ST. ROSE COLLEGE EDUCATIONAL FOUNDATION INC.

COLLEGE OF BUSINESS AND ACCOUNTANCY

MAS 3: CVP ANALYSIS
COST-VOLUME-PROFIT (CVP) ANALYSIS
3. Mixed costs- Possess both fixed and
With the goal of profit maximization, profit
variable component
planning is anticipating the effects of
4. Semi variable costs – The rate of
variables affecting profit to measure its
change in these cost items with the
outcome without necessarily disregarding
change in activity level is not
the firm’s social responsibility.
constant.
Cost-Volume-Profit (CVP) Analysis is one of 5. Semi fixed costs – Like variable
the analytical tools used in profit planning costs, it increases with the activity
which is a systematic examination of the level, although not proportionately,
relationships among costs, activity levels, and like fixed costs, they remain
or volume, and profit. constant for stretches of activity
levels although not for all activity
LOOKING BACK… levels.
VARIABLE COSTING INCOME
STATEMENT
COST BEHAVIOR ASSUMPTIONS
Sales xx
Less: Variable costs and expenses xx A. Relevant Range Assumption – The band
Contribution margin xx of activity in within which the identified
Less: Fixed costs and expenses xx cost behavior patterns are valid.
Operating income (loss) xx B. Time Assumption – States that the cost
In CVP analysis, we use variable costing to behavior patterns identified are true only
assist management in profit planning. over a specific period of time.

COST CONCEPTS AND CLASSIFICATIONS SEGREGATION OF FIXED AND VARIABLE

ELEMENTS OF MIXED COSTS
A. Functional Classifications –
Manufacturing costs and Selling and In making a cost analysis, it is best to
administrative costs identify specific cost items as either
variable or fixed. In terms of mixed costs,
B. Behavioral Classifications the following techniques may be used:
1. Fixed costs A. High-Low Method
B. Statistical Scatter Graph
C. Least Squares
BREAK-EVEN ANALYSIS

The focal point of CVP Analysis is the

computation of the break-even sales,
which is that point of activity level (sales
volume) where total revenues equal total
costs and expenses, meaning there is
neither profit nor loss.
2. Variable costs
For purposes of profit analysis and control,
managers give emphasis in the contribution
margin, i.e., the difference between sales
and variable costs.

To avoid operating loss, contribution margin

should be at least equal to fixed costs. Any
amount of contribution margin in excess of
fixed costs is profit.
SAMPLE PROBLEM 1

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 ST. ROSE COLLEGE EDUCATIONAL FOUNDATION INC.
COLLEGE OF BUSINESS AND ACCOUNTANCY
MAS 3: CVP ANALYSIS
Dianne Company makes a product that Considering sales as the base representing
sells for P160 per unit. Variable costs are 100%, we can develop ratios to express
P104 per unit, and fixed costs total both variable cost and contribution margin
P1,568,000 annually. as a percentage of sales as follows:

Our variable income statement above Variable Cost

Variable Cost Ratio =
expressed in equation form is as follows: Sales
and
Sales – Variable Cost – Fixed Cost = Profit Contribution Margin
Contribution Margin Ratio =
Sales
Stated differently, we have:
Based on the above formulas, sales can be
Sales = Variable Cost + Fixed Cost + Profit determined:
Knowing that: Variable Cost
Sales =
Sales = Units x Selling Price/Unit and, Variable Cost Ratio
and
Variable Costs = Units x Variable Contribution Margin
Sales =
Cost/Unit Contribution Margin Ratio

