COST-VOLUME-PROFIT (CVP) ANALYSIS
CVP Analysis is the systematic study or examination of the relationship among cost, volume ( cost driver) impact
variable costs and fixed costs and how changes these costs affects profit. Basically, CVP Analysis focuses on how
changes in cost driver impact variable costs and fixed costs and how changes these costs affect profit
Basic or Inherent Assumptions of CVP Analysis
The following are the several assumptions that commonly underlie CVP analysis;
1. All costs are categorized as variable or fixed.
2. COST and REVENUE relationships are PREDICTABLE and LINEAR over a relevant range of activity
3. Total variable costs change directly with cost driver, but variable cost per unit is constant over a relevant
range of activity.
4. Total fixed costs are constant but fixed cost per unit changes inversely with cost driver over a relevant
range of activity
5. Selling prices do not change as sales volume changes
6. Inventory levels are constant
7. Technology as well as productive efficiency is CONSTANT
8. For multiple products, SALES MIX is CONSTANT
9. Time value of money is ignored
Managers use CVP for planning allows them to concentrate on the relationships between revenues, costs, volume,
changes, taxes, and profits.
Factors Affecting Profit
Cost-Volume- Profit Analysis- a useful management tool that helps managers in panning for profit by way of
systematic analysis of the interrelationships among costs, volume and profit, such that:
If there is an increase in: Then profit will
1. Selling Price Increase
2. Unit variable cost Decrease
3. Fixed cost Decrease
4. Unit Sales ( volume) Increase
Solution Guide in Answering the CVP Analysis Questions
Per Unit Per Total Percentage
Sales XX XX 100%
Variable Cost (XX) (XX) (XX)
Contribution XX XX XX
Margin
Fixed Cost (XX) (XX)
Income before tax XX XX
Tax Expense (XX)
Net Income XX
Break-Even Point (BEP) – a level of activity, units(break-even volume) or in pesos(break-even sales), at which total
revenues equal total costs. At the break-even point, there is neither a profit nor a loss. The computations for either
BEP in units or BEP in Php sales are:
Required Selling Price, Unit and Peso Sales to Achieve A Target Profit
Margin of Safety (MoS)- It is the difference between actual or budgeted sales and break-even sales. It indicates
the maximum amount by which sales could decline without incurring a loss.
Margin of safety= Sales* - Breakeven Sales
Margin of Safety Ratio Margin of Safety
Sales
*The sales indicated therein may either be actual or budgeted
Degree of Operating Leverage (DOL)- measures how a percentage change in sales will affect company profits. It
indicates how sensitive the company is to sales volume increases and decreases. It is also known as operating
leverage factor.
Computation:
DOL= Contribution Margin/ Profit before Tax
Use:
Percentage change in sales X DOL = Percentage change in profit before tax
Sensitivity Analysis
Indifference point- the level of volume at which two alternatives being analyzed would yield equal amount of total
costs or profits. It is at this point where the decision maker would be indifferent as to what alternative to take.
Use of Sales Mix in Multi-Product Companies
Sales Mix- the relative combination of quantities of sales of various products that make up the total sales of a
company. It is also used to compute for the breakeven point in case there is more than one unit that the company
is producing and subsequently selling. The sales mix of each unit must be used to determine the Weighted Average
Contribution margin per unit and the Weighted Average Contribution Margin ratio.
Let’s Try:
KOYAWEL COMPANY has return on sales of 20%, income of P50,000, selling price of P10, and a contribution margin
of 40%
Requirements:
1. What are sales in total peso amount?
2. What is the total fixed cost?
3. What are sales in units (quantity sold)?
4. What is the variable cost per unit?
Kendeng Kendeng Co. plans to sell 50,000 units in the upcoming year 2025. Based on initial estimate, the selling
price of each unit is P50.00 and the variable cost is P20.00. the fixed cost of the company is P300,000
Required: Answer the following:
a. Prepare the contribution margin income statement
b. Compute for the contribution margin per unit and break even points in units
c. Compute for the contribution margin ratio and break even point in pesos
d. How many and how much must be sold to earn a NIBT of P300,000?
