is _________.
    2. The margin of safety ratio (MSR) and the break-even sales ration (BESR)
    are __________.
    3. At the present average monthly sales level of 11,000 units, the
    corporation’s operating leverage factor is _____.
    A company produces and sells a single product. The selling price is P25 and the
    variable costs is P15 per unit. The corporation’s fixed costs is P100,000 per month.
    Average monthly sales is 11,000 units.

    1. If fixed costs will increase by P20,000, the break-even point in units will
    increase (decrease) by _________.
    2. If variable costs per unit will go up by P5, the peso break-even sales will
    increase (decrease) to ________.
    3. If selling price will increase to P30, the break-even point in units will ________.
    4. If sales increase from P800,000 to P900,000, and if the degree of operating
    leverage is 5, one would expect profit to increase by ____.
    A company sells two products, Product 1 and Product 2. Three units of
    Product 1 are sold for every two units of Product 2. Fixed costs is P234,000
    per year.

    Product 1 is sold for P20 per unit and the variable costs identified with the
    production and sale of each unit of the product amounts to P14. Product 2 is
    sold for P24 per unit, and the variable costs identified with the production and
    sale of each unit of the product amounts to P20.
    1. The weighted average unit contribution margin is ___.
    2. The break-even point in units:
    Product 1 _______ Product 2 _______
    Following information pertains to X Company’s two products:
    Digicam Videocam
    Break-even point – units 360 240
    Selling price P4,500 P14,250
    Variable costs 2,250 5,000

    1. What is the weighted average contribution margin?


    2. How much is total fixed costs?
    3. How many units of each product should be sold if the company desires
    to earn profit before tax of P1,515,000?
    Antiporda, Inc. sells three products, A, B, and C. The company sells three
    units of C for each unit of A and two units of B for each unit of C. Total
    fixed costs amount to P760,000. Product A’s contribution margin per unit
    is P2. Product B’s is 150% of A’s and Product C’s is twice as much as B’s.
    How many units of each product must be sold to break-even?
    The TS Company sells Product A for P60 each. Variable cost is P36 per
    unit. Fixed costs are P375,000. How much sales (in units and in pesos)
    must be reached to realize a
    1. Net income of P102,000 before income taxes.
    2. Net income of P97,500 after income taxes. Tax rate is 35%.
    3. Net income of 15% of sales. Ignore income taxes.
    4. 20% Return on sales. Ignore income taxes.
    The Income Statement for Rocky Company for the past year is:
    Sales (150,000 @P30)4,500,000
    Cost of goods sold:
    Materials 1,050,000
    Labor 1,500,000
    Var FOH 450,000
    Fixed FOH 500,000
    Gross Profit 1,000,000
    Var marketing expense 135,000
    Fixed marketing expense 185,000
    Fixed manufacturing OH 180,000 500,000
    Income before income taxes 500,000
    Income tax 250,000
    Net income 250,000
    Rocky Company is preparing its budget for the coming year and has made
    the following projections about cost increases: materials, 5%, labor 8%, and
    all other costs (including fixed), 6%. Production capacity is 200,000 units.

    The President had been offered various proposals by the division manager
    as follows:
    a. Maintain the present volume and sales price.
    b. Produce and sell at capacity and reduce the unit price to P28.
    c. Raise the unit price to P32, spend an extra P300,000 on advertising, and
    produce and sell 180,000 units.
    Required: Recommendation based on quantification of alternatives.

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