MANAGEMENT ADVISORY SERVICES

COST VOLUME PROFIT RELATIONSHIP

CVP Analysis defined.

Cost-volume-profit analysis (CVP analysis) is one of the most powerful tools that managers have at their command. It
helps them understand the interrelationship between cost, volume, and profit in an organization by focusing on
interactions between the following five elements:

1. Prices of products
2. Volume of level of activity within the relevant range
3. Variable costs per unit
4. Total fixed Costs
5. Mix of products sold

Assumptions in CVP Analysis

a. Selling price remains constant for any volume

b. All costs can be classified as fixed and variable
c. Behavior or costs will be linear within the relevant range
d. There is no significant change in the size of inventory

Break-even Point

Break-even point is the level of sales volume where total revenues and total expenses are equal, that is, there is
neither profit nor loss. This point can be determined by using CVP Analysis.

PROBLEM 1 – BREAK EVEN POINT

The income statement of CPA Corporation during the year is as follow:

Total Per unit

Net sales 500,000 10
Variable costs 300,000 6
Contribution margin 200,000 4
Fixed costs 150,000 3
Net profit 50,000 1
Number of units sold – 50,000

Prepare a break-even graph.

PROBLEM 2 – CVP ANALYSIS WITH CHANGES IN COST STRUCTURE

The ABC Company sold 100,000 units of its product at P20 per unit. Variable costs are P14 per unit (manufacturing
costs of P11 and marketing costs of P3). Fixed costs are incurred uniformly throughout the year and amount to
P792,000 (manufacturing costs of P500,000 and marketing costs of P292,000).

Compute:

1. The break-even point in units and in pesos

2. The number of units that must be sold to earn an income of P60,000 before income tax.
3. The number of units that must be sold to earn an after-tax income of P90,000. Income tax rate is 40%.
4. The number of units required to break-even if there is 10% increase in wages and salaries. Labor cost
constitutes 50% of variable costs and 20% of fixed costs.

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PROBLEM 3 – CVP ANALYSIS Weighted Contribution Margin

Jump, Inc. is a footwear company which has three main products: one for cricket players, one for football players
and one for tennis players. Following table shows the sales price, variable cost per unit and units sold of each
product:

Cricket Football Tennis

Price per unit P80 P100 P150
Variable cost per unit 40 75 95
200,00
Units sold 50,000 5,000
0
Calculate the separate contribution margin ratio for each product and the weighted-average contribution margin ratio
of the company as a whole. If the company’s fixed costs are P2,200,000 per annum, calculate the breakeven
distribution of products.

PROBLEM 4 – MARGIN OF SAFETY

The Noor enterprises, a single product company, provides you the following data for the month of June 2019.

 Sales (3,500 units @ P20/unit): P70,000

 Variable cost per unit: P8
 Total fixed expenses for the month: P15,000

There was no opening and closing finished goods inventory in stock.

Required: Calculate breakeven point and margin of safety for Noor enterprises using above data.

PROBLEM 5 – OPERATING LEVERAGE

Company X Company Y
Amount % of Sales Amount % of Sales
Sales 100,000 100% 100,000 100%
Variable costs 60,000 60 30,000 70
Contribution margin 40,000 40 70,000 30
Fixed costs 30,000 60,000
Net income 10,000 10,000
Required:

1. Calculate the operating leverage for each company. If sales increase, which company benefits more?
2. Assume sales rise 10% in the next year, calculate the percentage increase in profit for each company.

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