e. How many and how much must be sold to earn a target NIAT of P420,000 (30% of tax)
f. How many and how much must be sold to earn a target NIBT of 8% of sales?
g. How many and how much must be sold to e arn a target NIBT of P4.50 per unit
h. What is the margin of safety ( in units) and (in pesos)? What is the MOS Ratio?
i. Degree of Operating Leverage
IKAW NA NGA Corp. produces and sells a single product. The product’s variable cost per unit is P12 while the
corporation’s total fixed costs is P120,000 per month. The company expected to sell 30,000 units per month and
planned its monthly results as follows:
Sales P600,000
Variable Cost (360,000)
Contribution Margin 240,000
Fixed Cost (120,000)
Income before Tax 120,000
Tax(30%) (36,000)
Net Income P84,000
Requirements: Based on the preceding information, answer the following questions independently:
a. What is the selling price did the company establish? What is the contribution margin per unit?
b. What is the break-even point in units and in total peso sales?
c. If the company wants a P160,000 before-tax profit, how many units must it sell? Wgat are the required
sales to earn that target profit?
d. If the company wants a P105,000 after tax profit, how many units must it sell? What are the required
sales to earn that target profit?
e. If the company wants a 10.50% after tax return on sales, what level of sales, in pesos, does it need? How
many units must it sell to earn the target profit percentage?
f. If the company wants a 10.50% after-tax return on sales, what level of sales in pesos, does it need? How
many units must it sell to earn the target profit percentage?
g. If the company wants an after-tax profit of P126,000 on its expected sales volume of 30,000 units, what
price must it charge
h. If the company wants a before-tax return on sales of 25% on its expected sales volume of 30,000 units,
what price must it charge?
DOOBIDAPDAP Corp. developed the following information for the product it sells:
Sales Price P100 per unit
Variable cost of good sold P46 per unit
Fixed cost of good sold P400,000
Variable selling expense 10% of sales price
Variable Administrative Expense P4 per unit
Fixed Selling Expense P200,000
Fixed Administrative Expense P150,000
For the current year ended, DOOBIDAPDAP Corp. produced and sold 50,000 units of product.
REQUIREMENTS
a. Prepare a CVP income statement for the current year.
b. What was the company’s break-even point in units and break even sales in current year?
c. What was the company’s margin of safety in units and peso amount in the current year?
d. What is the degree of operating leverage?
e. If the company can increase sales in units by 30%, what percentage increase will it experience in income?
CVP Analysis (Indifference point): UNO CUTIIIE Company, a lantern manufacturer, had the following results of
operation for the year ended December 31, 2021:
Sales (50,000 lanterns) P550,000
Variable Cost 400,000
Contribution Margin 150,000
Fixed Costs 75,000
Net Income 75,000
Currently, management is contemplating on whether it should install a new automated equipment which would
cost P150,000 with estimated useful life of 5 years. The acquisition of the equipment would reduce variable cost
per unit by P3.
Required:
a. Prepare a Contribution Margin income statement assuming management pushed through with the
purchase of the new equipment ( assume same levels of sales)
b. At what point would management be indifferent between purchasing and not purchasing the equipment?
Prepare a contribution income margin statement for each alternative
CVP Analysis ( Sales Mix): AMACANASIR Co. manufactures and sells three products: Magneto, Wolverine, and
Capcorn. Annual Fixed Costs are P6,670,000, and data about the three product follow.
Magneto Wolverine Capcorn
Sales in units 40,000 100,000 60,000
Selling Price P150 P200 P100
Variable Cost 45 120 81
Required:
a. Prepare the income statement of AMACANASIR Co.
b. Determine the sales mix in units and the sales mix in pesos
c. Compute the weighted contribution margin per unit and breakeven points in units
d. Compute the weighted contribution margin ratio and breakeven point in pesos
e. Assuming the company wants to earn a net income of P8,000,000, how many units must the company
sell?
