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Lecture-Guide-A-Cost-Volume-Profit-Analysis

The document discusses Cost-Volume-Profit (CVP) analysis, emphasizing its importance for managers in understanding the relationship between costs, volume, and profit. It outlines key elements of CVP analysis, including contribution margin and break-even point calculations, which are essential for revenue and cost planning. Additionally, it provides illustrative examples to demonstrate the application of CVP analysis in real-world scenarios.

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che chavez
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2 views

Lecture-Guide-A-Cost-Volume-Profit-Analysis

The document discusses Cost-Volume-Profit (CVP) analysis, emphasizing its importance for managers in understanding the relationship between costs, volume, and profit. It outlines key elements of CVP analysis, including contribution margin and break-even point calculations, which are essential for revenue and cost planning. Additionally, it provides illustrative examples to demonstrate the application of CVP analysis in real-world scenarios.

Uploaded by

che chavez
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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Lecture Guide B: Unit 1 Cost Volume Profit Relationships

COST VOLUME PROFIT RELATIONSHIPS


The Basis of cost volume profit (CVP) Analysis
Managers in making decision affecting the business operations must understands the interrelationship of cost, volume and
profit through the use of the information and analysis that the cost accounting department will provide to them. They need
to understand which cost would stay the same.
Significance of Cost-Volume-profit analysis
Cost-volume-profit (CVP) analysis is one of the most powerful tools that managers have at their command. It helps them
understand the interrelationship between cost volume and profit in an organization by focusing on interactions between the
following five elements:
1. Prices of products
2. Volume or level of activity within the relevant range
3. Variable cost per unit
4. Total Fixed Costs
5. Mix of products sold
If the above items are known the following relationship may be established;
a. Contribution margin per unit or marginal income per unit
This is the excess of unit selling price over unit variable costs and the amount each unit sold contribution toward
1. Covering fixed costs and
2. Providing operating profits

Formula: CM per unit= Unit Selling price – unit variable costs


b. Contribution Margin Ratio
This is the percentage of contribution margin to total sales. This ratio is computed as follows:
𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑀𝑎𝑟𝑔𝑖𝑛
CM ratio =
𝑆𝑎𝑙𝑒𝑠

The CM ratio is very useful in that it shows how the contribution margin will be affected by a given peso change in
total sales. For instance, if a company CM ratio is 40%. it means that each peso increases in sales, total contribution
margin will increase by P.0.40. net income likewise will increase by P0.40 assuming that there are no changes in fixed
costs.
The CM ratio is particularly valuable in those situations where the manage must make trade-off between change in
selling price and change in variable costs.

CVP ANALYSIS FOR BREAKEVEN PLANNING


The starting point in many business plans is to determine the break-even point
Break-even point is the level of sales volume where total revenues and total expenses are equal, that is there is neither profit
or loss. This point can be expenses are equal. That is there is neither profit or loss. This point can be determined by using
CVP analysis. Break-even point can be computed as follow;
𝑇𝑜𝑡𝑎𝑙 𝐹𝑖𝑥𝑒𝑑 𝐶𝑜𝑠𝑡
1. Break-even point (unit) = 𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑀𝑎𝑟𝑔𝑖𝑛 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡

𝑡𝑜𝑡𝑎𝑙 𝐹𝑖𝑥𝑒𝑑 𝐶𝑜𝑠𝑡


2. Break-even point pesos = 𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝐶𝑜𝑠𝑡𝑠
1−
𝑆𝑎𝑙𝑒𝑠

3. a. Break-even Sales
𝑇𝑜𝑡𝑎𝑙 𝐹𝑖𝑥𝑒𝑑 𝐶𝑜𝑠𝑡𝑠
for multi-products = 𝑊𝑒𝑖𝑔ℎ𝑡𝑒𝑑 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑐𝑜𝑛𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑀𝑎𝑟𝑔𝑖𝑛
Firms (combined units)

weighted Contribution Margin per unit =


𝑈𝑛𝑖𝑡 𝐶𝑀 𝑥 𝑁𝑜.𝑜𝑓 𝑢𝑛𝑖𝑡𝑠 𝑝𝑒𝑟 𝑚𝑖𝑥 + 𝑈𝑛𝑖𝑡 𝐶𝑀 𝑥 𝑁𝑜.𝑜𝑓 𝑢𝑛𝑖𝑡𝑠 𝑝𝑒𝑟 𝑀𝑖𝑥
𝑇𝑜𝑡𝑎𝑙 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑢𝑛𝑖𝑡𝑠 𝑝𝑒𝑟 𝑆𝑎𝑙𝑒𝑠 𝑀𝑖𝑥

