Scribd
Upload
7 views

CVP-Analysis-DISCUSSION

Cost-Volume-Profit (CVP) Analysis is a tool for profit planning that examines the relationship between profit, costs, and sales volume. It includes methods for calculating contribution margin, break-even points, and target profits, as well as assessing safety margins and sales mix. The document also provides exercises for practical application of CVP concepts in various scenarios.

Uploaded by

Paul Rexie
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
7 views

CVP-Analysis-DISCUSSION

Cost-Volume-Profit (CVP) Analysis is a tool for profit planning that examines the relationship between profit, costs, and sales volume. It includes methods for calculating contribution margin, break-even points, and target profits, as well as assessing safety margins and sales mix. The document also provides exercises for practical application of CVP concepts in various scenarios.

Uploaded by

Paul Rexie
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
You are on page 1/ 3

COST-VOLUME-PROFIT (CVP) ANALYSIS

CVP ANALYSIS - is a profit planning tool that deals with the relationship of profit with costs and sales volume.

For computation purposes, you may utilize the variable costing income statement format:

Traditional Income Statement Variable Costing Income Statement

Sales XX Sales XX
Less: Cost of Sales XX Less: Variable Costs XX
Gross Profit XX Contribution Margin (CM) XX
Less: Operating Expenses XX Fixed Costs XX
Net Income XX Net Income XX

Contribution margin – the excess of sales over variable costs that contributes to covering the fixed costs and providing
profits. Can be computed in the following methods:
a. Per Total (Total CM) = Sales minus Variable Costs
b. Per Unit (Contribution Margin per unit) = Selling Price – Variable Cost per Unit
c. In percentage (CM Ratio) = Total CM divide by Sales or CM per Unit divide by Selling Price
*The CM Ratio shows how contribution margin will be affected by a given peso change in total sales.

HOW DO WE USE CVP ANALYSIS?


1. For break-even planning
Break-even point – level of SALES where total revenue and total costs are equal (no profit or loss). Can be
computed in the following methods:
a. BEP in units (number of units to be sold in order to break-even) = Total Fixed Costs divide by CM per Unit
b. BEP in Pesos (total Peso sales needed to break-even) = Total Fixed Costs divide by CM Ratio
c. BEP Ratio (percentage of current sales only needed to break-even) = BEP in Pesos divide by Sales

2. For determining safety net


Margin of safety - is the maximum amount by which sales could decrease without incurring a loss.
a. MS in units = Units sold – BEP units
b. MS in Pesos = Sales – BEP in Pesos
c. MS Ratio = MS in Pesos divide by Sales or 100% – BEP Ratio

3. For reaching target profits:


a. Sales (units) with Target Profit = (Fixed Costs + Target Profit*) ÷ Unit CM
b. Sales (peso sales) with Target Profit = (Fixed Costs + Target Profit*) ÷ CM Ratio
c. Sales (peso sales) with Target Profit Ratio = Fixed Costs ÷ (CM Ratio – Profit Ratio)
* Target Profit must be expressed before tax: Pre-tax Profit = After-tax Profit ÷ (100% - tax rate)

4. For determining adequate sales of a mix of products:


SALES MIX (a.k.a. product mix) - is the proportion of different products that comprise the company’s total sales.
In order to determine the proper mix of products, we need the following:
a. Weighted average contribution margin per unit (WACMU)*
b. Weighted average contribution margin ratio (WACMR)*
*will be discussed
c. Overall BEP (units) = Fixed Costs ÷ Weighted Average Unit CM
d. Overall BEP (peso sales) = Fixed Costs ÷ Weighted Average CM Ratio

EXERCISE:
1. The income statement of Cutesy Company’s product shows:
Sales (100 units at P100 a unit) P10,000
Cost of Goods Sold
Direct Labor 1,500
Direct Materials 1,400
Variable Factory Overhead 1,000
Fixed Factory Overhead 500
4,400
Gross profit 5,600
Marketing Expense
Variable 600
Fixed 1,000
Administrative Expense
Variable 500
Fixed 1,000
3,100
Operating Income 2,500

1. Compute CM in Pesos, per unit and ratio.


2. Compute break-even point in units, pesos and ratio.
3. If sales increase by 25%, how much will be the new net income?
4. Compute the new break-even point if fixed factory overhead will increase by P1,700.
5. Compute the Margin of Safety in pesos, units and ratio.
6. Compute the number of units to be sold to earn net income of P60,000 before tax.
7. Compute the amount of sales to earn net income P60,000 after tax. Tax rate is 40%.
8. Compute the amount of sales to earn 10% of sales profit.

2. Zane Company sells tables and chairs in sets. The projected profit for next month is as follows:

Chairs Tables Total


Unit sales 45 units 15 units 60 units
Sales P 540.00 P 135.00 P 675.00
Variable Costs 450.00 75.00 525.00
Contribution Margin P 90.00 P 60.00 P 150.00
Fixed Costs 100.00
Profit P 50.00

REQUIRED:
1. How many units of chairs should be sold next month to break-even?
2. How many units of tables should be sold to earn a profit of P 150?

3. RED’s break-even sales are P 528,000. The variable cost ratio is 60% while the profit ratio is 8%.
REQUIRED: Determine the following:
1. Fixed Costs 7. Margin of Safety Ratio (using Sales)
2. Sales 8. Margin of Safety Ratio (using CM Ratio)
3. Variable Costs 9. Break-Even Ratio (using Sales)
4. Contribution Margin 10. Break-Even Ratio (using Margin of Safety Ratio)
5. Profit 11. Degree of Operating Leverage (using Profit)
6. Margin of Safety 12. Degree of Operating Leverage (using Margin of Safety Ratio)

QUIZZER

1. Which specific cost is not subtracted from the selling price to calculate contribution margin per unit?
a. Direct labor c. Fixed manufacturing overhead
b. Variable selling expenses d. Variable manufacturing overhead

2. Contribution margin is best defined as the amount available to cover


a. Fixed costs and profit c. Fixed costs and sales
b. Variable costs and profit d. Variable costs and fixed costs

3. At the break-even point, fixed cost is always


a. Less than contribution margin c. More than the variable costs
b. More than contribution margin d. Equal to the contribution margin
4. All of the following items affect a company’s break-even point, except
a. Total fixed costs c. Unit selling price
b. Unit variable cost d. Number of units sold

5. An increase in the income tax rate


a. Raises the break-even point
b. Lowers the break-even point
c. Increases sales required to earn a particular after-tax profit
d. Decreases sales required to earn a particular after-tax profit

6. A company with a negative margin of safety must have a(an)


a. Operating loss c. Sales above its break-even point
b. Operating profit d. Sales equal to its break-even point

7. Under CVP analysis, which of the following is NOT assumed to be constant?


a. Unit variable cost c. Unit fixed cost
b. Unit selling price d. Sales mix

8. The costing method that lends itself to break-even analysis is:


a. Normal c. Variable
b. Standard d. Absorption

9. The contribution margin will increase when sales volume remains the same and
a. Fixed costs will increase c. Variable costs will increase
b. Fixed costs will decrease d. Variable costs will decrease

10. Which of the following would decrease unit contribution margin the most?
a. A 15% decrease in selling price c. A 15% decrease in variable expenses
b. A 15% increase in variable expenses d. A 15% increase in fixed expenses

You might also like