3 - Cost Volume Profit & Break-Even Point Analysis

10/04/2022
MANAGEMENT ADVISORY SERVICES

(BAINTE4X)
Cost-Volume-Profit & Break-even Point Analysis.
Prepared by:
Ms. Grace A. Padiernos, CPA, CMA
PROF. GRACE A. PADIERNOS, CPA, CMA
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Cost Volume Profit Analysis
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• A tool used for decision-making that utilizes

the relationship among:
Cost-Volume-Profit Volume of sales
Sale price
(CVP) Variable costs
Analysis Fixed costs
Profit
Mix of sales
• Analyzes the effect of changes in product

cost, selling price, and volume or number of
outputs, and its effect to the overall
Cost-Volume-Profit operating profit of the firm.
(CVP) • Enable the firm to determine how many
units of a new product must be sold to
Analysis break-even or how many units of a product
must be sold to achieve a target or planned
profit.
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Contribution Margin (CM) Income Statement

Sales P xxx
Less: Variable costs (xxx)
Contribution Margin xxx
CVP uses the Less: Fixed Costs (xxx)
Contribution Operating Income xxx
Margin (CM)
Contribution Margin (CM) Income Statement with tax
Sales P xxx
Approach: Less: Variable costs (xxx)

Less: Fixed Costs (xxx)
Operating Income xxx
Less: Income Tax (xxx)
Net Income After Tax xxx
• Is used only for internal decision making

(Not Philippine Financial Reporting
Standards Compliant)
Contribution • Segregates costs according to their
Margin Income behavior instead of whether they are
product costs or period costs.
Statement • Helpful in aiding sensitivity analyses.
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Problem 1
Given the following projected CM income

statement for the coming year.
Sales (100 units) P 10,000 a. Determining the contribution margin, unit
contribution margin, and the contribution margin
Variable Cost (3,000) ratio.
b. How much will operating income be if only 80
Contribution margin P 7,000 units will be sold instead of 100.
c. How much operating income increase if 150
Fixed Costs (4,000) units will be sold instead of 100.
d. How much operating income be if variable cost
Operating income 3,000 per unit is P32.
e. How many units must be sold to earn the same
profit is sales price is only P 85.
11
Problem 1
a. Determining the contribution margin, unit

contribution margin, and the contribution
Sales (100 units) P 10,000
margin ratio.
Variable Cost (3,000)
Contribution margin P 7,000 CM = ?
Fixed Costs (4,000) UCM = ?
Operating income 3,000 CMR = ?
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Problem 1

margin ratio.
Contribution margin P 7,000 CM = ?

Fixed Costs (4,000)
Operating income 3,000
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Problem 1

margin ratio.
Contribution margin P 7,000 CM = P7,000
Fixed Costs (4,000)
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Problem 1

margin ratio.
Contribution margin P 7,000 UCM = ?

Fixed Costs (4,000)
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Problem 1

margin ratio.
Contribution margin P 7,000 UCM = CM/units
Fixed Costs (4,000) UCM = P7,000/100 units
Operating income 3,000 UCM = P70 per unit
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Problem 1

margin ratio.
Contribution margin P 7,000 CMR = ?

Fixed Costs (4,000)
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Problem 1

margin ratio.
Contribution margin P 7,000 CMR = CM/Sales
Fixed Costs (4,000) CMR = P7,000/P10,000
Operating income 3,000 CMR = 70%
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Problem 1
b. How much will operating income be if only

80 units will be sold instead of 100.
Sales per unit = ?
Contribution margin P 7,000
VC per unit = ?
Fixed Costs (4,000)
19
Problem 1


Sales per unit = P10,000/100 units
Sales per unit = P100 per unit
Fixed Costs (4,000)
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Problem 1

VC per unit = P3,000/100 units
VC per unit = P30 per unit
Fixed Costs (4,000)
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Problem 1

Variable Cost (3,000) 80 units will be sold instead of 100.
Contribution margin P 7,000 Contribution Margin (CM) Income Statement
Fixed Costs (4,000) Sales P xxx
Operating income 3,000 Less: Variable costs (xxx)

Sales per unit = P100
VC per unit = P30
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Problem 1

Fixed Costs (4,000) Sales (P100 x 80 units) P 8,000

VC per unit = P30
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Problem 1

Operating income 3,000 Less: Variable costs (P30 x 80 units) (2,400)

VC per unit = P30
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Problem 1


Contribution Margin 5,600
VC per unit = P30
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Problem 1


Less: Fixed Costs (4,000)
VC per unit = P30
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Problem 1


VC per unit = P30
Operating Income 1,600
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Problem 1

Variable Cost (3,000) units will be sold instead of 100.

