Cost Volume profit

analysis
 TABLE OF CONTENTS
01 03
THE BASICS OF MARGIN OF SAFETY
CVP ANALYSIS

02 04
BREAK-EVEN OPERATING LEVERAGE
ANALYSIS
 01
THE BASICS OF
CVP ANALYSIS
 COST-VOLUME-PROFIT ANALYSIS
● It is a systematic examination of the relationships among cost,
cost drive and profit.
● It is one of the most powerful tools that manager have at their
command.
● It helps them understand the interrelationship between the
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
 Elements of CVP ANALYSIS
1. Sales
a. Selling price
b. units or volume
2. Total fixed costs
3. Variable costs per unit
4. Sales mix

Applications of CVP analysis

Planning and decision-making, which may involve choosing the:
1. Type of product to produce and sell;
2. Pricing policy to follow
3. Marketing strategy to use
4. Type of productive facilities to require
 The contribution margin income statement
The costs and expenses in the Contribution Margin Income Statement are classified as to
behavior (variable and fixed). The amount of contribution margin, which is the difference
between sales and variable costs is shown.

Contribution Margin Income Statement

Sales (units x selling price) xx
Less: variable costs (units x variable cost per unit) xx
Contribution margin xx
Less: total fixed costs xx
Income before tax xx
 Break-even analysis
Break-even point is the level of sales volume where total revenues and total expenses are
equal, that is neither profit or loss. This point can be determined by using CVP analysis.

1. Single Product Break-even

Break-even point (units) = Total Fixed costs
Contribution Margin per unit

Break-even point (peso) = Total Fixed costs______

1 – (Variable costs/Sales)
 SALES mix
Sales mix refers to the relative proportions in which a company’s products are sold.
The idea is to achieve the combination, or mix that will yield the greatest amount
profits.
2. Multi Product Break-even
Break-even sales for multi products = Total fixed costs
(combined units) Weighted Average CM units

Weighted CM per unit = (Unit CM x No. of units per mix) + (Unit CM x No. of units per mix)
Total no. of units per Sales Mix

Break-even sales for multi products = Total Fixed Costs

(combined pesos) Weighted CM Ratio

Weighted CM ratio = Total Weighted CM (P)

Total Weighted Sales (P)
CVP Analysis for revenue and cost planning
CVP analysis can be used to determine the level of sales needed to achieve a desired
level of profit. In revenue planning, CVP analysis assists managers in determining the
revenue required to achieve a desired profit level.

Sales (units) = Total Fixed costs + Desired profit

Contribution Margin per unit

Sales (pesos) = Total Fixed costs + Desired profit

Contribution Margin Ratio
 MARGIN OF SAFETY
Margin of safety measures the potential effect of the risk that
sales will short of planned levels. This is the excess of actual or
budgeted sales over break-even sales and indicates the amount
by which sales could decrease before losses are incurred.

Margin of safety ratio = Margin of Safety

Actual or Planned Sales
 Operating leverage
● Operating leverage is the ratio of the contribution margin to
profit.
● A higher value of operating leverage indicates a higher risk in
the sense that a given change in sales will have a greater
impact on profit.
● It is desirable to have a high level of leverage if the sales
volume is strong but when sales begin to fall a lower level or
leverage is preferable.

Operating Leverage = Contribution Margin

Net Income
Illustrative
problems
MNO Corporation provided the following
information:
Total Per Unit
Net sales 500,000 10
Variable cost 300,000 6
Contribution Margin 200,000 4
Fixed Costs 150,000 3
Net Profit 50,000 1
● Required:
compute for break-even point in units and in pesos

1. Break-even point (units) = 150,000 = 37,500 units

4

2. Break-even point (pesos) = 150,000 = P 375,000

40%
Amflor Manufacturing Company’s budget for the coming year revealed the
following unit data:

Budgeted net income for the year P 875,000

Unit costs:
Variable Fixed
Manufacturing cost 14.00 12.00
Selling cost 2.50 5.50
General cost 0.25 7.00
Total 16.75 24.50

Unit selling price P 50

Required:
1. Determine the budgeted sales volume in units
2. Determine the margin of safety in peso amount and percentage
THANKS!