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Cost Volume Profit Analysis Review Notes

The document provides an overview of cost-volume-profit (CVP) analysis concepts and formulas. It defines key CVP terms like contribution margin, breakeven point, margin of safety, and explains how to calculate them. It also discusses how to use CVP to determine sales levels required to achieve target profit amounts. The examples provided illustrate how to apply the CVP formulas and concepts to analyze multi-product businesses.

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Alexis Kaye Dayag
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381 views10 pages

Cost Volume Profit Analysis Review Notes

The document provides an overview of cost-volume-profit (CVP) analysis concepts and formulas. It defines key CVP terms like contribution margin, breakeven point, margin of safety, and explains how to calculate them. It also discusses how to use CVP to determine sales levels required to achieve target profit amounts. The examples provided illustrate how to apply the CVP formulas and concepts to analyze multi-product businesses.

Uploaded by

Alexis Kaye Dayag
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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COST VOLUME PROFIT ANALYSIS REVIEW NOTES

Relevant range and its assumptions


1. Relevant range is the width of activities where the relationships
of costs and revenues are predictable because it is linear.
2. There are two related perspectives in predicting profit, namely
based on:
2.1. Basic assumptions perspective
2.2 Sensitivity analysis perspective
3.
Profit Variables Basic assumptions CVP Sensitivity analysis
Unit sales price ( USP ) Constant Changes
Variable cost rate ( VCR ) Constant Changes
Total fixed costs ( FC ) Constant Changes
Sales mix Constant Changes
Quantity sold Changes Changes
Work in process None None
inventory
Production and sales Equal Equal

4.
Sensitivity analysis involves predicting the outcome of a situation
after considering the effects of the changes in variables affecting
the outcome of the said situation. For example, what would
happen to profit if unit sales price increases by 12%. The change
in the sales price is the sensitivity, and its effect on profit involves
the sensitivity analysis.

Relevant formulas
1. Contribution Margin ( CM )
CM = Sales – Variable costs
CM = Sales x CMR
CM =Fixed costs + Profit
CM = Quantity sold x UCM

2. Contribution Margin Ratio ( CMR )


CMR =100% - VCR
CMR =CM/Sales
CMR =UCM/USP
CMR =NPR/MSR
CMR = IBIT/ Sales ( if Fixed costs remains the same )

where : IBIT is Income before Income Tax

3. Unit Contribution Margin ( UCM )


UCM =USP - UVC
UCM =FC / BEP ( units )
UCM =CM / Quantity sold
4.Profit
Profit =CM - FC
Profit =Sales x MSR x CMR
Profit =Sales x NPR
Profit = CM - FC
Profit = CM + FC

4. Breakeven Points ( BEP )


BEP ( units ) = FC/UCM
BEP ( pesos ) = FC/CMR
Composite BEP ( units ) = FC / Average UCM
Composite BEP ( pesos ) = FC / Average CMR
BEP ( units ) = Sales ( units ) x ( 1 – MSR )
BEP ( pesos ) = Sales ( pesos ) x ( 1 – MSR )

5. Fixed Costs ( FC )
FC = CM at BEP
FC = CM – Profit
FC = BEP ( units ) x UCM
FC = BEP ( pesos ) x CMR

6. Variable Cost Ratio ( VCR )


VCR = VC / Sales
VCR = UVC / USP
VCR = 100% - CMR
VCR = Costs / Sales
VCR = Costs – in FC / Sales
VCR = Costs + in FC / Sales

7. Margin of Safety ( MS )
MS ( units ) = Budgeted Sales ( units ) – Breakeven Sales
( units )
MS ( pesos ) = Budgeted Sales ( pesos ) – Breakeven Sales
( pesos )
MS ( units ) = Sales ( units )x MSR
MS ( pesos ) = Sales ( pesos )x MSR

8. Margin of Safety Ratio ( MSR )


MSR = MS ( units ) / Sales ( units )
MSR = MS ( pesos ) / Sales ( pesos )
MSR = NPR / CMR
MSR = [ 1 – ( Breakeven Sales ( units ) / Budgeted Sales ( units
)]
MSR = [ 1 – ( Breakeven Sales ( pesos ) / Budgeted Sales
( pesos ) ]
MSR = 1/ DOL
9. Profit Ratio
PR = Unit Profit Margin / USP
PR = Profit / Sales
PR = MSR x CMR

