CO

TS
RELATIONSHIP
T
FI

CO
O
PR

VOLUME

ST
COST-VOLUME-PROFIT
(CVP)
RELATIONSHIP
RELATIONSHIP
IT
OF
PR

VOLUME
By:

BON RYAN M. MAGBANUA

CVP
RELATIONSHIP
Managers are concerned about the impact of
their decisions on profit. The decisions they
make are about the---
• sales volume,
• pricing, or
• incurring a cost.

Therefore, managers require an understanding

of the relations among revenues, costs, volume,
and profit.
CVP Analysis

Cost-Volume-Profit (CVP) Analysis explains the behavior of

profits in response to a change in cost and volume. In other words,
it is an analysis presenting the impact of cost and volume on
profits.

A manager can find out the level of sales where the company will
be in a no-profit-no-loss situation with this analysis.
🡪 BREAK-EVEN POINT ANALYSIS

CVP analysis can also explain the no. of units of sales required to
achieve a particular targeted operating income.
🡪 TARGET INCOME

This helps management understand how far sales could change

before the company would have a net loss.
🡪 MARGIN OF SAFETY
 CVP Assumptions

1. Units Produced = Units Sold

2.
Changes in Sales Changes in Cost and
Volume Revenue

TOTAL COST (TC) = VARIABLE COST

3.
(VC) +
FIXED COST (FC)
CVP Assumptions

Selling Price
4. Variable Cost per Unit CONSTAN
Fixed Cost T

Relative Sales
5. For Multiple Proportion are
Products constant

6. Time Value of Money (Interest) is ignored

CVP Applications

Break-even point

What-if Analyses New Product

CVP
Product Mix Applications Replacement

Make or Buy Setting prices

CVP Analysis
Advantages vs Disadvantages

Advantages Disadvantages

❖ Finding Break-even Point ❖ Unrealistic Assumptions

❖ Evaluating of Investment ❖ Semi-Variable and Semi-
Proposals Fixed Costs
❖ Base for Planning & ❖ No. of units is not the only
Marketing Efforts driver of TC & TR
❖ Base for Setting a Budget
Margin Of Operating
Safety Leverage
Sensitivity Analysis
CONTRIBUTION MARGIN
(CM)
Contribution Margin Income Statement

Sales P xx
Less: VC xx
CM xx
Less: FC xx
Operating Income xx

The contribution margin is the difference between a company's

sales and its variable costs.
Contribution Margin vs Gross Profit
Margin
Contribution Margin ≠ Gross Profit Margin

Sales P xx Sales P xx
Less: VC xx Less: COGS xx
CM xx GPM xx

Only considers Considers all costs – Both

Variable Cost Variable and Fixed
BREAK-EVEN POINT

Break-even analysis is a subset of cost-volume-profit (CVP)

analysis. This is the level of sales where the company will not incur
a loss, yet not make a profit. (TR = TC)

Fixed
Break-even point in units = Cost
CM per
unit
Fixed
Break-even point in sales (peso) = Cost
CM Ratio
(%)
Graphical Presentation

Total
Break-even Revenue
Point
Total
Amou

Cost
nt

Variable Cost

Fixed
Cost

Number of Units Sold (Sales

Volume)
TARGET INCOME

CVP analysis is also used when a company is trying to determine

what level of sales is necessary to reach a specific level of income,
also called target income.

While knowing the break-even point is important, most businesses

hope to do better than break even. Often small-business owners will
aspire to a target level of profit. CVP analysis allows owners to
calculate the level of sales require to achieve this goal.

This will tell you the level of sales that you need to achieve to meet
your profit goal.
TARGET INCOME - Formula

Fixed Cost + Target

Required Sales in = Income
units CM per
unit

Fixed Cost + Target

Required Sales in = Income
Peso CM
Ratio
MARGIN OF SAFETY

The margin of safety is the volume of sales that the company is

selling above the break-even point. It can also be expressed in units
or in amount.

Margin of Safety = Actual/Expected Sales –

Break-even Point
 Example

EM BEE YEY, Inc., has sales of P750,000 and total variable costs of P450,000. The
company has fixed costs of P300,000. Assuming the company produced and sold
250,000 units during the year, the per unit sales price is P3.00 and the variable cost
per unit is P1.80. Identify the break-even point (BEP) and margin of safety (MOS)
(units & peso sales).
In Peso Per Ratio
Sales 750,000 3.00 100% Unit
VC (450,000)1.80 60%
CM 300,000 1.20 40%
FC (240,000)
Operating Income 60,000
240,000/40% 240,000/P1.20

Break-even Point 600,000 200,000 units

Margin Of Safety 150,000 50,000 units

750,000 – 600,000 250,000u – 200,000u

 Example

Using the data from the previous example, what level of sales would be
required if the company wanted P120,000 of income? The P120,000 of
income required is called the targeted income.
240,000+120,000
1.20
Required Sales in units 300,000 units
240,000+120,000
40%

Required Sales in peso P900,000.00

Sales 900,000
VC (540,000)
CM 360,000
FC (240,000)
Operating Income 120,000
CVP Analysis with Multiple Products

For a company with more than one product, sales mix ratio is used.
Different products have different selling prices, cost structures, and
contribution margins. A weighted-average CM must be calculated.

Fixed
Multi-product BEP = Weighted-average
Cost CM per unit

Total Contribution
Weighted-average CM in units = Margin
Total No. of Units
Sold
CVP Analysis with Multiple Products
- Example
Product A Product B Product C TOTAL
Units Sold 5,000 9,000 6,000 20,000
Revenue PHP 1,000,000.00 PHP 6,300,000.00 PHP 4,800,000.00 PHP 12,100,000.00
Weighted-
VC 600,000.00 4,095,000.00 3,360,000.00
average CM per 8,055,000.00

CM 400,000.00 2,205,000.00 unit

1,440,000.00 4,045,000.00

Weighted-
CM per unit 80.00 245.00 240.00 202.25
average CM
CM Ratio 40% 35% Ratio
30% 33%

Expected
Expected Sales
SalesMix
Mixininunits
units 25.00%
25.00% 45.00%
45.00% 30.00%
30.00% 100.00%
100.00%
Expected SalesMix
Expected Sales Mixinin
8.26%
8.26% 52.07%
52.07% 39.67%
39.67% 100.00%
100.00%
revenues
revenues
Degree of operating Leverage

Operating Leverage is the extent to which a company uses fixed costs in

its cost structure.

C
Degree of operating Leverage = M
Profi
t
High operating leverage means higher risk of loss when sales decline.

%change in = %change in Sales X Degree of Operating Leverage

Profit
Sensitivity Analysis

A business environment can change quickly, so a business

should understand how sensitive its sales, costs, and income
are to changes.

CVP analysis using the break‐even formula is often used for

this analysis.
Than
kYou