C O S T- V O L U M E - P R O F I T ( C V P )

A N A LY S I S
 CVP Analysis is a systematic examination of the
relationships among cost, volume (cost driver),
DEFINITION and profit.

2
 • Sales

ELEMENTS OF • Selling price

• Units or volume
C V P A N A LY S I S
• Total fixed costs
• Variable costs per unit
• Sales mix

3
DEFINITION OF TERMS
Break-even point is the point (sales volume
level in pesos or in units) where operationally,
there is neither profit nor loss. This is the point
where total revenue equals total variable costs
and total fixed costs.
Contribution margin is the difference
between the entity’s sales and total variable assuming 10,000 units are sold
costs. If selling price per unit is deducted with
the variable cost per unit, the difference is
called contribution margin per unit. When
contribution margin is divided to sales, a
percentage is obtained called contribution
margin ratio.

4
DEFINITION OF TERMS
Margin of safety is the difference between
actual or budgeted sales and break-even sales.
This is the amount of peso sales or the number
of units by which actual or budgeted sales may
be decreased without resulting into a loss.

Margin of safety ratio is MOS divided by the

actual or budgeted sales or by providing profit
ratio by the contribution margin ratio.

5
DEFINITION OF TERMS
Sales mix is the combination of products that, in
total, will compose the reported sales of an entity
with multiple product lines.

6
1. All costs are classifiable as either variable
or fixed.
2. Cost and revenue relationships are
predictable and linear over a relevant range KEY
of activity and a specified period of time.
ASSUMPTIONS
3. Total variable costs change directly with the
cost driver, but variable costs per unit are IN
constant over the relevant range. C V P A N A LY S I S
4. Total fixed costs are constant over the
relevant range, but fixed costs per unit vary
inversely with the cost driver.
5. Selling prices per unit do not change as
sales volume changes.

7
 KEY
6. Inventory levels remain constant (i.e., ASSUMPTIONS
production equals sales).
IN
7. If the company sells multiple products,
sales mix is constant.
C V P A N A LY S I S
8. The time value of money is ignored.

8
CONTRIBUTION MARGIN METHOD

9
SCM Company sells its products at P200 per unit. Variable cost per unit includes P75 in materials,
P40 in labor, P15 in variable overhead, and P10 in variable selling and administrative expenses.
Fixed costs per period amounts to P750,000.
1. How much is the contribution margin per unit?
2. What is the contribution margin ratio?
3. How many units should the entity sell to break-even?
4. How much sales should the entity achieve to break even?
5. Compute BEP through equation approach.

10
SCM Company sells its products
at P200 per unit. Variable cost per
unit includes P75 in materials, P40
in labor, P15 in variable overhead,
and P10 in variable selling and
administrative expenses. Fixed
costs per period amounts to
P750,000.
1. How much is the contribution
margin per unit?
2. What is the contribution margin
ratio?
3. How many units should the
entity sell to break-even?
4. How much sales should the
entity achieve to break even?
5. Compute BEP through equation
approach.

11
SCM Company sells its products
at P200 per unit. Variable cost per
unit includes P75 in materials, P40
in labor, P15 in variable overhead,
and P10 in variable selling and
administrative expenses. Fixed
costs per period amounts to
P750,000.
1. How much is the contribution
margin per unit?
2. What is the contribution margin
ratio?
3. How many units should the
entity sell to break-even?
4. How much sales should the
entity achieve to break even?
5. Compute BEP through equation
approach.
SCM Company sells its products
at P200 per unit. Variable cost per
unit includes P75 in materials, P40
in labor, P15 in variable overhead,
and P10 in variable selling and
administrative expenses. Fixed
costs per period amounts to
P750,000.
1. How much is the contribution
margin per unit?
2. What is the contribution margin
ratio?
3. How many units should the
entity sell to break-even?
4. How much sales should the
entity achieve to break even?
5. Compute BEP through equation
approach.
M U LT I - P R O D U C T / S E R V I C E
B R E A K - E V E N C A L C U L AT I O N S

14
N O T E S F O R C O M P U T I N G WA U C M
& WA C M R
• For purposes of computing the weighted average unit contribution margin, the sales mix ratio is
determined using the sales volume in units.
• For purposes of computing the weighted average contribution margin ratio, the sales mix ratio is
determined using the sales volume in pesos.

15
A company sells Products A, B, and C. Data about the three products are as follows:
A B C Total
Selling price P 100 P 120 P 50
Variable costs per unit 36 90 30
Contribution margin 64 30 20
Sales in units 1,500 2,000 2,500 6,000
Total fixed costs P125,000

1. Compute for the company’s break-even point in pesos.

2. Compute for the company’s break-even point in units.

16
G R A P H I N G C V P R E L AT I O N S H I P S
Units sold 0 10,000 15,000 20,000
Selling price per unit 200 200 200 200
VC per unit 140 140 140 140
Total FC 750,000 750,000 750,000 750,000