VC per unit = P30
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Problem 1


VC per unit = P30
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Problem 1

VC per unit = P30
30
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Problem 1

VC per unit = P30
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Problem 1

VC per unit = P30
32
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Problem 1

VC per unit = P30
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Problem 1

VC per unit = P30
Increase in OI = 6,500 – 3,000 = 3,500
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Problem 1

d. How much operating income be if variable
Variable Cost (3,000) cost per unit is P32.
Fixed Costs (4,000)

35
Problem 1


36
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Problem 1


37
Problem 1

38
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Problem 1

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Problem 1

40
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Problem 1

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Problem 1

e. How many units must be sold to earn the
Variable Cost (3,000) same profit if sales price is only P 85.
Fixed Costs (4,000)

42
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Problem 1

Fixed Costs (4,000) Sales per unit = P85 per unit

Operating income 3,000 VC per unit = ?
UCM = ?
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Problem 1

Fixed Costs (4,000) Sales per unit = P85 per unit

Operating income 3,000 VC per unit = P30 per unit (P3,000 / 100 units)
UCM = ?
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Problem 1
Sales (100 units) P 10,000 e. How many units must be sold to earn the same
profit is sales price if only P 85.
Contribution margin P 7,000 Sales per unit = P85 per unit
Fixed Costs (4,000) VC per unit = P30 per unit (P3,000 / 100 units)
UCM = P55 per unit (P85 – 30)
Units = CM/UCM
Units = P7,000 / P55
Units = 127.27 units
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1. Changes in the levels of revenue and cost

resulted from changes in the number of
output sold only.
2. Cost of the company can be separated
between fixed and variable.
3. The behavior of costs (fixed and variable)
CVP are linear and within the relevant range.
Assumptions 4. The selling price, variable cost per unit,
and the total fixed costs are identifiable
and constant.
5. If more than one product (or services) are
available, the mix of products (or services)
sold do not change.
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CVP Graph
Y-axis
Peso Amount
Break-even
X-axis
Units
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• The number of output wherein the total

contribution margin is equal to total fixed
costs. Thus, operating profits are equal to
zero.
Break-even • The level of sales where total revenues
equals total costs. At this point, there is
point (BEP) no profit or loss.
• Contribution margin (CM) = Total fixed
costs (TFC).
• Sales = VC + FC.
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Approaches in CVP Analysis
1. Profit equation method

2. Unit contribution margin method
3. Contribution margin ratio method
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Profit
equation Operating income = Unit contribution margin x Units – Total fixed cost
method: OI = UCM x Units - TFC
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Break-even point in units =
𝑻𝑭𝑪
BEPu =
𝑼𝑪𝑴
UCM method: Target Profit Sales in units =
𝑻𝑭𝑪 𝑶𝑰
TPSu =
𝑼𝑪𝑴
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Break-even point in sales revenue =
𝑻𝑭𝑪
BEPSR =
𝑪𝑴𝑹
CMR method: Target Profit Sales in sales revenue =
TPSSR =
𝑪𝑴𝑹
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Problem 2
Consider the following:
Fixed expenses P 78,000
Selling Price 20
Unit Variable Cost 8
Target net profit 42,000
a. how many unit sales are required to breakeven?

b. How many unit sales are required to earn the target net
profit?
c. How much revenues are needed to breakeven?
d. How much revenues are needed to earn the target net profit
Assume a tax rate of 20%:

e. How many units of sales are required to earn the target net
profit?
f. How much revenues are needed to earn the target net profit?
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Problem 2
Selling Price 20


profit?

