COST-VOLUME-PROFIT

ANALYSIS
Contribution Margin
Income Statement
Contribution Margin Income
Statement

Sales
Variable cost
Contribution Margin
(Fixed costs)
Net income
Contribution Margin IS

Following is relevant information for Snowdown Sandwich

Shop, a small business that serves sandwiches:

Total fixed cost per month P 1,500

Variable cost per sandwich 2.50
Sales price per sandwich 5.25

During the month of June, Snowdown sold 600

sandwiches. Using the preceding information, prepare its
contribution margin income statement for the month of
June.
SW1: Contribution Margin
Riverside Inc. makes one model of wooden canoe. Partial
information for it follows:
Number of canoes produced and sold 540 units
Total variable cost P 67,500
Total fixed cost 150,000

Prepare Riverside’s contribution margin income statement for each

independent scenario:
a. Riverside sells its canoes for P500 each.
b. Riverside raises the sales price to P600 per canoe.
c. Both sales price and variable cost per unit increase by 10%.
d. Riverside cuts its fixed cost by 20%
SW1: Contribution Margin

a. Riverside sells its canoes for P500 each.

Sales 270,000
Less: Variable costs (67,500)
Contribution margin 202,500
Less: Fixed costs (150,000)
Net income 52,500
SW1: Contribution Margin

b. Riverside raises the sales price to P600 per canoe.

Sales 324,000
Less: Variable costs (67,500)
Contribution margin 256,500
Less: Fixed costs (150,000)
Net income 106,500
SW1: Contribution Margin

c. Sales price and variable cost per unit increase by 10%.

Sales 297,000
Less: Variable costs (74,250)
Contribution margin 222,750
Less: Fixed costs (150,000)
Net income 72,750
SW1: Contribution Margin

d. Cuts its fixed cost by 20%.

Sales 270,000
Less: Variable costs (67,500)
Contribution margin 202,500
Less: Fixed costs (120,000)
Net income 82,500
SW2: Contribution Margin
The following information pertains to the first year of operation for
Crystal Cold Coolers Inc.
Number of units sold 2,500
Unit sales price P 350
Direct materials per unit 80
Direct labor per unit 60
Variable manufacturing overhead per unit 10
Fixed manufacturing overhead per unit
75
(P225,000/3,000 units)
Total variable selling expenses (P15 per unit sold) 37,500
Total fixed general and administrative expenses 65,000
SW2: Contribution Margin

Required: Prepare Crystal Cold’s full absorption costing

and contribution margin income statement for
the year.
SW2: Contribution Margin
Full absorption costing income statement
Sales 875,000
Cost of sales
Direct material 200,000
Direct labor 150,000
Variable overhead 25,000
Fixed overhead 225,000 (600,000)
Gross profit 275,000
Operating expenses
Selling expenses 37,500
General & administrative exp. 65,000 (102,500)
Net Income 172,500
SW2: Contribution Margin
Contribution margin income statement
Sales 875,000
Variable costs
Direct material 200,000
Direct labor 150,000
Variable overhead 25,000
Selling expenses 37,500 (412,500)
Contribution margin 462,500
Fixed costs
Fixed overhead 225,000
General & administrative exp. 65,000 (290,000)
Net income 172,500
Cost-Volume-Profit
Relationship
Cost Volume Profit Analysis

How many units will be manufactured?

What is the company’s break-even point in
units and pesos?
How many units or sales amount do I need
to earn a target profit?
Should the selling price be changed?
Cost Volume Profit Analysis

Focusses on interactions between the five

elements:
• Price of products
• Volume or level of activity
• Variable cost per unit
• Total fixed costs
• Mix of products sold
Cost Volume Profit Analysis
The income statement of one Manhattan Company’s
product shows:
Cost Volume Profit Analysis
Sales (100 units at P100 per unit) 10,000
Cost of goods sold
Direct materials used 1,400
Direct labor 1,500
Variable factory overhead 1,000
Fixed factory overhead 500 (4,400)
Gross profit 5,600
Marketing expense
Variable 600
Fixed 1,000
Administrative expense
Variable 500
Fixed 1,000 (3,100)
Operating income 2,500
Cost Volume Profit Analysis

