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CHAPTER 5:

COST VOLUME PROFIT AND BREAK EVEN ANALYSIS

Cost Volume Profit Analysis a systematic examination of the relationships among costs, activity levels or volume, and profit. Cost Behavior - refers to the way costs change with respect to a change in the activity level, such as production or sales volume, labor or machine hours, etc.

Fixed Cost - cost that do not change

Variable Cost cost that change directly

Mixed Cost - Total Cost = Fixed Cost + Variable Cost Fixed Cost = Total Cost Variable Cost

Relevant Range refers to the band of activity within which the identified cost behavior patterns are valid. High-Low Method techniques used to segregate mixed cost components.

Formula:

Variable Rate per Unit = difference in cost (high−low)

difference in activity level

Fixed Cost = Total Cost (Activity Level * VRU)

Check:

Sales = (SP x No. of Units) Less: Variable Cost = (VC x No. of Units) Contribution Margin = (CMU x No. of Units)

Break Even Analysis

BES/units = Fixed Cost

BESR = BES

CMU

sales

BES/pesos = Fixed Cost

CMR

Contribution Margin = Sales – VC or FC + P Contribution Margin Unit = SP
Contribution Margin = Sales – VC or FC + P
Contribution Margin Unit = SP – VC
Contribution Margin Ratio = CMU
SP
Variable Cost Ratio = Variable Cost
Sales
VCR =
VC/u =
Variable Cost
CM
Sales =
Variable Cost Ratio or
CMR

Margin of Safety the difference between actual or planned sales volume and break even sales. It indicates the amount by which actual or planned sales may be reduced without incurring loss.

Margin of Safety = sales break even sales

Margin of Safety Ratio =

MOS

Actual or planned sales

Profit = Operating Income

Actual Sales

Profit before Tax (100%) = Profit after Tax

100%−Tax Rate

+

* Selling Price

RS(u) = FC + Desired Profit

CMU

RS(u) =

FC

RS(p) = FC+Desired Profit

CMR

RS(p) =

FC

Adj.

CMU

Adj. CMR

Ex. 5-6 Nancy Corporation Income Statement

Sales (20,000 units)

300,000

Less: Cost of Goods Sold

180,000

Gross Income

120,000

Less: Selling and Admin Expense

80,000

Operating Income Other Data:

40,000

1

75% of the selling and admin expense is

3 of the cost of goods sold is fixed

variable

Required:

a. Total Fixed Cost = P80,000

180,000 * 1

3 = 60,000

80,000 8 25% = 20,000

b. VC/u and VC Ratio = P9 and 60%

20,000

VCR = 15 = .6 or 60%

VC/u = 180,000

= 9

9

c. CMU and CMR = 6 and 40%

CMU = 15 9 = 6

6

CMR = 15 = .4 or 40%

d. BEP in Units & Pesos = 13,333.33 & P200,000

BEP/u = 80,000 = 13,333.33 BEP/p=

Check:

80,000

6

40%

.4 =200,000

Sales (13,333.33 * 15)

= 200,000

Less: (13,333.33 * 9)

= 120,000

Contribution Margin

= 80,000

Less: Fixed Cost

= 80,000

BEP

= 0

e. MOS in units & pesos = 6,666.67 & P100,000

MOS/u = 20,000 13,333.33 = 6,666.67 MOS/p = 300,000 200,000 = 100,000

f. MOSR & BESR = 33.33% and 66.67%

MOSR =

100,000

300,000 = 33.33%

BESR = 200,000

300,000 = 66.67%

g. Required Sales in units and in pesos if the company desires to earn operating income of P60,000 = 23,333.33 and 350,000

RS/u = 80,000+60,000

 

RS/p = 80,000+60,000

40% .4

= 350,000

6

Check:

Sales (23,333.33 * 15)

= 350,000

Less: (23,333.33 * 9)

= 210,000

Contribution Margin

= 140,000

Less: Fixed Cost

= 80,000

Profit

= 60,000

h. Required Sales in units and in pesos if the company wants to earn profit of 20% of sales = 26,666.67 and P400,000

SP 20% = 3

CMU (6-3) = 3 CMR 40%-20%

RS/u = 80,000

3

= 26,666.67 RS/p =

80,000 .2 = 400,000

20%

i. Assuming that the tax rate is 35%, the required sales in units and in pesos if the company projects income after tax of 65,000 = 30,000 and P450,000

80,000+( 65,000 )

65%

6

= 30,000 x 15 SP = 450,000

j. The profit ratio for the year ended = 13.33%

40,000

300,000 = 13.33 %

5-3 High-Low Method

 

Highest

Lowest

Monthly Cost

24,600

18,750

Machine Hours

32,000

12,500

Difference

5,850

19,500

5,850

Rate of Variability = 19,500 = 0.30 VC/MH

Highest TC = FC + VC FC = 24,600 (9,600 * 0.30) = 15,000 Lowest FC = 18,750 (12,500 * 0.30)= 15,000

5-4 High-Low Method Sales Volume

10,300

Shipping Expense

3,090

27,500

5,850

9,300

2,889

15,000

4,200

Highest

5,580

27,500

Lowest

2,889

9,300

Difference

2,961

18,200

2,961

Rate of Variability = 18,200 = 0.163 VC/MH

Highest

TC = FC + VC FC = 5,850 (27,500 * 0.163) = 1,367.5 Lowest FC = 2,889 (9,300 * 0.163) = 1,373

Highest

4,200

15,000

Lowest

2,889

9,300

Difference

1,311

5,700

1,311

Rate of Variability = 5,700 = 0.23 VC/MH

Highest FC = 4,200 (15,000 * 0.23) = 750 Lowest FC = 2,889 (9,300 * 0.23) = 750

5-5 High-Low Method and Break-Even Computation

 

Total Cost

Units

July

31,700

6,000

August

26,800

4,100

September

32,740

5,800

October

39,600

7,300

November

35,200

5,340

December

37,000

5,300

Highest

39,600

7,300

Lowest

26,800

4,100

Difference

12,800

3,200

Rate of Variability = 12,800 = 4 VC/MH

Highest FC = 39,600 (7,300 * 4) = 10,400 Lowest

FC = 26,800 (4,100 * 4) = 10,400

SP = 9(Given)

3,200

VC = 4

BEP/u = 10,400

5

= 2,080

FC (2,080 x 9) Less: VC (2,080 x 4)

= 18,720

= 8,320

CM

= 10,400

Less: FC

= 10,400

BEP

= 0

- Deth