4. a. Break-even sales for multi-product firm (combined pesos) =


𝑇𝑜𝑡𝑎𝑙 𝐹𝑖𝑥𝑒𝑑 𝐶𝑜𝑠𝑡𝑠
𝑊𝑒𝑖𝑔ℎ𝑡𝑒𝑑 𝐶𝑀 𝑟𝑎𝑡𝑖𝑜

𝑇𝑜𝑡𝑎𝑙 𝑊𝑒𝑖𝑔ℎ𝑡𝑒𝑑 𝐶𝑀(𝑃)


weighted CM Ratio = 𝑇𝑜𝑡𝑎𝑙 𝑊𝑒𝑖𝑔ℎ𝑡𝑒𝑑 𝑆𝑎𝑙𝑒𝑠 (𝑃)

CVP ANALYSIS FOR REVENUE AND COST PLANNING


CVP analysis can be used to determine the level of sales needed to achieve a desired level of profit. In revenue planning
CVP analysis assists managers in determining the revenue required to achieve a desired profit level. The equation that may
be used to compute for target sales follows:
𝑇𝑜𝑡𝑎𝑙 𝐹𝑖𝑥𝑒𝑑 𝐶𝑜𝑠𝑡𝑠+𝑑𝑒𝑠𝑖𝑟𝑒𝑑 𝑃𝑟𝑜𝑓𝑖𝑡
SALES (in unit) = 𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑀𝑎𝑟𝑔𝑖𝑛 𝑃𝑒𝑟 𝑈𝑛𝑖𝑡

Or
𝑇𝑜𝑡𝑎𝑙 𝐹𝑖𝑥𝑒𝑑 𝐶𝑜𝑠𝑡𝑠 +𝐷𝑒𝑠𝑖𝑟𝑒𝑑 𝑃𝑟𝑜𝑓𝑖𝑡
Sales (Pesos) = 𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑀𝑎𝑟𝑔𝑖𝑛 𝑅𝑎𝑡𝑖𝑜

Illustration 1 = Computation of Break-even Point


MNO Corporation provided the following information:
Total Per Unit
Net Sales 500,000 P10
Variable Costs 300,000 6
Contribution Margin 200,000 P4
Fixed Cost 150,000 3
Net profit 50,000 P1

A: Computation of Break-even Point


𝑃150,000
1. Break-even Point (unit) = 10−6
= 37,500 units
𝑃150,0000
Break –even Point (P) = 40%
= P375,000

Illustration 2 = Break-even Analysis

The Income Statement for one Manhattan Company’s product shows:

The Income Statement for one of Manhattan Company’s Product shows:

Sales (100 units at P100 a unit) .............................................P10,000


Cost of Goods Sold
Direct Labor 1,500
Direct material used 1,400
Variable factory overhead 1,000
Fixed factory overhead 500 4,400
Gross Profit P 5,600
Marketing expenses:
Variable 600
Fixed 1,000
Administrative expenses:
Variable 500
Fixed 1,000 3,100
Operating Income P 2,500

Required: 1. Compute the Break-even point in units


2.If sales increase by 25% How much will be the new operating income?
3. Compute the new break-even point in pesos if fixed factory overhead will increase by 1,700.

Solution:
𝑃500+1,000+1,000
1. Break –even point =
𝑃50

= 50 Units

2. Current Net Income P2,500


Add: Incremental Contribution margin
(25 units x P50) 1,250
Operating Income 3,750
𝑝2,500+𝑝1,700
3. Break-even point = 50%

= P8,400

Illustration 3 CVP analysis for a multi-Products Firm

Lors Inc. Produces only two product A and B : These accounts for 60% and 40% of the total sales pesos of Lor’s
respectively. Variable costs as a percentage of sales pesos are 60% for A and 85% of B. Total fixed cost are P150,000.
There are no other costs.

Require: Compute
1. The weighted contribution margin ratio
2. The break-even point in sales pesos
3. The sales pesos necessary to generate a net income of P9,000 if total fixed cost will increase by 30%

Solution: A B
1. Sales mix ratio 60% 40%
Multiplied by : Contribution Margin ratio 40% 15%
Weighted Contribution margin ratio 24% 6% = 30%

𝐹𝑖𝑥𝑒𝑑 𝑐𝑜𝑠𝑡𝑠
2. BEP (P) = 𝑊𝑒𝑖𝑔ℎ𝑡𝑒𝑑 𝐶𝑀𝑅

𝑃150,000
= 30%

= P500,000
3. Desired net income P 9,000
Add: Total Fixed Cost
(150,000 x 130%) 195,000
Contribution Margin P 204,000
Divided by Weighted CMR 30%
Sales necessary to generate desired net
Income P 680,000

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