profit?
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a. how many unit sales are 𝑻𝑭𝑪

required to breakeven?
BEPu =
𝑼𝑪𝑴
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Problem 2
Selling Price 20

Selling price – Unit Variable Cost = Unit Contribution Margin

20 – 8 = 12
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𝑻𝑭𝑪
BEPu =
𝑼𝑪𝑴
𝑷𝟕𝟖,𝟎𝟎𝟎
BEPu =
a. how many unit sales are 𝟏𝟐
required to breakeven?
BEPu = 6,500 units
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Problem 2
Selling Price 20


profit?

profit?
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b. how many unit sales are

required to earn the target net 𝑻𝑭𝑪 𝑶𝑰
profit?
TPSu =
𝑼𝑪𝑴
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Problem 2
Selling Price 20


20 – 8 = 12
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TPSu =
𝑼𝑪𝑴
𝑷𝟕𝟖,𝟎𝟎𝟎 𝟒𝟐,𝟎𝟎𝟎
b. how many unit sales are
TPSu =
𝟏𝟐
required to earn the target net
profit? TPSu = 10,000 units
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Problem 2
Selling Price 20


profit?

profit?
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c. How much revenues are 𝑻𝑭𝑪

needed to breakeven?
BEPSR =
𝑪𝑴𝑹
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Problem 2
Selling Price 20

UCM/Sales price = CMR

*12/20 = 60%

20 – 8 = 12
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𝑻𝑭𝑪
BEPSR =
𝑪𝑴𝑹
𝑷𝟕𝟖,𝟎𝟎𝟎
BEPSR =
𝟔𝟎%
c. How much revenues are
needed to breakeven? BEPSR = P130,000
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Problem 2
Selling Price 20


profit?
d. How much revenues are needed to earn the target net
profit?

profit?
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d. How much revenues are

needed to earn the target net 𝑻𝑭𝑪 𝑶𝑰
profit?
TPSSR =
𝑪𝑴𝑹
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Problem 2
Selling Price 20


*12/20 = 60%

20 – 8 = *12
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TPSSR =
𝑪𝑴𝑹
𝑷𝟕𝟖,𝟎𝟎𝟎 𝟒𝟐,𝟎𝟎𝟎
TPSSR =
d. How much revenues are 𝟔𝟎%
needed to earn the target net
profit? TPSSR = P200,000
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Problem 2
Selling Price 20


profit?
profit?

profit?
70
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e. How many units of sales are

required to earn the target net 𝑻𝑭𝑪 𝑶𝑰
profit?
TPSu =
𝑼𝑪𝑴
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Problem 2
Selling Price 20


20 – 8 = 12
42,000 / 80% = 52,500
Target Net Profit 52,500

Less: Tax expense (10,500)
Checking: 52,500 x 20% = 10,500
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TPSu =
𝑼𝑪𝑴
𝑷𝟕𝟖,𝟎𝟎𝟎 𝟓𝟐,𝟓𝟎𝟎
e. How many units of sales are
TPSu =
𝟏𝟐
required to earn the target net
profit? TPSu = 10,875 units
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Problem 2
Selling Price 20


profit?
profit?

profit?
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f. How much revenues are

needed to earn the target net 𝑻𝑭𝑪 𝑶𝑰
profit?
TPSSR =
𝑪𝑴𝑹
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Problem 2
Selling Price 20


*12/20 = 60%

20 – 8 = *12
42,000 / 80% = 52,500

Less: Tax expense (10,500)
Checking: 52,500 x 20% = 10,500 PROF. GRACE A. PADIERNOS, CPA, CMA
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TPSSR =
𝑪𝑴𝑹
𝑷𝟕𝟖,𝟎𝟎𝟎 𝟓𝟐,𝟓𝟎𝟎
TPSSR =
f. How much revenues are 𝟔𝟎%
needed to earn the target net
profit? TPSSR = P217,500
77
Problem 3
Albatross company has fixed costs of P 90,300. At a sales
volume of P360,000, return on sales of 10%; at a
P600,000 volume, return on sales is 20%.
What is the breakeven volume?
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Margin of Safety (MoS)
• MoS is the difference between actual or budgeted sales and the breakeven point.
• This pertains to the amount that is budgeted or actual sales can fall before it will
result to a loss (A buffer zone).
• These calculations are helpful in risk management.
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MoS (in peso) = actual or budgeted sales – break-even sales
𝑴𝒐𝑺 (𝒊𝒏 𝒑𝒆𝒔𝒐)

