COST – VOLUME – PROFIT

ANALYSIS
 COMPANIES MUST EARN
PROFITS TO STAY IN BUSINESS
• What will happen to profits if increasing advertising costs by
P250,000 increases sales by 50,000 units?
• How many units must we sell to earn P50,000?
• What selling price should we set?
• Should we hire another salesperson?
• Would staying open another two hours each day be profitable?
 CVP ANALYSIS
A method for analysing the relationships among COSTS,
VOLUME ,and PROFITS.

These relationships are being used by managers to plan,

budget, and make decisions.
ASSUMPTIONS USED IN CVP ANALYSIS
1. The behaviour of SALES, COSTS and EXPENSES is LINEAR within the
RELEVANT RANGE.
2. Unit sales price is CONSTANT.
3. There is only 1 product. In case of a multiple product operations,
sales mix is constant.
4. There is no work-in process inventory.
5. PRODUCTION is equal to SALES
 FIRST STEP IN CVP ANALYSIS

➢ Classify costs according

to their BEHAVIOR.
UNDERSTANDING THE CONCEPT
OF CONTRIBUTION MARGIN

CM= SALES – VARIABLE

COSTS
Illustration:
Acoustics Concepts, Inc., produces and sells speakers. During the
month of June, the following data are available:
UNIT SALES PRICE P 250
UNIT VARIABLE COST 150
TOTAL FIXED COST P 35,000
UNITS SOLD 400

1. What is the
a) Contribution Margin;
b) Contribution Margin Ratio; and
c) Variable Cost Ratio?
2. Prepare an income statement using CM FORMAT. ( TOTAL AND PER
UNIT)
CONTINUATION OF ILLUSTRATION….

What if the unit(s) sold is (are)

➢ 1 unit
➢ 350 units
 ILLUSTRATE THE CVP
RELATIONSHIPS IN A GRAPHIC
FORM
 BREAKEVEN POINT
➢ TOTAL SALES = TOTAL COSTS
➢POINT OF PRODUCTION WHERE
THERE IS NO PROFIT OR LOSS
➢CM = TFC
FORMULA OF COMPUTING BEP

BEP (in terms of units) = TFC / UCM

BEP (in terms of peso) = TFC/CMR

 MARGIN OF SAFETY (MOS)
➢ It is the decline in volume from the expected level of
sales to the breakeven point.
➢ It is the amount where sales could be reduced before
incurring a loss.
➢ It is the difference between expected sales and the
breakeven point.

Note: THE HIGHER THE MARGIN OF SAFETY, THE LOWER

THE RISK OF NOT BREAKING EVEN.
 MOS Formula
MOS (UNITS) = BUDGETED SALES UNITS – BREAKEVEN SALES UNITS

MOS (PESO) = BUDGETED PESO SALES – BREAKEVEN PESO SALES

= MOS (UNITS) X SP/UNIT

MOS RATIO = MOS(UNITS) / BUDGETED SALES UNITS

= MOS (PESO) / BUDGETED PESO SALES
1. Foris Company's product sells for P16 and has a variable cost per unit of P12.
Fixed costs are P120,000.

a. Compute the break-even point in pesos.

b. Compute the number of units Foris must sell to earn a P30,000 profit.

c. Foris has a target profit of P36,000 and expects to sell 30,000 units. Compute
the selling price Foris must charge to earn the target profit.

d. Foris wants to keep its selling price at P8 per unit and earn a 10% return on
sales. Calculate the number of units Foris must sell to meet the target.
2. Kurapika Company sells a product for P20, variable costs are
P8 per unit, and fixed costs are P32,000.

a. What is Kurapika' break-even point in units?

b. Find the selling price that Kurapika must charge to earn an

P8,000 profit selling 1,600 units.

c. Kurapika is considering new equipment that would

increase fixed costs by P2,000 while reducing unit variable
costs by P1.60 per unit. Find the sales level where Kurapika is
indifferent between the two cost structures.
3. Tornado Company has sales of P550,000 and has variable
costs of P330,000. Fixed costs are P180,000.

a. Compute the break-even point.

b. Compute Tornado's sales to earn a P50,000 profit.
c. Compute the sales Tornado would need to earn a 10%
return on sales.
4. SonGoku Company's product sells for P80 and has a variable
cost per unit of P60. Fixed costs are P400,000.

a. Compute the break-even point in pesos.

b. Compute the number of units must SonGoku sell to earn a

P100,000 profit.

c. SonGoku has a target profit of P152,000 and expects to sell

30,000 units. Compute the selling price SonGoku must charge
to earn the target profit.

d. SonGoku wants to keep its selling price at P80 per unit and
earn a 10% return on sales. Calculate the number of units
SonGoku must sell to meet the target.
5. Lupin Inc's product sells for P32 and has a variable cost
per unit of P20. Fixed costs are P120,000. The effective tax rate
is 40%.

a. Compute the break-even point.

b. Compute the number of units Lupin must sell to earn a
P30,000 after-tax profit.
c. Lupin has an after-tax target profit of P36,000 and
expects to sell 20,000 units. Compute the selling price Lupin
must charge to earn the target profit.
6. Zenigata Company has sales of P350,000, variable costs
of P200,000, and fixed costs of P125,000. Zenigata has an
effective tax rate of 40%.
a. Compute the break-even point.
b. Compute Zenigata's sales needed to earn a P75,000
after-tax profit.
c. Compute the sales Zenigata would need to earn a 15%
after-tax return on sales.
CVP ANALYSIS IN
A MULTIPRODUCT
ENVIRONMENT
ASSUMPTION:
➢ The PRODUCT SALES MIX stays CONSTANT as
total sales volume changes or that the AVERAGE
CONTRIBUTION MARGIN RATIO stays
CONSTANT as total sales volume changes.

