COST-VOLUME-PROFIT

(CVP) ANALYSIS
 OUTLINE
Cost Behavior Analysis
Variable Costs
Fixed Costs
Mixed Costs
Relevant Range
Cost-Volume-Profit Analysis
Basic Components
CVP Income Statement
Break-even Analysis
Target Net Income
Margin of Safety
Variable Costs
- vary in total directly and proportionately with the
changes in activity level. It remains the same
per unit at every level of activity.
Total Long Distance
Telephone Bill

Minutes Talked
Fixed Costs
- remain the same in total regardless of changes
in the activity. Fixed cost per unit vary inversely
with the activity; as the volume increases, unit
fixed cost declines and vice versa.
Monthly Basic
Telephone Bill

Number of Local Calls

 Mixed Costs
- contain both variable and fixed components. It changes
in total but not proportionately with the change in the
activity level.
Y
Total Utility Cost

Variable
Cost per KW

X Fixed Monthly
Activity (Kilowatt Hours)
Utility Charge
 High-Low Method

Month Maintenance Maintenance

Hours Cost
The variable cost per
Jan 625 P7,950 hour of maintenance
Feb 500 7,400 is equal to the change
Mar 700 8,275 in cost divided by the
Apr 550 7,625 change in hours.
May 775 9,100
June 800 9,800
High 800 9,800 P2,400
= P8.00/hr
Low 500 7,400 300
Change 300 P2,400
High-Low Method
Month Maintenance Hours Maintenance
Cost
High Level 800 P9,800
Low Level 500 7,400
Change 300 P2,400

Total Fixed Cost = Total Cost – Total Variable Cost

Total Fixed Cost = P9,800 – (8/hour × 800 hours)
Total Fixed Cost = P9,800 – P6,400
Total Fixed Cost = P3,400
Total Fixed Cost = P7,400 – (8/hour × 500
hours)
Total Fixed Cost = P7,400 – P4,000
Total Fixed Cost =P 3,400
 Regression Analysis

Y Total maintenance cost = P11,000

20
* ** *
Maintenance Cost
(in thousands)

* *
**
10 * *
Intercept = Fixed cost: P10,000

0 X
0 1 2 3 4
Patients (in thousands)
Patients = 800
Regression Analysis

Total maintenance cost for 800 patients P11,000

Less: Fixed Cost 10,000
Estimated total variable cost per patient 1,000

Variable cost per unit = P1,000 = P1.25/patient

800
Variable Costs and Relevant Range

Economist’s A straight line

closely
Curvilinear Cost approximates a
Function curvilinear
variable cost line
Relevant within the
relevant range.
Range
Total Cost

Accountant’s Straight-Line
Approximation (constant unit
variable cost)

Activity
Fixed Costs and Relevant Range

90
Rent Cost (in Thousands)

Total cost doesn’t

Relevant change for a wide
60 range of activity, and
Range then jumps to a new
higher cost for the
next higher range of
30 activity.

0
0 500 1,000 1,500
Rented Area (square meters)
Cost Behavior Patterns
Summary of Variable and Fixed Cost Behavior
Cost In Total
Variable Total variable cost is
proportional to the activity
level within the relevant range.
Total fixed cost remains the
same even when the activity
Fixed level changes within the
relevant range.
Per Unit
Variable cost per unit remains
the same over wide ranges
of activity.
Fixed cost per unit goes
down as activity level goes up.
 CVP Analysis
Impact/effect of changes in costs and
volume on company’s profits
 Sales volume required to break-even
 Sales volume required to earn a desired profit
 Expected profit on a given sales volume
 Effect on profit of change in selling price,
variable costs and fixed costs
 Effect of profit of change in sales/product mix
 CVP Analysis
Assumptions:
 Selling price per unit is constant
 Variable costs per unit is constant
 Total fixed costs is constant
 Everything produced is sold
 Costs are only affected because activity changes
 Sales mix remains constant, in case of multi-
product
 CVP Income Statement
ABC Company
CVP Income Statement
For the month ended May 31, 2012
Total Per Unit % Sales
Sales (500 calculators @ P500) P250,000 P500 100%
Variable Costs 150,000 300 60%
Contribution Margin 100,000 200 40%
Fixed Costs 80,000 160
Net Income P20,000 P40

Contribution Margin = P100,000

Contribution Margin per Unit = P200
Contribution Margin Ratio = 40%
 Break-even Analysis
Break-even point (BEP)
• 0 Net Income
• Sales - Variable Costs = Fixed Costs
• Contribution Margin = Fixed Costs

BEP Approaches
• Equation Method
• Contribution Margin Method
• Graphical Method
 Equation Method

Break-even point:
Sales = Variable Costs + Fixed Costs + Income
500Q = 300Q + P80,000 + 0
200Q = P80,000
Q = P80,000 / 200
BEP Q = 400 units
BEP sales = 400 x P500 or P200,000
 Contribution Margin Method
BEP = Fixed Costs
Contribution Margin per unit
= P80,000 / 200
= 400 units
BEP = Fixed Costs
Contribution Margin Ratio
= P80,000 / 40%
= P200,000
Graphical Method or CVP Graph
450,000
Break-even point
400,000
(400 units or P200,000 in sales)
350,000

300,000

250,000

200,000

150,000

100,000

50,000

-
- 100 200 300 400 500 600 700 800

Units
Break-even for Multiple Products
Calculators Printers Total
Sales P250,000 100% P300,000 100% P550,000 100.0%
Variable Costs 150,000 60% 135,000 45% 285,000 51.8%
Cont. Margin 100,000 40% 165,000 55% 265,000 48.2%
Fixed Cost 170,000
Net Income P95,000
Sales Mix P250,000 45% P300,000 55% 100.0%

P265,000 = 48.2%
550,000

Break-even Sales = Fixed Costs

CM Ratio
= P170,000 / 48.2%
= P352,697
Target Net Income
1. Equation Method
2. Contribution Margin Method
3. Graphical Method
Equation Method
Sales = Variable costs + Fixed costs + Target Income

P500Q = P300Q + P80,000 + P100,000

P200Q = P180,000
Q = P180,000 / 200
Q = 900 units
The Contribution Margin Method

Unit sales to attain Fixed costs + Target profit

=
the target profit CM per unit

P80,000 + P100,000
= 900 units
P200/unit
Margin of Safety
BEP Sales Actual Sales
400 units 500 units
Sales (@P500) P200,000 P250,000
Variable Costs (@P300) 120,000 150,000
Contribution Margin 80,000 100,000
Fixed Costs 80,000 80,000
Net Income P0 P20,000
Margin of safety = Actual sales – BEP sales
= P250,000 – P200,000
= P50,000

Margin of safety ratio = P50,000 / 250,000

= 20%