Management Science

Prepared by: Kathleen Gail Gumba

Irish Nicole Hizon

Cost-Volume-Profit Analysis
What is Cost-Volume-Profit Analysis?
Cost Volume Profit (CVP) Analysis, is a systematic examination of the relationships among
costs, activity levels or volume, and profit. This model is used to predict the impact on profits of
changes in those parameters. it is a way for companies to determine how changes in costs and
sales volume affect a company’s profit.

Key Assumptions in CVP Analysis

• Costs are classified as variable or fixed.
• Variable costs change at a linear rate.
• Fixed costs remain unchanged within the relevant range.
• Selling prices do not change as sales volume changes.
• Volume is the greatest factor affecting costs.
CVP analysis also manages product contribution margin. The contribution margin is the
difference between total sales and total variable costs. For business to be profitable, the
contribution margin must exceed total fixed costs.
Contribution Margin
The contribution margin is used to determine the breakeven point of sales. By dividing the total
fixed costs by the contribution margin ratio, the breakeven point of sales in terms of total dollars
may be calculated.
Margin of Safety
It is the difference between actual or budgeted sales and break-even sales. This is the amount that
represents at how much can sales go down before the entity can anticipate losses.
How is CVP Analysis used?
Cost-volume-profit analysis is used to determine whether there is an economic justification for a
product to be manufactured. A target profit margin is added to the breakeven sales volume to
arrive at the target sales volume needed to generate the desired profit.
What assumptions does CVP Analysis make?
The reliability of CVP lies in the assumptions it makes, including that the sales price and the
fixed and variable cost per unit are constant. The costs are fixed within a specified production
level. All units produced are assumed to be sold, and all fixed costs must be stable.
Another assumption is all changes in expenses occur because of changes in activity level. Semi-
variable expenses must be split between expenses classifications using the high-low method,
scatter plot, or statistical regression.
Break-even Analysis
Break-even analysis is a modeling technique to determine the number of units to sell or produce
that will result in zero profit.
when total revenue equals total cost, it is called the break-even point. at this point profit is zero.
The breakeven point is the number of units that need to be sold or the amount of sales revenue
that has to be generated in order to cover the costs required to make the product.
Breakeven Sales Volume= FC
CM
Where:
FC= fixed cost
CM= Contribution Margin: (Sales – Variable Costs)
Breakeven analysis entails calculating and examining the margin of safety for an entity based on
the revenues collected and associated costs. Analyzing different price levels relating to various
levels of demand, the breakeven analysis determines what level of sales are necessary to cover
the company’s total fixed costs.
Users of Breakeven Analysis
Breakeven analysis is used by a wide range of entities, from entrepreneurs, financial analysts,
business and government agencies.
• Entrepreneurs: it is useful for entrepreneurs and founders because it helps determine the
minimum level of sales needed to cover costs.
 • Financial analysts: these professionals use breakeven analysis as a profitability and risk
metric. Financial analysts tie breakeven analysis into their valuations and
recommendations on a business.
• Investors: they conduct breakeven analysis to determine the financial performance of
companies. With this information, they make more informed decisions on their asset
selections.
• Businesses: a broad range of businesses use breakeven analysis to paint a better picture of
their cost structure, pricing, as well as their operational efficiencies.
• Government Agencies: they need to understand the financial viability of projects and
programs and they use breakeven analysis to determine this. It answers the question:
What is the minimum level of sales or revenue required to cover costs?
Components of Break-even Analysis
1. Volume is the level of sales or production by a company. it can be expressed as the number of
units produced and sold, as the dollar volume of sales, or as percentage of total capacity
available.
2. There are typically two types of cost incurred in the production: fixed costs and variable costs.
a. Fixed Costs are generally independent of the volume of units produced and sold. Fixed costs
remain constant regardless of how many units of products are produced within a given range.
b. Variable Costs are determined on per unit basis. thus, total variable costs depend on the
number of units produced.
Total variable costs are a function of the volume and the variable cost per unit. This relationship
can be expressed mathematically as:
Total variable cost=
Total cost= total fixed cost + total variable cost
Or
3. Profit is the difference between total revenue and total cost. the total revenue is the volume
multiplied by the price per unit.
Total revenue = vp
or

Example of Break-even Analysis

Sales: 500,000
Less: Variable Cost 350,000
Contribution Margin 150,000
Less: Fixed Cost 150,000
Net Income -

SYSTEM OF LINEAR EQUALITIES AND INEQUALITIES

Linear Equations
A system of linear equation comprises two or more linear equations. The solution of a linear
system is the ordered pair that is a solution to all equations in the system.
In two variables (x and y), the graph of a system of two equations is a pair of lines in the plane.
There are three possibilities:
• The line intersects at zero points.
• The lines intersect at exactly one point.
• The lines intersect infinitely many points.
Graphing Method
This is useful when you just need a rough answer, or you're pretty sure the intersection happens
at integer coordinates.
Substitution Method
First, solve the linear equation for y in terms of x. Then substitute that expression for y in the
other linear equation. You will get an equation in x.
Linear Combination Method
Add ( or subtract) a multiple of one equation to (or from) the other equation, in such a way that
either the x-terms or the y-terms cancel out. Then solve for x (or y, whichever is left) and
substitute back to get the other coordinate.
Linear Inequalities
A system of linear inequalities in two variables consists of at least two linear inequalities in the
same variables. The solution of linear inequality is the ordered pair that is a solution to all
inequalities in the system and the graph of the linear inequality is the graph of all solutions of the
system.
QUANTITATIVE ANALYSIS
WHAT IS QUANTITATIVE ANALYSIS?
Process of collecting and evaluating measurable and verifiable data such as revenues, market
share, and wages in order to understand the behavior and performance of a business.
QUANTITATIVE ANALYSIS TECHNIQUES
REGRESSION ANALYSIS
is a common technique that is not only employed by business owners but also by statisticians and
economist. it involves using statistical equations to predict or estimate the impact of one variable
on another.
LINEAR PROGRAMMING
Is a quantitative method that determines how to achieve such an optimal solution. it is also used
to determine how a company can make optimal profits and reduce its operating costs, subject to a
given set of constraints, such as labor.
DATA MINING
are used to evaluate very large sets of data to find patterns of correlations concealed within them
APPLICATIONS OF QUANTITATIVE ANALYSIS IN THE BUSINESS SECTOR
PROJECT MANAGEMENT
the planning and organizing of a company’s resources to move a specific task, event, or duty
toward completion
PRODUCT PLANNING
is the set of methods and processes a business uses to plan the development of a new product. it
centers around the internal processes that are required for a product to be developed. It does not
include marketing and deployment, as there are external aspects of product development.
MARKETING
activities a company undertakes to promote the buying or selling of a product or services.
FINANCE
is defined as the management of money and includes activities such as investing, borrowing,
leding, budgeting, saving, and forecasting.
PURCHASE AND INVENTORY
A purchase involves the acquisition of goods or services in exchange for a payment of some kind
and inventory refers to all the items, goods, merchandise, and materials held by a business for
selling in the market to earn a profit.
BOTTOM LINE
the final line in the accounts of a company or organization, stating the total profit or loss that has
been made