Required:
1. Compute the break-even point in units and sales
peso amount.
2. If sales volume increases by 25%, how much will be
the new operating income?
3. Compute the new break-even point in pesos if fixed
factory overhead will increase by P1,700
SW3: CVP Analysis
Per unit Quantity Net income/
Fixed cost
SP VC sold Net (loss)
50 25 2,800 70,000 0
25 10 3,000 45,000 0
15 5 1,000 10,000 0
45 20 600 15,000 0
80 65 3,000 20,000 25,000
75 40 4,500 70,000 87,500
90 50 2,000 35,000 45,000
30 22 2,000 40,000 (24,000)
65 50 2,000 35,000 (5,000)
SW4: CVP Analysis
Delta Chi Sorority is planning its annual Riverboat
Extravaganza. The Extravaganza committee has assembled
the following expected costs for the event:

Dinner (per person) P7

Favors and program (per person) 3
Band 1,500
Tickets and advertising 700
Riverboat rental 4,800
Floorshow and strolling 1,000
entertainers
SW4: CVP Analysis

Required:
The committee members would like to charge P30 per
person for the evening’s activities.
1. Compute the break-even point for the Extravaganza (in
terms of the number of persons that must attend).
2. Assume that only 250 persons attended the
Extravaganza last year. If the same number attends this
year, what price per ticket must be charged to break-
even?
SW4: CVP Analysis

Dinner (per person) P7 V

Favors and program (per person) 3 V
Band 1,500 F
Tickets and advertising 700 F
Riverboat rental 4,800 F
Floorshow & strolling entertainers 1,000 F
Variable cost P10
Fixed cost P8,000
SW4: CVP Analysis

1. Compute the break-even point for the Extravaganza (in

terms of the number of persons that must attend).

400 persons

2. Assume that only 250 persons attended the

Extravaganza last year. If the same number attends
this year, what price per ticket must be charged to
break-even?
P 42 per ticket
SW5: CVP Analysis

Nat Company’s most recent income statement is shown

below:

Total Per Unit

Sales (30,000 units) P 150,000 P5
Less: Variable expenses 90,000 3
Contribution margin 60,000 2
Less: Fixed expenses 50,000
Net operating income 10,000
SW5: CVP Analysis
Required:
Prepare the new income statement under each of the
following conditions (consider each case independently):
1. The sales volume increases by 15%.
2. The sales price decreases by 50 cents per unit, and the
sales volume increases by 20%.
3. The selling price increases by 50 cents per unit, fixed
expenses increase by P10,000, and sales volume
decreases by 5%.
4. Variable expenses increase by 20 cents per unit, the
selling price increases by 12%, and the sales volume
decreases by 10%.
SW5: CVP Analysis
+SP +VC
-SP
Original + Volume +FC +SP
+ Volume
-Volume -Volume
Sales 150,000 172,500 162,000 156,750 151,200
Less: Variable expenses 90,000 103,500 108,000 85,500 86,400
Contribution margin 60,000 69,000 54,000 71,250 64,800
Less: Fixed expenses 50,000 50,000 50,000 60,000 50,000
Net operating income 10,000 19,000 4,000 11,250 14,800

Quantity 30,000 34,500 36,000 28,500 27,000

Sales 5.00 5.00 4.50 5.50 5.60

Less: Variable expenses 3.00 3.00 3.00 3.00 3.20
Contribution margin 2.00 2.00 1.50 2.50 2.40
SW6: CVP Analysis

Rojo Products sells camping equipment. One of the

company’s products, a camp lantern, sells for P900 per
unit. Variable expenses are P630 per lantern, and fixed
expenses associated with the lantern total P1,350,000 per
month.
Required:

1. Compute the company’s break-even point in number

of lanterns an in total sales pesos.

5,000 lanterns P 4,500,000

SW6: CVP Analysis
Rojo Products sells camping equipment. One of the
company’s products, a camp lantern, sells for P900 per
unit. Variable expenses are P630 per lantern, and fixed
expenses associated with the lantern total P1,350,000 per
month.
Required:
2. If the variable expenses per lantern increase as a
percentage of the selling price, will it result in a higher
or a lower break-even point? Why? Assume that the
fixed expenses remain unchanged)
Higher number of units
to break-even
SW6: CVP Analysis

3. At present, the company is selling 8,000 lanterns per

month. The sales manager convinced that a 10%
reduction in the selling price will result in a 25%
increase in the number of lanterns sold each month.
Prepare the two contribution income statements, one
under present operating conditions, and one as
operations would appear after the proposed changes.
Show both total and per unit data on your statements.
SW6: CVP Analysis
Per Unit Original Proposed
Selling price 900 810
Variable cost 630 630
Contribution margin 270 180

