Cost-Volume-Profit

Analysis

Prof. Jason R. Radam, CPA, DBA, CB, RCA, CAT

 Basic Principles

 Cost and expenses are segregated into fixed and

variable elements

 Profit = Sales – Cost and expenses

 Profit = Sales – Fixed costs – Variable costs
 Basic Principles
Basic assumptions within the relevant range:
 Linearity – The behavior of sales and costs are linear
 Behavior of sales, costs, and expenses:
 Sales – it changes directly in relation to the level of units sold
 Fixed costs (total) – is constant regardless to the change in
the level of units of production and sales
 Fixed costs (per unit) – changes inversely with the level of
production
 Variable cost (total) – change in direct proportion with the
level of production
 Variable cost (per unit) – is constant regardless to the change
in the level of units of production and sales
 Basic Principles
 Selling price – assumed to be constant
 Work in process (WIP) inventory – disregarded; there is
no WIP inventory
 Finished goods (FG) inventory – no change;
production = sales
 Product and sales mix:
 There is only one product, or
 If there are two or more products produced and sold, the
sales mix is assumed to be constant
 Marginal Income Statement
Condensed format Expanded format

Sales Px Sales P x
Less: Variable cost and expenses x Less: Variable cost of goods sold x
Contribution margin P x Manufacturing margin P x
Less: Fixed cost and expenses x Less: Variable expenses x
Income before income tax P x Contribution margin P x
Less: Fixed cost and expenses x
Income before income tax P x
 Basic Principles

 Variable production costs refer to direct materials,

direct labor, and variable overhead
 Variable expenses are those expenses incurred not
related to production; examples are delivery expenses,
salesmen’s commission, and packing supplies
 Fixed costs and expenses can be direct or indirect;
examples are rent of factory and office building, salaries
expense, and taxes and insurances
 Relevant formulas
Contribution margin (CM) = ?
CM = Sales – Variable costs
CM = Sales x CMR
CM Ratio (CMR) = ?
CMR = 100% - VC Ratio
CMR = UCM / USP
Unit CM (UCM) = ?
UCM = USP – UVC
UCM = FC / BEP (units)
UCM = CM / Quantity sold
Profit (EBIT) = ?
Profit = CM – Fixed costs
Profit = Sales x ROS
∆Profit = ∆CM - ↑ in FC
∆Profit = ∆CM + ↓ in FC
Break-even point (BEP) = ?
BEP (units) = FC / UCM
BEP (pesos) = FC / CMR
Comp. BEP (units) = FC / Ave.
UCM
Comp. BEP (pesos) = FC / Ave.
CMR
 Relevant formulas
At BEP:
 Profit (loss) = 0
 Sales = Total costs
 Contribution margin = Total
fixed costs
Fixed costs (FC) = ?
FC = CM – Profit
FC = BEP (units) x UCM
VC Ratio (VCR) = ?
VCR = VC / Sales
VCR = UVC / USP
VCR = 100% - CMR
VCR = ∆Costs / ∆Sales
Margin of Safety (MS) = ?
MS = Actual sales – Actual
breakeven sales
MS = Budgeted sales – Budgeted
breakeven sales
MS = Sales x MS Ratio (MSR)
 Relevant formulas
MSR = MS / Actual (budgeted)
sales
MSR = 1 – (BE Sales / Actual
sales)

Degree of operating leverage (DOL):

DOL = CM / EBIT
DOL = %∆ in EBIT / %∆ in Sales
 Exercise Problems
Matador Company produces a merchandise that has the following data:

Unit sales price P80 per unit

Unit variable costs P48 per unit
Total fixed costs P640,000 per year
Units sold during the current year 25,000 units

Required:
a. Unit contribution margin, contribution margin ratio, and variable cost ratio
b. Break-even point in units and in pesos
c. Margin of safety in units and in pesos, and margin of safety ratio
d. Net profit ratio (ROS)
e. The amount of profit using the margin of safety
f. If sales increase by P300,000, how much would you expect income to increase?
 Solution Guide

a.
Units Unit price Amount Rate
Sales 25,000 P80 P2,000,000 100%
Less: Variable costs 25,000 48 1,200,000 60%
Contribution margin 25,000 P32 P 800,000 40%
Less: Fixed costs 640,000
Income before income tax P 160,000

UCM = P32 ; CMR = 40% ; VCR = 60%

b. BEP (units) = FC / UCM = P640,000 / P32 = 20,000 units

BEP (pesos) = FC / CMR = P640,000 / 40% = P1,600,000
To prove: Contribution margin (P1,600,000 x 40%) P640,000
Less: Fixed costs 640,000
Profit 0
 Solution Guide

c. Amount Units Rate

Actual sales P2,000,000 25,000 100%
Less: Break-even sales 1,600,000 20,000 80%
Margin of safety P 400,000 5,000 20%

d. Net profit ratio (ROS) = P160,000 / P2,000,000

= 8%

e. Profit = MS x CMR = P400,000 x 40% = P160,000

f. Increase in CM (increase in profit) = increase in sales x CMR

= P300,000 x 40% = P120,000
 Exercise Problems
Emperador Corporation produces three products, namely, products L, B and M.
Multi-product sales mix are based on units. The following data are related to the
three products:
L B M
Unit sales price P 200 P 50 P 120
Unit variable costs 120 20 90
Sales mix 2 5 3

Total fixed costs = P800,000

Required:
a. Weighted average unit contribution margin (WAUCM)
b. Composite BEP in units and allocation of CBEP
c. Composite BEP in pesos
d. Sales per mix and composite BEP
e. The number of units to be sold if the company wants a profit of P400,000.
 Solution Guide
a.
UCM Sales mix ratio WAUCM
L P80 2/10 P16
B 30 5/10 15
M 30 3/10 9
P40

b. Composite BEP (units) = FC / WAUCM = P800,000 / P40

= 20,000 units

Allocation of Comp. BEP (units):

L = 20,000 x 2/10 = 4,000 units
B = 20,000 x 5/10 = 10, 000 units
M = 20,000 x 3/10 = 6,000 units
 Solution Guide
c. Composite BEP (pesos) = FC / WACMR = P800,000 / P 39.604 = P 2,020,000
WACMR = WAUCM / WAUSP = P40 / P101 = 39.604%

WAUSP = ?
L = P200 x 2/10 = P 40
B = 50 x 5/10 = 25
M = 120 x 3/10 = 36
WAUSP P101

d. Sales per mix = FC / Comp. UCM = P800,000 / P400 = 2,000 units

UCM Sales mix WAUCM

L P80 2 P160
B 30 5 150
M 30 3 90
P400
 Solution Guide

Composite BEP (units)

L = 2,000 x 2 = 4,000 units

B = 2,000 x 5 = 10,000 units
M = 2,000 x 3 = 6,000 units
Composite BEP (units) 20,000 units

e. Composite sales = FC + Target Profit / Ave. UCM

= (P800,000 + 400,000) / P40
= 30,000 units
Ω End Ω