Lecture On Bus Math 3 - CVP Analysis

Aklan Catholic College
Archbishop Gabriel M. Reyes St.

5600 Kalibo, Aklan, Philippines
Tel. Nos.: (036)268-4152; 268-9171
Fax No.: (036)268-4010
Website: http://www.acc.edu.ph
E-mail Add: aklancollege@yahoo.com
COST-VOLUME PROFIT ANALYSIS
- Systematic examination of the relationships among costs, cost driver, and profit.
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 acquire.
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, which is shown below:
Contribution Margin Income Statement
Sales (units x selling price) Pxxx

Less: Total Variable costs (units x variable cost per unit) xxx
Contribution margin Pxxx
Less: Total fixed costs xxx
Profit/Operating income Pxxx
Based on the above, you can notice the following computations:
Total Sales = Units sold x Unit selling price

Total Variable Costs = Units sold x Unit variable cost
Total Costs = Total variable costs + Total fixed costs
Profit = Total Sales – Total costs
Contribution Margin = Total Sales – Total Variable Costs
Illustration
Let us say,
Unit sales price P200

Unit variable cost P120
Total fixed costs P400,000
Units sold 8,000 units
Compute the following:

1. Total sales
2. Total variable costs
1
3. Total costs
4. Profit
5. Contribution margin
VARIABLE COSTS AND FIXED COSTS
Variable costs vary directly in proportion to the change in the level of production. Variable cost
change in total in direct proportion to changes in the level of production but is constant on a per
unit basis. Examples of variable costs are direct materials, direct labor, variable overhead, and
variable expenses.
Fixed costs remain constant regardless of the level of production but changes inversely in
relation to the level of production. Examples of fixed costs are rental expense, interest expense,
insurance expense, depreciation expense, advertising expense, etc.
Cost Sensitivity and Break-Even Analysis
Let us say,
Unit sales price P200

Let us observe the following:

Units Sold Total Sales Total VC Unit VC Total FC Unit FC Total Cost Profit(Loss)
3,000 units P600,000 P360,000 P120 P400,000 P133.33 P760,000 P(160,000)
4,000 units P800,000 P480,000 P120 P400,000 P100.00 P880,000 P(80,000)
5,000 units P1,000,000 P600,000 P120 P400,000 P 80.00 P1,000,000 P -0-
6,000 units P1,200,000 P720,000 P120 P400,000 P 66.66 P1,120,000 P80,000
7,000 units P1,400,000 P840,000 P120 P400,000 P 57.14 P1,240,000 P160,000

Break-Even Point – the sales volume (in pesos or in units) where total revenues or sales equals
total costs, that is there is no profit or loss.
METHODS OF DETERMINING THE BREAKEVEN POINT
1. Graphical Method
Amount (Pesos)
Total Sales
Profit Total Costs

Breakeven Point
Variable Costs
Fixed Costs
0 No. of Units
2
2. Contribution Margin Method (Formula Method)
a. Breakeven Point in Units
BEPUnits = FC
UCM
where : BEPunits = Breakeven point in units

FC = Total Fixed Costs
UCM = Unit Contribution Margin
UCM = Unit SP – Unit VC
b. Breakeven Point in Pesos
BEPPesos = FC
CMR
where : BEPpesos = Breakeven point in pesos

FC = Total Fixed Costs
CMR = Contribution Margin Rate
CMR = CM/Total Sales or UCM/USP
Exercises:
1. A company has the following budgeted data for the year 2016:
Sales in units 100,000 units

Unit selling price P150
Compute for the following:

a. Total Sales d. Total costs
b. Total variable costs e. Profit
c. Contribution margin
2. MXD Corporation has the following data regarding its first year of operations:
Units selling price P120

Unit variable costs P 90
Determine the Breakeven point using:

a. Graphical method
b. Formula method
-END-

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Aklan Catholic College

Archbishop Gabriel M. Reyes St.

COST-VOLUME PROFIT ANALYSIS

Elements of CVP Analysis

Applications of CVP Analysis

Planning and decision-making, which may involve choosing the:

THE CONTRIBUTION MARGIN INCOME STATEMENT

Contribution Margin Income Statement

Sales (units x selling price) Pxxx

Based on the above, you can notice the following computations:

Total Sales = Units sold x Unit selling price

Unit sales price P200

Compute the following:

VARIABLE COSTS AND FIXED COSTS

Cost Sensitivity and Break-Even Analysis

Unit sales price P200

Let us observe the following:

4,000 units P800,000 P480,000 P120 P400,000 P100.00 P880,000 P(80,000)

5,000 units P1,000,000 P600,000 P120 P400,000 P 80.00 P1,000,000 P -0-

6,000 units P1,200,000 P720,000 P120 P400,000 P 66.66 P1,120,000 P80,000

7,000 units P1,400,000 P840,000 P120 P400,000 P 57.14 P1,240,000 P160,000

METHODS OF DETERMINING THE BREAKEVEN POINT

Profit Total Costs

a. Breakeven Point in Units

where : BEPunits = Breakeven point in units

b. Breakeven Point in Pesos

where : BEPpesos = Breakeven point in pesos

Sales in units 100,000 units

Compute for the following:

Units selling price P120

Determine the Breakeven point using:

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