MoS (in %) =
𝑨𝒄𝒕𝒖𝒂𝒍 𝒐𝒓 𝒃𝒖𝒅𝒈𝒆𝒕𝒆𝒅 𝒔𝒂𝒍𝒆𝒔
Formulas: MoS (in units) =

𝑺𝒆𝒍𝒍𝒊𝒏𝒈 𝒑𝒓𝒊𝒄𝒆
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Problem 4
Given the following income statement, answer the
following questions:
Sales revenue P 400,000

Variable Costs 260,000
Contribution margin 140,000
Fixed costs 105,000
a. What is the MoS?

b. What is the MoSR?
c. Interpret your answers.
d. What is the profit margin/sales margin?
e. What is the CMR?
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Problem 4

Fixed costs 105,000

a. What is the MoS?

e. What is the CMR?
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MoS:
83
Problem 4
Fixed costs 105,000

TFC / CMR = BEPSR

105,000 / *35% = 300,000
CM / SR = CMR
140,000 / 400,000 = 35%
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MoS (in peso) = 400,000 – 300,000
MoS: MoS (in peso) = 100,000
85
Problem 4

Fixed costs 105,000

a. What is the MoS?

e. What is the CMR?
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MoSR:
MoS (in %) =
87
Problem 4
Fixed costs 105,000

MoS (in peso) = 100,000
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MoS (in %) =
𝟏𝟎𝟎,𝟎𝟎𝟎
MoS (in %) =
𝟒𝟎𝟎,𝟎𝟎𝟎
MoSR: MoS (in %) = 25%
89
Problem 4

Fixed costs 105,000

a. What is the MoS?

e. What is the CMR?
90
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Interpret There is a buffer amounting to P100,000 or 25% before the company
answers: Can incur or result into a loss.
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Problem 4

Fixed costs 105,000

a. What is the MoS?

e. What is the CMR?
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Profit margin
or
Sales margin:
𝑶𝒑𝒆𝒓𝒂𝒕𝒊𝒏𝒈 𝑷𝒓𝒐𝒇𝒊𝒕 𝒐𝒓 𝑵𝒆𝒕 𝒊𝒏𝒄𝒐𝒎𝒆 𝒂𝒇𝒕𝒆𝒓 𝒕𝒂𝒙
PM =
𝑺𝒂𝒍𝒆𝒔
93
Problem 4
Fixed costs 105,000

94
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Profit margin
𝑶𝒑𝒆𝒓𝒂𝒕𝒊𝒏𝒈 𝑷𝒓𝒐𝒇𝒊𝒕 𝒐𝒓 𝑵𝒆𝒕 𝒊𝒏𝒄𝒐𝒎𝒆 𝒂𝒇𝒕𝒆𝒓 𝒕𝒂𝒙
PM =
or PM =
𝟑𝟓,𝟎𝟎𝟎
𝟒𝟎𝟎,𝟎𝟎𝟎
Sales margin: PM = 8.75%
95
Problem 4

Fixed costs 105,000

a. What is the MoS?

e. What is the CMR?
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CMR: CMR =
𝑪𝒐𝒏𝒕𝒓𝒊𝒃𝒖𝒕𝒊𝒐𝒏 𝑴𝒂𝒓𝒈𝒊𝒏
97
Problem 4
Fixed costs 105,000