Quantity 8,000 10,000

Total
Sales 7,200,000 8,100,000
Variable cost (5,040,000) (6,300,000)
Contribution margin 2,160,000 1,800,000
Fixed costs (1,350,000) (1,350,000)
Net income 810,000 450,000
SW6: CVP Analysis
Per Unit
4. Refer to (3) above.
Selling price 810
How many lanterns
Variable cost 630
would have to be
Contribution margin 180
sold at the new
selling price to yield
a minimum net Quantity 11,500
operating income
of P720,000 per Total
month? Sales 9,315,000
Variable cost (7,245,000)
Contribution margin 2,070,000
Fixed costs (1,350,000)
Net income 720,000
CVP – Multi Product

Product A Product B
Sales price 135.00 167.50
Variable cost per unit 61.50 68.50
Product mix 40% 60%
Calculate Edgewater’s weighted-average contribution
margin peso per unit.
P 88.80
CVP – Multi Product

Product A Product B
Sales price 135.00 167.50
Variable cost per unit 61.50 68.50
Product mix 40% 60%
Calculate Edgewater’s weighted-average contribution
margin per unit.
P 88.80
Calculate the break-even point if Edgewater’s total fixed
costs are P230,000.
2,591
SW7: CVP – Multi Product

Unit CM Sales ratio

WA CM
Product A Product B Product A Product B
9.00 8.00 70 30 8.70
2.50 4.20 20 80 3.86
15.75 11.90 60 40 14.21
45.60 55.50 35 65 52.04
SW8: CVP – Multi Product

Ping Pong Total

Sales P 100,000 P 50,000 P 150,000
Less: Variable expenses 25,000 5,000 30,000
Contribution margin 75,000 45,000 120,000
Less: Fixed expenses 90,000
Net operating income 30,000
SW8: CVP – Multi Product

Required:
1. Compute the overall contribution margin ratio for the
company.
80%
2. Compute the overall break-even point for the
company in sales pesos.
P 112,500
3. Verify the overall break-even point for the company by
constructing a contribution format income statement
showing the appropriate levels of sales for the two
products.
SW8: CVP – Multi Product

Ping Pong Total

Sales 75,000 37,500 112,500
Less: Variable expenses 18,750 3,750 22,500
Contribution margin 56,250 33,750 90,000
Less: Fixed expenses 90,000
Net operating income 0
SW9: CVP – Multi Product

The Insular Corporation sells two products, D and W at a

rate of 2 units and 3 units respectively. The following data
are available:

D W
Unit selling price P 10 P5
Unit variable costs 6 3
Total fixed cost P 420,000
SW9: CVP – Multi Product

Required: Determine the:

1. Weighted contribution margin peso per unit
2. Break-even point in units (combined)
3. Weighted contribution margin ratio
4. Break-even point in sales pesos (combined)
5. Break-even point in sales for Product D and W
SW9: CVP – Multi Product
Required: Determine the:
1. Weighted contribution margin peso per unit
P2.80
2. Break-even point in units (combined)
150,000
3. Weighted contribution margin ratio
40%
4. Break-even point in sales pesos (combined)
1,050,000
5. Break-even point in sales for Product D and W
D = P600,000
W = P450,000
Margin of Safety
Margin of Safety

The amount by which sales could

decrease before losses are incurred.
Margin of Safety

𝑀𝑂𝑆 = 𝐴𝑐𝑡𝑢𝑎𝑙 𝑠𝑎𝑙𝑒𝑠 − 𝐵𝑟𝑒𝑎𝑘𝑒𝑣𝑒𝑛 𝑠𝑎𝑙𝑒𝑠

𝑀𝑂𝑆
𝑀𝑂𝑆 𝑟𝑎𝑡𝑖𝑜 =
𝐴𝑐𝑡𝑢𝑎𝑙 𝑠𝑎𝑙𝑒𝑠
Margin of Safety
Amflor Manufacturing Company’s budget for the
coming year revealed the following data:
Budgeted net income for the year P 120,000
Unit costs: Variable Fixed
Manufacturing cost P 20 P 360,000
Selling cost 6 75,000
General cost 4 45,000
Unit selling price 50

1. Determine the budget sales volume in units.

Margin of Safety
Amflor Manufacturing Company’s budget for the
coming year revealed the following data:
Budgeted net income for the year P 120,000
Unit costs: Variable Fixed
Manufacturing cost P 20 P 360,000
Selling cost 6 75,000
General cost 4 45,000
Unit selling price 50

2. Determine the breakeven point in units.

Margin of Safety
Amflor Manufacturing Company’s budget for the
coming year revealed the following data:
Budgeted net income for the year P 120,000
Unit costs: Variable Fixed
Manufacturing cost P 20 P 360,000
Selling cost 6 75,000
General cost 4 45,000
Unit selling price 50

