Cost-Volume-Profit
(CVP) Analysis
Members:
Sweetheart E. Rocaberte
Welmarie Shyne O. Alera
Cost-Volume-Profit Analysis
CVP analysis is a systematic examination of the
relationships among costs, cost drivers or activity level
(or volume), and profit.
Use of CVP Analysis
CVP analysis helps managers answer several questions
such as
• The number of units to be sold to break even
• The effect of changes in the fixed cost on the break
even point
• The effect of changes in the sales price on the break
even point
Elements of CVP
• Sales
Selling price
Units or volume
• Variable cost per unit
• Total fixed costs
• Sales mix
Applications of CVP analysis
CVP analysis is used by management
accountants in planning and decision-
making, which may involve the:
1. Type of product to produce and sell;
2. Pricing policy to follow;
3. Marketing strategy to use; and
4. Type of productive facilities to acquire.
Assumptions
1. All costs are classifiable as either variable or fixed.
2. Cost and revenue relationships are predictable and linear over
a relevant range of activity and a specified period of time.
3. Total variable costs change directly with the cost driver, but
variable costs per unit are constant over the relevant range.
4. Total fixed costs are constant over the relevant range, but fixed
costs per unit vary inversely with the cost driver or volume.
Assumptions
5. Selling prices per unit and market conditions remain
unchanged.
6. Production equals sales, i.e., there is no change in inventory.
7. If the company sells multiple products, sales mix is constant.
8. Technology, as well as productive efficiency, is constant.
9. The time value of money is ignored.
Limitations
• CVP analysis requires estimations and approximations for data
collection, and so lacks accuracy and precision.
• In CVP analysis, total revenues and total costs are believed to be
linear and can be represented by straight lines. In some instances,
this assumption may be discovered to be false.
• CVP analysis is conducted within a meaningful range of operational
activity, with the assumption that operational productivity and
efficiency stay constant. This assumption may be incorrect.
• CVP analysis presupposes that expenses may be reliably classified as
fixed or variable. In reality, such categorisation can be challenging.
Limitations
• The CVP analysis is based on the assumption of no change in inventory levels
over the period. This also implies that the number of units generated during
the period is equal to the number of units sold. When inventory levels
fluctuate, CVP analysis gets more complicated.
• If pricing, unit costs, sales mix, operational efficiency, or other important
variables change, the overall CVP analysis and linkages must be adjusted as
well.
• Additionally, a number of issues develop when performing a multi-product
analysis in conjunction with a CVP analysis.
• Another issue arises when the units of measurement have a non-linear
relationship.
Break Even Point
The break-even point is the sales volume level in
pesos or in units where total revenues equals
total costs. Thus, there is neither loss nor profit.
Break Even Point
BEP (Units) = Total fixed cost
Sales price – Variable cost/unit
Or
BEP (units) = Total fixed cost
Contribution margin per unit
Break Even Point
BEP (Pesos) = Total fixed cost
Contribution margin ratio
Or
BEP (Pesos) = BEP in units x Selling price/unit
Contribution Margin
Contribution margin/unit
= Selling price – Variable cost
Contribution margin ratio
= CM per unit
Sales price/unit
Sample Problem
Nicolas Company produces a product that sells for P800.00. The variable cost is
P350 for direct materials, P200 for labor, P50 for variable overhead and P30,000
for fixed overhead. The units sold for the month is 500 units.