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CMR =
𝟏𝟒𝟎,𝟎𝟎𝟎
CMR =
CMR:
𝟒𝟎𝟎,𝟎𝟎𝟎
CMR = 35%
99
Cost Structure
Cost structure is how a company uses a mix of variable costs and fixed costs.
Cost structures can either be:

a. High variable costs - low fixed costs
b. Low variable costs - high fixed costs
The Indifference point is the level of sales wherein:
Cost structure A = Cost structure B
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Formula: UCM(a) x Units – TFC(a) = UCM(b) x Units – TFC(b)
101
Problem 6
The following data relate to Guitar Company which sells a single
product.
Unit selling price P50
Purchase cost per unit 20

Sales commission (15% of sales) 7.50
Monthly fixed costs P450,000
The firm’s salesman would like to change their compensation

from a 15% commission to 5% plus P100,000 per month fixed
salary, Presently, the salesmen receive commission only
At what sales volume in units would the two compensation plans

be indifferent?
102
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Problem 6
product.



be indifferent?
103
UCM(a) x Units – TFC(a) = UCM(b) x Units – TFC(b)

Solution:
104
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Problem 6
product.



be indifferent?
105

Selling price – Unit variable cost = UCM
50 – (20 + 7.50) = 22.50
Solution:
106
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22.50 x Units – TFC(a) = UCM(b) x Units – TFC(b)
Solution:
107
Problem 6
product.



be indifferent?
108
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22.50 x Units – 450,000 = UCM(b) x Units – TFC(b)
Solution:
109
Problem 6
product.



be indifferent?
110
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22.50 x Units – 450,000 = UCM(b) x Units – TFC(b)
Selling price – Unit variable cost = UCM
50 – (20 + *2.50) = 27.50
*Selling price x 5% = sales commission

Solution: 50 x 5% = 2.50
The firm’s salesman would like to change their

compensation from a 15% commission to 5%
111

22.50 x Units – 450,000 = 27.50 x Units – TFC(b)
Solution:
112
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Problem 6
product.



be indifferent?
113

22.50 x Units – 450,000 = 27.50 x Units – TFC(b)
450,000 + 100,000 = 550,000
plus P100,000 per month fixed salary

Solution:
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22.50 x Units – 450,000 = 27.50 x Units – 550,000
22.50 Units – 450,000 = 27.50 Units – 550,000
550,000 – 450,000 = 27.50 Units – 22.50 Units
100,000 = 27.50 Units – 22.50 Units
Solution: 100,000 = 5 Units
𝟏𝟎𝟎,𝟎𝟎𝟎 𝟓 𝒖𝒏𝒊𝒕𝒔
=
𝟓 𝒖𝒏𝒊𝒕𝒔 𝟓 𝒖𝒏𝒊𝒕𝒔
20,000 units
115
Cost Structure A Cost Structure B
Sales 1,000,000 1,000,000
Less: Variable costs (550,000) (450,000)
Contribution Margin 450,000 550,000
Less: Fixed Costs (450,000) (550,000)
Operating Income 0 0
Checking: A: Sales (P50 x 20,000 units) = 1,000,000

VC (P27.50 x 20,000 units) = 550,000
TFC = 450,000
B: Sales (P50 x 20,000 units) = 1,000,000

VC (P22.50 x 20,000 units) = 450,000
TFC = 550,000
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Degree of
Operating Leverage
Operating leverage is the measure of the
degree or the effects of fixed costs have
on changes in operating income where
there is a change in sales. Leverage
magnify the change in sales in the
operating income. If the company have
high fixed costs in its operating cost
structures, the higher the degree of
operating leverage.
117
Formulas:
DoL =
𝑶𝒑𝒆𝒓𝒂𝒕𝒊𝒏𝒈 𝑰𝒏𝒄𝒐𝒎𝒆
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Problem 7
Below is the Income statement for Blender Co. for 2021?
Sales P 400,000
Variable costs (125 000)
Contribution margin P275 000
Fixed costs (200 000)
Profit before tax 75,000
What is the degree of operating leverage for Blender

Company for 2021?
119
Problem 7
Sales P 400,000


Company for 2021?
120
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DoL =
Solution: 𝑶𝒑𝒆𝒓𝒂𝒕𝒊𝒏𝒈 𝑰𝒏𝒄𝒐𝒎𝒆
121
Problem 7
Sales P 400,000


Company for 2021?
122
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DoL =
𝑶𝒑𝒆𝒓𝒂𝒕𝒊𝒏𝒈 𝑰𝒏𝒄𝒐𝒎𝒆
𝟐𝟕𝟓,𝟎𝟎𝟎
DoL =
𝟕𝟓,𝟎𝟎𝟎
Solution: DoL = 3.67x
123
Multi-product CVP
Note: in multiproduct CVP, always assume a constant mix of product.

