…continuation

COST-VOLUME-PROFIT ANALYSIS
JOSEPH CHRISTIAN V. ORAA

MBA 509 MANAGEMENT ACCOUNTING

CVP ANALYSIS – BASIC PREMISE
Assuming fixed costs remain fix within the relevant
range. 

• HIGHER VC – LOWER CMR – HIGHER BES

• LOWER VC – HIGHER CMR – LOWER BES
 Consider the following information developed by
the accountant at Curly, Inc.:

Total Per Unit Percent

Sales (400 surfboards) Php200,000 Php500 100%
Less: variable expenses Php120,000 Php300 60%
Contribution margin Php80,000 Php200 40%
Less: fixed expenses Php80,000
Net income Php0
Target Net Profit
We can determine the number of surfboards
that Curly must sell to earn a profit of
P100,000 using the contribution- margin
approach.
Contribution-Margin Approach
We can determine the number of surfboards
that Curly must sell to earn a profit of
P100,000 using the contribution- margin
approach.

Fixed expenses + Target profit Units sold to earn

Unit contribution margin = the target profit
Contribution-Margin Approach
We can determine the number of surfboards
that Curly must sell to earn a profit of
P100,000 using the contribution- margin
approach.

Fixed expenses + Target profit Units sold to earn

Unit contribution margin = the target profit

P80,000 + P100,000
= 900 surfboards
P200
 Equation Approach
Sales revenue – Variable expenses – Fixed expenses = Profit

(P500 × X) – (P300 × X) – P80,000 = P100,000

(200X) = P180,000
X = 900 units
 3-8

Target Net Profit

and Income Taxes Example
We can determine the number of surfboards
that Curly must sell to earn a profit of
P70,000 using the contribution- margin
approach.
Fixed expenses + Target profit ÷ (1 – tax rate) Units sold to earn
Unit contribution margin = the target profit

P80,000 + [P70,000 ÷ (1 – 30%)] = 900 surfboards

P200
 3-9

Target Net Profit

and Income Taxes Example
Proof:
Revenues: 900× P500 P450,000
Variable costs: 900 × P300 270,000
Contribution margin P 180,000
Fixed costs 80,000
Operating income 100,000
Income taxes: P100,000 × 30% 30,000
Net income P 70,000
Applying CVP Analysis
Safety Margin

The difference between budgeted sales

revenue and break-even sales revenue.
The amount by which sales can drop before
losses begin to be incurred.
Safety Margin
Curly, Inc. has a break-even point of P200,000. If
actual sales are P250,000, the safety margin is
P50,000 or 100 surfboards.
Break-even Actual sales
sales 400 units 500 units
Sales PHP 200,000 PHP 250,000
Less: variable expenses PHP 120,000 PHP 150,000
Contribution margin PHP 80,000 PHP 100,000
Less: fixed expenses PHP 80,000 PHP 80,000
Net income PHP 0 PHP 20,000
Sensitivity Analysis
• Sensitivity analysis is the use of multiple what-if
scenarios to model a range of possible outcomes.

▫ Change in Fixed Cost

▫ Change in unit Contribution Margin
▫ Predicting Profit Given Expected Volume
 Changes in Fixed Costs
Curly is currently selling 500 surfboards per month.
The owner believes that an increase of P10,000 in
the monthly advertising budget, would increase bike
sales to 540 units.

Should we authorize the requested increase in the

advertising budget?
Changes in Fixed Costs

Current Sales Proposed Sales

(500 Boards) (540 Boards)
Sales PhP250,000 PhP270,000
Less: variable expenses PhP150,000 -
Contribution margin PhP100,000
Less: fixed expenses PhP80,000
Net income PhP20,000

540 units × P500 per unit = P270,000

Changes in Fixed Costs

Current Sales Proposed Sales

(500 Boards) (540 Boards)
Sales PhP250,000 PhP270,000
Less: variable expenses PhP150,000 PhP162,000
Contribution margin PhP100,000 PhP108,000
Less: fixed expenses PhP80,000 PhP90,000
Net income PhP20,000 PhP18,000

P80,000 + P10,000 advertising = P90,000

Changes in Fixed Costs

Current Sales Proposed Sales

(500 Boards) (540 Boards)
Sales PhP250,000 PhP270,000
Less: variable expenses PhP150,000 PhP162,000
Contribution margin PhP100,000 PhP108,000
Less: fixed expenses PhP80,000 PhP90,000
Net income PhP20,000 PhP18,000

Sales will increase by

P20,000, but net income
will decrease by P2,000.
Changes in Unit Contribution Margin
Because of increases in cost of raw materials,
Curly’s variable cost per unit has increased
from P300 to P310 per surfboard. With no
change in selling price per unit, what will be
the new break-even point?
Changes in Unit Contribution Margin
Because of increases in cost of raw materials,
Curly’s variable cost per unit has increased
from P300 to P310 per surfboard. With no
change in selling price per unit, what will be
the new break-even point?
(P500 × X) – (P310 × X) – P80,000 = P0

X = 422 units (rounded up)

 Predicting Profit Given Expected
Volume

Given:
{
Fixed expenses
Unit contribution margin
Target net profit } Find: {required sales volume}

Given:
{ Fixed expenses
Unit contribution margin
Expected sales volume } Find: {expected profit}
Predicting Profit Given Expected
Volume
In the coming year, Curly’s owner expects to sell 525
surfboards. The unit contribution margin is
expected to be P190, and fixed costs are expected
to increase to P90,000.

How much profit can we expect to earn?

