CVP Analysis

Cost-Volume-Profit
(CVP) Analysis

The basic objective of

CVP Analysis, also
referred to as break-even
analysis, is determining
how a company’s sales
impact profits.

CVP Formula:

Sales Revenues - Variable Costs - Fixed Costs

= Profit

OR

(Sales Price x no. of units) - (Variable cost per

unit x no. of units) - Fixed Costs = Profit

Image Source: https://www.researchgate.net/figure/Cost-Volume-Profit-Graph-5_fig3_30772086

CVP Analysis Use Case:
The Professor’s Nook (Filipino Restaurant)
Location UP Town Center

Fixed Costs Rent, Interest on bank loan, salary of Restaurant Manager

Variable Costs Food ingredients, cooks, servers, electricity, containers for take out

Selling Price per Food Serving P1,000

Variable Cost P600

Fixed Cost per Month 60,000

Question: How many customers do you need to have each month in order to break even?
 Contribution Margin

Selling Price per Food Serving P1,000

Variable Cost P600

Fixed Cost per Month 60,000

Contribution Margin = Net Sales - Total Variable Expenses

Contribution Margin = Contribution Margin per Unit x No. of Units Sold
Contribution Margin per Unit = Selling Price per Unit - Variable Cost per Unit

Contribution Margin per Unit = 1000 - 600

= 400
 Breakeven Point
Sales Revenue - Variable Costs - Fixed Costs = 0

How many units must The Professor’s Nook sell to break even?

P1000x - P600x - P60000 = 0 (P1000x150) - (P600x150) - P60000 = 0

P400x - P60,000 = 0 P150,000 - P90,000 - P60,000 = 0
P400x = P60,000
x = P60,000 / P400
x = 150
 CVP Analysis: Target Income
Target Income is the amount of income that enables management to reach its
objectives.

How many units must The Professor’s Nook sell to achieve a P300,000 target income?

P1000x - P600x - P60000 = P300,000 (P1000x900) - (P600x900) - P60,000 = P300,000

P400x - P60,000 = P300,000 P900,000 - P540,000 - P60,000 = P300,000
P400x = P300,000+60,000
P400x = P360,000
X = P360,000 / P400
x = 900
 Sensitivity Analysis
Sensitivity analysis is a financial model that determines how target variables are
affected based on changes in other variables known as input variables.

What if fixed costs increase from P60,000 to P80,000? How many units must The
Professor’s Nook sell to achieve a P300,000 target income?

P1000x - P600x - P80000 = P300,000 (P1000x950) - (P600x950) - P80,000 = P300,000

P400x - P80,000 = P300,000 P950,000 - P570,000 - P80,000 = P300,000
P400x = P300,000+80,000
P400x = 380,000
x = P380,000 / P400
x = 950
 Sensitivity Analysis
Sensitivity analysis is a financial model that determines how target variables are
affected based on changes in other variables known as input variables.

What if variable costs increase from P600 to P700 due to increase in cost of
ingredients? How many units must The Professor’s Nook sell to achieve a P300,000
target income?

P1000x - P700x - P60,000 = P300,000 (P1000x1,200) - (P700x1,200) - P60,000 = P300,000

P300x - P60,000 = P300,000 P1,200,000 - P840,000 - P60,000 = P300,000
P300x = P300,000+60,000
P300x = 360,000
x = P360,000 / P300
x = 1,200
 Sensitivity Analysis
Initial Data Proposed Changes

Sales price per meal P1,000 P800 (P1,000 x 80%)

Sales Volume 1,100 1,600 (1,100 +500)

Variable costs per meal P600

Fixed costs P60,000 P80,000 (60,000 + 20,000

Target income P300,000 x

Sales Revenue - Variable Costs - Fixed Costs = Target Income

(P800 x 1,600) - (P600 x 1,600) - P80,000 = x
P1,280,000 - P960,000 - P80,000 = x
P240,000 = x (Target Income)

Is it a good decision to implement changes?

 Sensitivity Analysis
Initial Data Proposed Changes

Sales price per meal P1,000

Sales Volume 1,100

Variable costs per meal P600 P500 (P600-P100)

Fixed costs P60,000 P80,000 (60,000 + 20,000)

Target income P300,000 x

Sales Revenue - Variable Costs - Fixed Costs = Target Income

(P1,000 x 1,100) - (P500 x 1,100) - P80,000 = x
P1,100,000 - P550,000 - P80,000 = x
P470,000 = x (Target Income)

Is it a good decision to implement changes?

 Sales Mix
Sales Mix is the proportion of sales revenue represented by each of a company’s
products.

Product A Product B Product C Total

Sales Revenue P25,000 100% P45,000 100% 30,000 100% P100,000 100%

Less Variable Costs P20,000 80% P30,000 66.67% 21,000 70% P71,000 71%

Contribution Margin P5,000 20% P15,000 33.33% 9,000 30% P29,000 29%

Sales Mix 25% 45% 30% 100%

What business strategy can you make to increase contribution margin?

 Reminder

F2F Classes, Room 1 TMC

May 11, 2023