Sale mix can be stated in terms of:
1. Sales Unit Product mix (SUPM)
2. Sales Revenue Mix (SRM)
Rule:
GIVEN SUPM, USE WAUCM to arrive at BEP(U)
GIVEN SRM, USE WACMR to arrive at BEP(SR)
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Problem 8
Answer in white board.
The sales unit product mix between products A and B are 1:2. Sales price and variable
costs of the two are as follows:
A B
Sales price P8 P6
Variable cost 2 3
Fixed costs is P600,000.
a.) Determine the sales revenue mix.

b.) What is the WAUCM?
c.) What is the WACMR?
d.) What is the break-even point (units)?
How many sales units for A?
How many sales units for B?
e.) What is the break-even point (sales revenue)?
How much sales for A?
How much sales for B?
f.) What is the target profit sales in units if the target profit is P300,000?
g.) What is the target profit sales revenue if target profit is P900,000?
125
Thank you!!!
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3 - Cost Volume Profit & Break-Even Point Analysis

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10/04/2022

MANAGEMENT ADVISORY SERVICES

PROF. GRACE A. PADIERNOS, CPA, CMA

PROF. GRACE A. PADIERNOS, CPA, CMA

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PROF. GRACE A. PADIERNOS, CPA, CMA

PROF. GRACE A. PADIERNOS, CPA, CMA

Cost Volume Profit Analysis

PROF. GRACE A. PADIERNOS, CPA, CMA

• A tool used for decision-making that utilizes

PROF. GRACE A. PADIERNOS, CPA, CMA

• Analyzes the effect of changes in product

PROF. GRACE A. PADIERNOS, CPA, CMA

Contribution Margin (CM) Income Statement

Contribution Operating Income xxx

Approach: Less: Variable costs (xxx)

• Is used only for internal decision making

PROF. GRACE A. PADIERNOS, CPA, CMA

Given the following projected CM income

PROF. GRACE A. PADIERNOS, CPA, CMA

a. Determining the contribution margin, unit

PROF. GRACE A. PADIERNOS, CPA, CMA

a. Determining the contribution margin, unit

Contribution margin P 7,000 CM = ?

Operating income 3,000

PROF. GRACE A. PADIERNOS, CPA, CMA

a. Determining the contribution margin, unit

Operating income 3,000

PROF. GRACE A. PADIERNOS, CPA, CMA

a. Determining the contribution margin, unit

Contribution margin P 7,000 UCM = ?

Operating income 3,000

PROF. GRACE A. PADIERNOS, CPA, CMA

a. Determining the contribution margin, unit

PROF. GRACE A. PADIERNOS, CPA, CMA

a. Determining the contribution margin, unit

Contribution margin P 7,000 CMR = ?

Operating income 3,000

PROF. GRACE A. PADIERNOS, CPA, CMA

a. Determining the contribution margin, unit

PROF. GRACE A. PADIERNOS, CPA, CMA

b. How much will operating income be if only

Operating income 3,000

PROF. GRACE A. PADIERNOS, CPA, CMA

b. How much will operating income be if only

Variable Cost (3,000)

Operating income 3,000

PROF. GRACE A. PADIERNOS, CPA, CMA

b. How much will operating income be if only

Operating income 3,000

PROF. GRACE A. PADIERNOS, CPA, CMA

Sales (100 units) P 10,000

Fixed Costs (4,000) Sales P xxx

Operating income 3,000 Less: Variable costs (xxx)

PROF. GRACE A. PADIERNOS, CPA, CMA

Sales (100 units) P 10,000

Fixed Costs (4,000) Sales (P100 x 80 units) P 8,000

Operating income 3,000 Less: Variable costs (xxx)