Required
1. Compute for total variable cost.
2. Compute the total fixed cost
3. Compute for the BEP (units)
4. Compute for the contribution margin
5. Compute for the contribution margin ratio
6. Compute for the BEP (pesos)
Solution
1. Direct materials P 350
Direct labor 200
Variable overhead 50
Total variable cost P 600
2. Total fixed cost= P30,000
3. BEP (UNITS)= total fixed cost
Selling Price/unit- Variable cost/unit
=P30,000
P800-P600
=150 Units
Solution
4. Contribution margin/unit = Selling price- variable cost
= P800 - P600
= P200/unit
5. Contribution margin ratio=Contribution margin/unit
Selling price/unit
= P 200/P800
= 25%
6. BEP ( PESOS)= Total fixed cost
Contribution margin/ratio
=P30,000
25%
=P120,000
Or BEP (PESOS)= 150 units ×P800
= P120,000
If a statement is prepared for the break even sales, it will appear as
Sales P120,000
Variable cost (150xP600) 90,000
Contribution margin 30,000
Fixed cost 30,000
Net income 0
The contribution margin statement for the Nicolas Company assuming sales of
500 units will appear as
Sales(500xP800) P400,000
Variable cost (500xP600) 300,000
Contribution margin 100,000
Fixed cost 30,000
Net income P 70,000
If we express the contribution margin statement in form of a
formula, then it will be
Net income = revenue – total variable cost – total fixed cost
The Cost Volume Profit Graph
Margin of Safety
Margin of safety is the units sold or
revenue earned above the BEP volume.
It represents the number of units or
amount of sales revenue that the
company can absorb before incurring a
loss.
Margin of safety = current sales – BEP sales
= 500 units – 150 units
= 350 units
Margin of safety in pesos = 350 units x P800
= P 280,000
or
Margin of safety in pesos = P400,000 – P120,000
= P 280,000
Margin of safety ratio = Margin of safety
Total sales
= P280,000/P400,000
= 70%
CVP analysis for multiproduct firm
Sales mix is the combination of products
being marketed by the company. It is
measured in terms of units sold.
CVP analysis for multiproduct firm
Selina Company produces three products A,B and C
with the following characteristics.
PRODUCT A PRODUCT B PRODUCT C
Sales price/unit P 10.00 P 16,00 P 18.00
Variable cost/unit 6.00 10.00 14.00
Expected sales (unit) 20,000 20,000 40,000
Total fixed costs are P1,800,000. Assume that sales mix will be the
same at all sales level.
CVP analysis for multiproduct firm
Required
1.Compute for the break- even point in
total units
2. Compute for the units A, B and C must
sell at break- even point
3. Compute for the total contribution
margin if the company expects profit of
P350,000.
CVP analysis for multiproduct firm
Solution
PRODUCT A PRODUCT B PRODUCT C
Sales price/unit P 10.00 P 16.00 P 18.00
Variable cost/unit 6.00 10.00 14.00
Contribution margin P 4.00 P 6.00 P 4.00
Break- even in total units = Total fixed cost
Weighted average contribution margin
= 1,800,000
4.50
= 400,000 units
CVP analysis for multiproduct firm
Weighted average contribution margin= Total contribution margin
= (20,000×4)+(20,000×6)+(40,000×4)
80,000
= 4.50/unit
2. Sales in unit of A, B and C at break- even
A= 400,000×25% (200,000/800,000)=100,000
B=400,000×25% (200,000/800,000)=100,000
C=400,000×50% (400,000/800,000)=200,000
3. Expected net income P 350,000
Total fixed cost 1,800,000
Total contribution margin P 2,150,00
CVP analysis for multiproduct firm
BEP may be computed using this alternative solution
BEP (units) = Total fixed cost
Weighted CM per unit
= 1,800,000
1.00+1.50+2.00
= 400,000 units
Weighted CM per unit
A B C
Contribution margin/unit P 4.00 P6.00 P4.00
Multiply by sales misx ratio 25% 25% 50%
Weighted contribution P1.00 P1.50 P2.00
margin per unit
Sales and units with desired profit
CVP gives us a way to determine how many units must
be sold, or how much sales revenue must be earned to
earn a particular net income.
Sales = Total fixed cost + desired profit
Contribution margin/unit
Operating leverage
Operating leverage is the use of fixed cost to get higher
percentage changes in profit as sales changes. It is
concerned with the relative mix of fixed cost and
variable cost in an organization.
Operating leverage
Degree of operating leverage = Contribution margin
Operating income
The greater the degree of operating leverage, the more
that changes in sales will affect operating income.
