Polytechnique University of the Philippines
Sto. Tomas Branch
Cost-
Volume-
Profit
Analysis
CHAPTER 8
Jhun Jhun M. Quiatchon, MBA
LEARNING
• OBJECTIVES
At the end of this chapter, the student should
be able to:
1. identify the different elements that
influence profit;
2. discuss break-even analysis; and
3. Perform CVP analysis
• The economic decisions and actions
of management are directed toward
Overview the realization of profit.
Definition • Cost-volume-profit
(CVP) analysis is a
way to find out how
changes in variable
and fixed costs
affect a firm's
profit.
Internal Elements that
Affects the Profitability
Level of a Business
• Prices of the product sold
• Volume of sales
• Variable cost per unit
• Fixed Cost
• Product Mix
Assumptions of CVP Analysis
• All cost are classified as fixed costs and variable costs.
• The fixed cost remains constant within the relevant range.
• The variable cost changes in proportion to the changes in activity
levels (e.g. volume)
• The product mix is considered constant.
• Inventories do not significantly change.
• The business operates under normal operating conditions.
CVP Analysis
• CVP analysis is a quantitative approach that
determines the sales volume and mix of products
required to achieve the desired profitability level of a
business.
• A special case of CVP is the break-even analysis.
CVP Analysis
• Break-even (BE) analysis is a tool that determines the
point at which the total costs and revenue are equal.
• The break-even point can be determined either with
the aid of a graph or using a formula.
• The margin of safety is the difference between the
actual or targeted sales level and the break-even
sales.
BE formula
• In terms of units or quantities
BE
• In terms of pesos or amount
BE
Contribution Margin (CM) formula
• CM per unit
BE = Unit selling price – Unit variable cost
• In terms of pesos or amount
CM Ratio
BE for multi-products
• In terms of combined units
• BE
• In terms of combined pesos
BE
Weighted average contribution margin
(WACM) formula
WACM per unit = [Unit x No. of units per mix] + [Unit CM x Unit per mix]
WACM ratio
Sales at the desired profit level formula
• Sales (units)
Sales (pesos)
Margin of Safety formula
• Margin of safety =Actual/Targeted Sales – BE Sales
Illustration
Princess Company presents the following information:
Sales revenue Php3,000,000
Total variable cost 1,800,000
Total fixed cost 800,000
Sales price per unit 400
Variable cost per unit 240
Required. Perform the following
1. Construct a BE chart
2. Compute the BE in units and pesos
3. Determine the margin of safety
Steps in Constructing BE Chart
1. Designate the horizontal line (x-axis) as the sales volume in pesos or in
units with appropriate intervals.
2. Designate the vertical line (y-axis) as the cost with marked intervals.
3. Draw the fixed cost line parallel to the x-axis. The line should start from
the y-axis and run to the right side of the graph
4. Draw the total cost line starting from the point of origin of the fixed cost
line.
5. Draw the revenue line starting from the zero point.
6. Draw the BE line using a broken line starting from the point where the
revenue and cost lines intersect. The line should run downward and
leftward until it meets the x-axis and y-axis.
Answer 1
The BE chart reveals
that the total revenue
of Php2,000,000 is
equal to the total cost
of Php2,000,000.
Below this level, the
business incurs losses,
while above this point,
it realizes profit.
Answer 2
• In computing the BE in units, the CM per unit is first
computed as follows:
CM per unit = Unit selling price – Unit variable cost
= 400-200
= Php160
Answer 2
• The BE in units is determined as follows:
BE
BE
BE
Answer 2
• To compute the BE in pesos, the contribution
margin ratio is first determined as follows:
CM Ratio
Answer 2
• The BE in pesos is then computed as follows:
B
Answer 2
• To prove that the BE level of the business is
Php2,000,000 or at 5,000 units, the following
computing is presented:
BE = Total revenue – Fixed Cost – Variable Cost
= (5,000 units x Php400)-Php800,000 – (5,000 units x Php240)
= 2,000,000-800,000-1,200,000
Answer 3
• The margin of safety is determined as follows:
Margin of safety=Actual/Targeted Sales – BE Sales
=3,000,000 – 2,000,000
= Php1,000,000
Answer 3
• The margin of safety is computed as follows:
Margin of safety=Actual/Targeted Sales – BE Sales
=(3,000,000/400) - 500
= 2,500 units