Then, let x = the number of units to be sold Using the same equation and substituting
to break-even, where profit = 0 the terms cited above, we come up with:
P160x = P104x + P1,568,000 + 0 Fixed Cost + Profit
Sales =
P160x – P104x = P1,568,000 + 0 Contribution Margin Ratio
P56x = P1,568,000 + 0
Since at break-even point, profit is zero, it
P1,568,000+0 can be deleted from the formula, thus
x =
P56 contribution margin should be equal to
x = 28,000 units or P4,480,000 fixed costs, then the sales figure represents
(28,000 x P160), break-even the break-even sales in pesos.
sales in pesos.
Fixed Cost
Using the same equation and substituting Break-even sales in pesos =
Contribution Margin Ratio
the terms cited above, we come up with:
In our sample problem, contribution
Fixed Cost+Profit
Sales in units = margin ratio equals 35% (P56 / P160).
Contribution Margin Per Unit
With fixed costs at P1,568,000, break-even
Contribution Margin Per Unit = Difference between sales in pesos is:
Selling Price Per Unit and Variable Cost Per Unit
P1,568,000
Since at break-even point, profit is zero, it = P4,480,000
35%
can be deleted from the formula, thus, we
ADDITIONAL CONSIDERATIONS:
shall have:
Desired Profit – We just deleted profit from
Fixed Cost
Break-even sales in units = Contribution Margin Per Unit
the formula since its value is zero. Hence,
sales with desired profit can be determined
Once the break-even sales in units is with the following formulas:
known, the break-even sales in pesos can
Fixed Cost+Desired Profit
be easily determined by multiplying the per Break-even sales in units = Contribution Margin Per Unit
unit selling price. However, another and
formula can be used to directly compute Fixed Cost+Desired Profit
Break-even sales in pesos =
for break-even sales in pesos. Contribution Margin Ratio
Reconsidering our formula to compute the
contribution margin: Desired Profit After Tax – The profit figure
in the formula above is understood to be
Contribution Margin = Sales – Variable Cost profit before tax. In this case the desired
profit after tax should be converted to
Stated differently, we have:
profit before tax using the tax rate
Sales = Variable Cost + Contribution Margin provided.

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 ST. ROSE COLLEGE EDUCATIONAL FOUNDATION INC.
COLLEGE OF BUSINESS AND ACCOUNTANCY
MAS 3: CVP ANALYSIS
Desired Profit Expressed as A Certain ACTUAL OR PLANNED SALES
Percentage of Sales – Let PR = desired
If MSR = 25%, then BESR = 1 – 25% = 75%
profit. Using the formula to get your break-
even sales in pesos, we have: BES P75,000
= = = P100,000
BESR 75%
Fixed Cost
Break-even sales in pesos = CMR−PR ACTUAL OR PLANNED PROFIT

MARGIN OF SAFETY Actual or Planned Sales P100,000

x Contribution Margin Ratio 40%
The difference between actual or planned Contribution Margin P 40,000
sales volume and break-even sales which Fixed Costs P 30,000
indicated the amount by which actual or Profit P 10,000
planned sales may be reduced without
incurring a loss. It can be expressed in Or using the profit percentage,
units, in pesos of sales or as a ratio.
PR = MSR x CMR
Margin of Safety Ratio – The planned or
actual sales is used as the base.
PR = 25% x 40%
Margin of Safety = Actual or Planned Sales PR = 10%
- Break-even Sales Thus,

Margin of Safety Actual or Planned Sales P100,000

𝑀𝑎𝑟𝑔𝑖𝑛 𝑜𝑓 𝑆𝑎𝑓𝑒𝑡𝑦 𝑅𝑎𝑡𝑖𝑜 = x Profit Ratio 10%
𝐴𝑐𝑡𝑢𝑎𝑙 𝑜𝑟 𝑃𝑙𝑎𝑛𝑛𝑒𝑑 𝑆𝑎𝑙𝑒𝑠
Actual or Planed Profit P 10,000
SAMPLE PROBLEM 1 (CON’T)
MULTI-PRODUCT BREAK-EVEN
Dianne Company makes a product that ANALYSIS
sells for P160 per unit. Variable costs are
P104 per unit, and fixed costs total When a company manufactures and/or
P1,568,000 annually. The company sold sells more than one product, hence, a
35,000 units or P5,600,000 during the multi-product sales situation. In the multi-
current year. product sales analysis, the sales mix is
assumed to be constant.
MARGIN OF SAFETY IN PESOS
SAMPLE PROBLEM 3
= P5,600,000 – P4,480,000
Daisy Company has been operating for
= P1,120,000 only a few months. The company sells
three products: Aye, Bee, and Cee, which
MARGIN OF SAFETY IN UNITS
is sold at a ratio of 5:2:3 per sale. Prices
= 35,000 – 28,000 and variable costs per unit are as follows:

= 7,000 units Aye Bee Cee

Selling price P20 P30 P15
MARGIN OF SAFETY RATIO Variable cost
P10 P18 P9
P1,120,000 7,000 per unit
= OR
P5,600,000 35,000
Total fixed costs amount to P305,072.
= 0.20 OR 20%
BES IN UNITS USING COMPOSITE CM/U
SAMPLE PROBLEM 2
1. Composite CM/sale
Dhalia Company has fixed costs of
Aye = P10 x 5 = P50
P30,000, a margin of safety ratio of 25%
Bee = P12 x 2 = P24
and a contribution margin ratio of 40%.
Cee = P 6 x 3 = P18
Determine the following:
P92 composite CM/sale
BREAK-EVEN SALES
2. BES in number of sales
Fixed Cost 𝑃30,000
= = = P75,000 =
𝐹𝑖𝑥𝑒𝑑 𝐶𝑜𝑠𝑡
=
305,072
= 3,316 𝑠𝑎𝑙𝑒𝑠
CMR 40% 𝐶𝑜𝑚𝑝𝑜𝑠𝑖𝑡𝑒 𝐶𝑀/𝑠𝑎𝑙𝑒 𝑃92

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 ST. ROSE COLLEGE EDUCATIONAL FOUNDATION INC.
COLLEGE OF BUSINESS AND ACCOUNTANCY
MAS 3: CVP ANALYSIS
3. BES in units per product its contribution margin. Operating profit, meaning
EBIT.
Aye = 3,316 x 5 = 16,580
Bee = 3,316 x 2 = 6,632 Contribution Margin
DOL =
Cee = 3,316 x 3 = 9,948 EBIT
OR
33,160 units
Percentage ∆ in EBIT
DOL =
BES IN PESOS USING COMPOSITE CMR Percentage ∆ in Sales
OR
1. Composite CM/sale 1
DOL =
2. Composite SP/sale MSR

Aye = P20 x 5 = P100 Once the DOL rate is determined, the

Bee = P30 x 2 = P 60 percentage change in EBIT is determined as
follows:
Cee = P15 x 3 = P 45
P205 composite SP/sale Percentage ∆ in EBIT = Percentage ∆ in Sales x DOL

3. Composite CMR
SAMPLE PROBLEM 4
𝐶𝑜𝑚𝑝𝑜𝑠𝑖𝑡𝑒 𝐶𝑀𝑅/𝑠𝑎𝑙𝑒 𝑃92
= = = 44.88% Dimples Company manufactures and sells
𝐶𝑜𝑚𝑝𝑜𝑠𝑖𝑡𝑒 𝑆𝑃/𝑠𝑎𝑙𝑒 𝑃205
personal air purifiers for P1,800 each. Variable
4. BES in pesos costs are P1,260 per unit, and fixed costs total
P13,500,000 per year. The company currently
Fixed Cost 305,072 sells 40,000 units a year.
= = = P679,780*
Composite CMR 44.88%
A. Compute for the degree of operating leverage
*Difference due to rounding off.
at the present level of sales.
BES IN UNITS USING AVERAGE CM/U Contribution Margin
1. Average CM/u (P540 x 40,000 units) P21,600,000
- Fixed Costs 13,500,000
Aye = P10 x 5/10 = P5 EBIT P 8,100,000
Bee = P12 x 2/10 = P2.4 21,600,000
Cee = P 6 x 3/10 = P1.8 DOL =
8,100,000
= 2.67
P9.2 Average CM/u
B. If sales are expected to increase by 25% next
2. BES in units year, what is the:
Fixed Cost P305,072
1. Percentage change in profit.
= = = 33,160 units
Average CM/u P9.2 = 25% x 2.67 = 66.67%*
BES IN PESOS USING AVERAGE CM/U 2. Expected increase in net income.
1. Average CM/u = P8,100,000 x 66.67% = P5,400,000*

2. BES in units * Difference due to rounding off

3. BES in units, per product allocation Proof,

40,000 units x 1.25% = 50,000 unit sales, next

Aye = 33,160 x 5/10 = 16,580
year.
Bee = 33,160 x 2/10 = 6,632
Cee = 33,160 x 3/10 = 9,948 Contribution Margin
33,160 units (P540 x 50,000 units) P27,000,000
- Fixed Costs 13,500,000
4. BES in pesos EBIT P13,500,000
EBIT, previous year P 8,100,000
Aye = 16,580 x P20 = P331,600
Bee = 6,632 x P30 = P198,960
Peso Change P 5,400,000
Cee = 9,948 x P15 = P149,220 P5,400,000
P679,780 Percentage Change in EBIT = = 66.67%
P8,100,000
DEGREE OF OPERATING LEVERAGE

Operating leverage refers to the ability of the

business to increase its operating profit in relation to

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