3. Determine the margin of safety in peso and percentage.

SW10: Margin of Safety
Mama Jo Corporation is a distributor of a sun umbrella used at
resort hotels. Data concerning the next month’s budget appear
below:
Selling price P 25 per unit
Variable expense 15 per unit
Fixed expense P 8,500 per month
Unit sales 1,000 units per month

Required:
1. Compute the company’s margin of safety. P 3,750
2. Compute the company’s margin of safety as a percentage of its
sales.
15%
Reminders: Margin of Safety

MOS Ratio
Product A 10%
Product B 20%
Which is riskier?
Operating Leverage
Operating Leverage

Potential effect of the risk that sales will

fall short of planned levels as influenced
by the relative proportion of fixed to
variable manufacturing costs
Operating Leverage

𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑀𝑎𝑟𝑔𝑖𝑛
𝐷𝑂𝐿 =
𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒
Operating Leverage
These sales and cost data are for two companies in the
transportation industry:

A B
Sales 100,000 100,000
Variable costs (60,000) (30,000)
Contribution margin 40,000 70,000
Fixed costs (30,000) (60,000)
Net income 10,000 10,000

1. Calculate the operating leverage for each company. If sales

increase, which company benefits more? How do you know?
Operating Leverage
These sales and cost data are for two companies in the
transportation industry:

A B
Sales 100,000 100,000
Variable costs (60,000) (30,000)
Contribution margin 40,000 70,000
Fixed costs (30,000) (60,000)
Net income 10,000 10,000

2. Assume that sales rise 10% in the next year. Calculate the
percentage increase in profit for each company. Are the
results what you expected?
SW11: Operating Leverage
Franda Company installs home theater systems. The company’s
most recent monthly contribution format income statement
appears below:

Amount % of Sales
Sales P 120,000 100%
Variable expenses (84,000) 70%
Contribution margin 36,000 30%
Fixed expenses (24,000)
Net operating income P 12,000

Required: 3
1. Compute the company’s degree of operating leverage.
SW11: Operating Leverage
Franda Company installs home theater systems. The company’s
most recent monthly contribution format income statement
appears below:

Amount % of Sales
Sales P 120,000 100%
Variable expenses (84,000) 70%
Contribution margin 36,000 30%
Fixed expenses (24,000)
Net operating income P 12,000

2. Using the degree of operating leverage, estimate the impact on

30% increase,
net operating income of a 10% increase in sales.
net income is P15,600
SW11: Operating Leverage
Franda Company installs home theater systems. The company’s
most recent monthly contribution format income statement
appears below:

Amount % of Sales
Sales P 120,000 100%
Variable expenses (84,000) 70%
Contribution margin 36,000 30%
Fixed expenses (24,000)
Net operating income P 12,000

3. Verify your estimate from part (2) above by assuming 10%

increase in sales.
SW11: Operating Leverage

Original 10% increase

Sales 120,000 132,000
Variable expenses 84,000 92,400
Contribution margin 36,000 39,600
Fixed expenses 24,000 24,000
Net operating income 12,000 15,600
SW12: Operating Leverage

KT Door Company sells prehung doors to home builders.

The doors are sold for P60 each. Variable costs are P42
per door and fixed costs total P450,000 per year. The
company is currently selling 30,000 doors per year.
Required:
1. Prepare a contribution format income statement for
the company at the present level of sales and compute
the degree of operating leverage.
2. Management is confident that the company can sell
37,500 doors next year (an increase of 7,500 doors or
25% over current sales).
SW12: Operating Leverage
1. Prepare a contribution format income statement for
the company at the present level of sales and compute
the degree of operating leverage.

Sales 1,800,000
Less: Variable costs 1,260,000
Contribution margin 540,000
Less: Fixed costs 450,000
Net income 90,000

Degree of operating leverage 6

SW12: Operating Leverage
2. Management is confident that the company can sell
37,500 doors next year (an increase of 7,500 doors or
25% over current sales). Compute the following:
a. The expected percentage increase in net operating
income for the next year.
150%
b. The expected net operating income for next year.
(Do not prepare an income statement. Use the
degree of operating leverage to compute your
answer.)
P 225,000
Reminders:Operating Leverage

Net income Operating Leverage

Product A P50,000 5
Product B P50,000 2
a. If sales volume increases, which product will give the
highest net income?
b. If sales volume decreases, which product will give the
lowest net income?
c. Which of the two products is riskier in relation to change
in sales volume?
QUIZ next meeting.
Bring your own calculator &
highlighter.