Total Sales 0 2,000,000 3,000,000 4,000,000

Total Variable Costs 0 1,400,000 2,100,000 2,800,000
Total Fixed Costs 750,000 750,000 750,000 750,000
Total Costs 750,000 2,150,000 2,850,000 3,550,000
Net Income/(Loss) (750,000) (150,000) 150,000 450,000

17
G R A P H I N G C V P R E L AT I O N S H I P S

X-AXIS

Y-AXIS
G R A P H I N G C V P R E L AT I O N S H I P S

4500000

4000000 Total Sales

3500000 Total Costs
Break-even Point
3000000

2500000

2000000

1500000

1000000

500000

0
0 5000 10000 15000 20000 25000

19
REQUIRED SALES WITH
DESIRED PROFIT
To earn a desired amount of profit before tax

To earn a desired amount of profit after tax

To earn a desired profit ratio (profit as a percentage of the required sales)

20
SCM Company sells its products at P200 per unit. Variable cost per unit includes P75 in materials,
P40 in labor, P15 in variable overhead, and P10 in variable selling and administrative expenses.
Fixed costs per period amounts to P750,000. The entity’s desired profit before tax is P330,000.
1. How many units should the entity sell to achieve the target profit before tax?
2. How much sales should the entity generate to achieve the target profit before tax?

21
SCM Company sells its
products at P200 per unit.
Variable cost per unit
includes P75 in materials,
P40 in labor, P15 in variable
overhead, and P10 in
variable selling and
administrative expenses.
Fixed costs per period
amounts to P750,000. The
entity’s desired profit before
tax is P330,000.
1. How many units should the
entity sell to achieve the
target profit before tax?
2. How much sales should the
entity generate to achieve
the target profit before tax?

22
SCM Company sells its products at P200 per unit. Variable cost per unit includes P75 in materials,
P40 in labor, P15 in variable overhead, and P10 in variable selling and administrative expenses.
Fixed costs per period amounts to P750,000. The entity’s desired profit after tax is P193,500. The tax
rate is 25%.
1. How many units should the entity sell to achieve the target profit after tax?
2. How much sales should the entity generate to achieve the target profit after tax?

23
SCM Company sells its
products at P200 per unit.
Variable cost per unit includes
P75 in materials, P40 in labor,
P15 in variable overhead, and
P10 in variable selling and
administrative expenses.
Fixed costs per period
amounts to P750,000. The
entity’s desired profit after
tax is P193,500. The tax rate is
25%.
1. How many units should the
entity sell to achieve the
target profit after tax?
2. How much sales should the
entity generate to achieve
the target profit after tax?

24
MARGIN OF SAFETY
Margin of safety measures the potential effect of the risk that the sales will fall short of planned sales,
which is the difference between actual or budgeted sales and break-even sales.

25
SCM Company’s budget for the coming year revealed the following data:
Budgeted net income P875,000
Variable Fixed
Manufacturing P14.00 P12.00
Selling 2.50 5.50
General 0.25 7.00
Unit selling price P50

1. Compute for the margin of safety in pesos.

2. Compute for the margin of safety ratio.

26
SCM Company’s budget for the coming year
revealed the following data:
Budgeted net income P875,000
Variable Fixed
Manufacturing P14.00 P12.00
Selling 2.50 5.50
General 0.25 7.00
Unit selling price P50

1. Compute for the margin of safety in pesos.

2. Compute for the margin of safety ratio.

0 0

27
O P E R AT I N G L E V E R A G E
• Operating leverage represents the relationship between the entity’s fixed costs and variable costs.

• An entity with high fixed costs tends to have a high operating leverage, like airline industries.
Usually, its fixed costs are higher than its variable costs.

• An entity with a high operating leverage can expect net income going up when sales increase, because
fixed costs will remain the same.

• Similarly, an entity with a high operating leverage can expect net income going down when sales
decrease because it will still incur fixed costs, up until they suffer losses.

28
D E G R E E O F O P E R AT I N G
LEVERAGE
• The degree of operating leverage measures how well an entity generates profit using its fixed costs. It
is used to measure the extent of the change in profit before tax resulting from the change in sales.
• Leverage is achieved by increasing fixed costs while lowering variable costs.

29
Following is the company’s result of operations from its present sales level of 10,000 units:
Sales (10,000 units @ P5) P 50,000
Variable costs (10,000 units @ P3) 30,000
Contribution margin P 20,000
Fixed costs 12,000
Profit before tax P 8,000

1. Compute for the operating leverage factor (OLF).

2. If the company’s sales would increase by 10%, by what rate would profit before tax increase?

30
Following is the company’s result of operations from its present sales level of 10,000 units:
Sales (10,000 units @ P5) P 50,000
Variable costs (10,000 units @ P3) 30,000
Contribution margin P 20,000
Fixed costs 12,000
Profit before tax P 8,000

1. Compute for the operating leverage factor (OLF).

2. If the company’s sales would increase by 10%, by what rate would profit before tax increase?

31
PROOF:
Present Proposed % Change
Sales P 50,000 P 55,000 10%
Variable costs 30,000 33,000
Contribution margin P 20,000 P 22,000
Fixed costs 12,000 12,000
Profit before tax P 8,000 P 10,000 25%

32