Predicting Profit Given Expected
Volume
In the coming year, Curly’s owner expects to sell 525
surfboards. The unit contribution margin is
expected to be P190, and fixed costs are expected
to increase to P90,000.
Total contribution - Fixed cost = Profit

(P190 × 525) – P90,000 = X

X = P99,750 – P90,000
X = P9,750 profit
CVP Analysis with Multiple Products
For a company with more than one product, sales
mix is the relative combination in which a
company’s products are sold.

Let’s assume Curly sells surfboards and sailboards

and see how we deal with break-even analysis.
CVP Analysis with Multiple Products
Curly provides us with the following information:
Unit Unit Number
Selling Variable Contribution of
Description Price Cost Margin Boards
Surfboards Php500 Php300 Php200 500
Sailboards Php1,000 Php450 Php550 300
Total sold 800

Number % of
Description of Boards Total
Surfboards 500 62.5% (500 ÷ 800)
Sailboards 300 37.5% (300 ÷ 800)
Total sold 800 100.0%
CVP Analysis with Multiple Products
Weighted-average unit contribution margin
Contribution Weighted
Description Margin % of Total Contribution
Surfboards Php200 62.5% Php125
Sailboards Php550 37.5% Php206
Weighted-average contribution margin Php331

P200 × 62.5%
CVP Analysis with Multiple Products
Break-even point
Break-even Fixed expenses
point = Weighted-average unit contribution margin

Break-even P170,000
point = P331.25

Break-even
= 514 combined unit sales (rounded up)
point
CVP Analysis with Multiple Products
Break-even point
Break-even
= 514 combined unit sales
point

Breakeven % of Individual
Description Sales Total Sales
Surfboards 514 62.5% 321
Sailboards 514 37.5% 193
Total units 514
Effects of Sales Mix on Income
Pants Shop Example
Management expects to sell 2 shirts at P20 each for
every pair of pants it sells.
This will not require any additional fixed costs.
Effects of Sales Mix on Income
Contribution margin per shirt: P20 – P9 = P11
What is the contribution margin of the mix?
P28 + (2 × P11) = P28 + P22 = P50
Effects of Sales Mix on Income
P84,000 fixed costs ÷ P50 = 1,680 packages
1,680 × 2 = 3,360 shirts
1,680 × 1 = 1,680 pairs of pants
Total units = 5,040
Effects of Sales Mix on Income
What is the breakeven in peso?
3,360 shirts × P20 = P 67,200
1,680 pairs of pants × P70 = 117,600
P184,800
Effects of Sales Mix on Income
What is the weighted-average budgeted
contribution margin?
Pants: 1 × P28 + Shirts: 2 × P11
= P50 ÷ 3 = P16.667
Effects of Sales Mix on Income
The breakeven point for the two products is:
P84,000 ÷ P16.667 = 5,040 units
5,040 × 1/3 = 1,680 pairs of pants
5,040 × 2/3 = 3,360 shirts
Effects of Sales Mix on Income
Sales mix can be stated in sales peso:
Pants Shirts
Sales price P70 P40
Variable costs 42 18
Contribution margin P28 P22
Contribution margin ratio 40% 55%
 3 - 34

Effects of Sales Mix on Income

Assume the sales mix in peso
is 63.6% pants and 36.4% shirts.
Weighted contribution would be:
40% × 63.6% = 25.44% pants
55% × 36.4% = 20.02% shirts
45.46%
 3 - 35

Effects of Sales Mix on Income

Breakeven sales peso is P84,000
÷ 45.46% = P184,778 (rounding).
P184,778 × 63.6% = P117,519 pants sales
P184,778 × 36.4% = P 67,259 shirt sales
Cost Structure and Operating Leverage
The cost structure of an organization is the relative
proportion of its fixed and variable costs.
Operating leverage is . . .
the extent to which an organization uses fixed costs
in its cost structure.
greatest in companies that have a high proportion
of fixed costs in relation to variable costs.
Measuring Operating Leverage
Operating leverage Contribution margin
factor = Net income

Actual sales
500 Board
Sales Php250,000
Less: variable expenses Php150,000
Contribution margin Php100,000
Less: fixed expenses Php80,000
Net income Php20,000
Measuring Operating Leverage
Operating leverage Contribution margin
factor = Net income

Actual sales
500 Board
Sales Php250,000
Less: variable expenses Php150,000
Contribution margin Php100,000
Less: fixed expenses Php80,000
Net income Php20,000

P100,000
= 5
P20,000
Measuring Operating Leverage
A measure of how a percentage change in sales
will affect profits.

If Curly increases its sales by 10%, what will

be the percentage increase in net income?
Measuring Operating Leverage
A measure of how a percentage change in sales
will affect profits.

Percent
Percent increase
increase in
in sales
sales 10%
10%
Operating
Operating leverage
leverage factor
factor ×× 55
Percent
Percent increase
increase in
in profits
profits 50%
50%
CVP Analysis with Spreadsheets
Using Microsoft Excel to perform CVP analysis.

A spreadsheet program is ideally suited to performing CPV routinely.

1. Choose “Tools: Goal Seek…” from the U-Develop
menu bar. Price P0.60
Variable cost P0.36
2. In the “Set cell” edit field, enter the cell Fixed cost P1,500
address for the target profit calculation. Profit (P300)
3. In the “To value” edit field, enter the Volume 5,000

target profit. U-Develop

4. In the “By changing cell” edit field, enter Price P0.60
Variable cost P0.36
the cell address of the volume variable.
Fixed cost P1,500
5. Click “OK” and the program will find the Profit P0.00
break-even volume. Volume 6,250
USES OF CVP ANALYIS
• PLANNING

• CONTROL

• ANALYIS
Accurate and reliable data to generate information
for better decision