Note: Without the assumption of a constant sales

mix, BEP cannot be calculated, nor can CVP
analysis be used effectively.
PROBLEM 1 Freeza Company sells three products. Planned results are as
follows.
Product
P Q R
--- --- ---
Selling price P20 P8 P6
Variable cost 8 6 3
--- --- ---
Contribution margin P12 P2 P3
=== === ===
Units sold 10,000 20,000 70,000
Fixed costs are P200,000.
a. Determine the weighted-average contribution-margin per unit.
b. Determine the break-even point in units sold.
c. Compute the total unit sales required to earn a P75,000 profit.
PROBLEM 2 The general manager of So-Lo Grocery Stores reviewed the following
data.

Produce Meat/Dairy Canned Goods

Contribution margin percentage 40% 35% 30%
Sales mix percentage, in dollars 30% 20% 50%

Fixed Costs are P680,000 per month.

a. Determine the weighted-average contribution margin percentage.

b. Determine the break-even sales dollar per month.
c. Determine the sales necessary to earn P210,000 per month.
PROBLEM 3 Davis Exterminating Company performs a wide variety of pest control services.
George Davis, the owner, has been examining the following forecasts for 2018.

Type of Service Expected Peso Volume for 2018 Contribution Margin Percentage
Termites P 160,000 50%
Lawn pests 120,000 60%
Interior pests 120,000 80%

Davis expects total fixed costs of P150,000 in 2018.

Required:
a. What is the weighted-average contribution margin percentage?
b. What profit should Davis earn?
c. The actual sales mix turned out to be 20% termites, 30% lawn pests, and 50% interior pests.
Total actual sales were P400,000 and total fixed costs were P150,000. Determine the following:
1. The actual weighted average contribution margin percentage.
2. Profit.
❑ IMPORTANT POINTS:

➢Any SHIFT in the PRODUCT SALES MIX will change the

WEIGHTED AVERAGE CONTRIBUTION MARGIN PERCENTAGE and
BEP.

➢If the sales mix shifts toward a product with a LOWER PESO
CM, the BEP will INCREASE and PROFITS will DECREASE, unless
there is a corresponding increase in total revenues.

➢If the sales mix shifts toward a product with a HIGHER PESO
CM, the BEP will DECREASE and PROFITS will INCREASE.
Seatwork: 13 points The Barnes Company manufactures two products.
Information about the two product lines is as
Mel’s Male Accessories sells wallets and follows:
money clips. Historically, the firm’s sales
have averaged three wallets for every Product K Product Y
money clip. Each wallet has an P8 Selling price per unit P80 P30
contribution margin, and each money clip
has a P6 contribution margin. Mel’s incurs Variable costs per unit 45 15
fixed cost in the amount of P180,000. The Contribution margin per unit P35 P15
selling prices of wallets and money clips,
respectively, are P30 and P15. The company expects fixed costs to be P189,000.
The firm expects 60 percent of its sales (in units)
a. How much revenue is needed to break to be Product K (a sales mix of 3:2).
even? How many wallets and money
clips does this represent? (3) Required:
b. How much revenue is needed to earn a a. Calculate the contribution margin per
profit of P150,000? (2) package. (2)
c. If Mel’s earns the revenue determined in b. Determine the break-even point in units for
(b) but does so by selling five wallets for Product K and Product Y. (2)
every two money clips, what would be c. Determine the level of sales (in dollars)
the profit or (loss)? Why is this amount necessary to generate a before-tax profit of
not P150,000? (2) P135,000. (2)
The Barnes Company manufactures two products. Information about the two product lines is as follows:

Product K
Product Y
Selling price per unit P80 P30
Variable costs per unit 45 15
Contribution margin per unit P35 P15

The company expects fixed costs to be P189,000. The firm expects 60 percent of its sales (in units) to be
Product K (a sales mix of 3:2).

Required:

1. Calculate the contribution margin per package.

2. Determine the break-even point in units for Product K and Product Y.
3. Determine the level of sales (in dollars) necessary to generate a before-tax profit of P135,000.
The Millennium Company produces two types of products: Quality and Superior. The company
expects to sell 1,200 units of Quality and 800 units of Superior.

A projected income statement for the firm as a whole follows:

Sales P400,000
Less: Variable costs 100,000
Contribution margin P300,000
Less: Fixed costs 75,000
Operating income P225,000

Required:

1. Determine the break-even point in terms of sales revenue.

2. Determine the sales revenue necessary to generate a before-tax profit of P300,000.
3. Determine the sales revenue necessary to generate an after-tax profit of P270,000 if the
tax rate is 40 percent.
LaVerle, Inc., manufactures a product that sells for P480. The variable costs per unit
are as follows:

Direct materials P160

Direct labor 100
Variable manufacturing overhead 40

During the year, the budgeted fixed manufacturing overhead is estimated to be

P100,000, and budgeted fixed selling and administrative costs are expected to be
P40,000. Variable selling costs are P20 per unit.

Required:
1. Determine the break-even point in units.
2. Determine the number of units that must be sold to earn P60,000 in profit before
taxes.
3. Determine the number of units that must be sold to generate an after-tax profit of
P60,000 if there is a 40 percent tax rate