10.Degree of Operating Leverage ( DOL )


DOL = CM / IBIT
DOL = 1 / MSR
DOL = % in IBIT / % in Sales

EXPRESSION OF PROFIT
1. PROFIT BEFORE TAX
Sales ( units ) = ( FC + IBIT )
UCM
Sales ( pesos ) = ( FC + IBIT )
CMR IBIT is the same with PBIT ( Profit Before tax )
2. PROFIT AFTER TAX
Sales ( units ) = FC +( Profit After Tax / 1 – Tax Rate )
UCM
Sales ( pesos ) = FC +( Profit After Tax / 1 – Tax Rate )
CMR

3. PROFIT % BEFORE TAX


Sales ( pesos ) = FC / ( CMR – Profit Rate Before Tax)

4. PROFIT PER UNIT BEFORE TAX


Sales ( units ) = FC / ( UCM – Profit Per Unit )

5. PROFIT % AFTER TAX


Sales ( pesos ) = FC / [ CMR – ( Profit Rate Before Tax/ After Tax Rate ) ]

6. PROFIT % BASED ON CMR, BEFORE TAX


Sales ( pesos ) = FC / ( CMR – Profit Rate )

7. PROFIT % BASED ON CMR, AFTER TAX


Sales ( pesos ) = FC / [ CMR – ( Profit Rate Before Tax/ After Tax Rate ) ]
NOTE FOR NUMBERS 6 AND 7..
The PROFIT RATE BEFORE AND AFTER TAX IS BASED ON THE CONTRIBUTION MARGIN RATIO
6. EX. Profit is 20% of CMR, before tax and the CMR is 30%.
Profit Rate = 20% x 30% ( CMR )
Profit Rate = 6%
7. EX. Profit is 20% of CMR, after tax of 30% and the CMR is 40%.
Profit Rate = ( 20% / 70% ( After Tax rate ) ) x 40% ( CMR )
Profit Rate = 28.57% x 40 %
Profit Rate = 11.43%

COST VOLUME PROFIT ANALYSIS REVIEW PROBLEMS


1. BASIC CVP RELATIONSHIPS ( Activity )
ABC Inc. produces a product that has the following data.

Unit sales price P80.00 per unit


Unit variable costs P 48.00 per unit
Total fixed costs P640,000 per annum
Units sold for the current year 25,000 units

Required:
a. UCM , CMR, and VCR.
b. BEP ( units ) and BEP ( pesos ).
c. MS ( units ), MS ( pesos ), and MSR.
d. PR
e. The amount of profit using the MS.

2.SALES WITH PROFIT ( Activity )


XYZ Inc. sells a product with the following related data.

Unit contribution margin P40.00 per unit


Variable cost ratio 75%
Total fixed costs P200,000

Required: What would be the sales in pesos and in units if:


a. Profit before tax is P300,000.
b. Profit after tax of 40% is P300,000.
c. Profit rate before tax is 20% of sales.
d. Unit profit margin before tax is P8.00.
e. Profit is 20% of sales, after tax of 40%.
f. Profit rate before tax is 10% of CMR.
g. Profit is 20% of CMR, after tax of 40%.

3.MULTI PRODUCT SALES MIX BASED IN UNITS


EFG Inc. produces three products, A, B, and C, with the
following related data.

A B C
Unit sales price P200 P50 P120
Unit variable costs P120 P20 P90
Sales mix in units 2 5 3
Total fixed costs P800,000

Required:
a. Weighted average unit contribution margin.
b. Composite BEP in units
c. The number of units to be sold if the firm wants a profit of
P40,000.

4.MULTI PRODUCT SALES MIX BASED IN PESOS


EFG Inc. produces three products, A, B, and C, with the
following related data.
A B C
Sales P200 P50 P120
CMR 50% 40% 30%
Total fixed costs P1,480,000
Tax rate 40%

Required:
a. Weighted average contribution margin ratio.
b. Composite BEP in pesos.
c. Composite sales in pesos if the firm wants a profit of
P3,000,000 net of tax.

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