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Cost-Volume-Profit

Analysis

Prof. Jason R. Radam

Basic Principles

Cost and expenses are segregated into fixed and


variable elements
Profit = Sales Cost and expenses
Profit = Sales Fixed costs Variable costs

Basic Principles
Basic assumptions within the relevant range:

Linearity The behavior of sales and costs are linear


Behavior of sales, costs, and expenses:

Sales it changes directly in relation to the level of units sold


Fixed costs (total) is constant regardless to the change in
the level of units of production and sales
Fixed costs (per unit) changes inversely with the level of
production
Variable cost (total) change in direct proportion with the
level of production
Variable cost (per unit) is constant regardless to the change
in the level of units of production and sales

Basic Principles

Selling price assumed to be constant


Work in process (WIP) inventory disregarded; there is
no WIP inventory
Finished goods (FG) inventory no change;
production = sales
Product and sales mix:

There is only one product, or


If there are two or more products produced and sold, the
sales mix is assumed to be constant

Marginal Income Statement


Condensed format
Sales
Px
Less: Variable cost and expenses
x
Contribution margin
P x
Less: Fixed cost and expenses
x
Income before income tax
P x

Expanded format
Sales
P x
Less: Variable cost of goods sold
x
Manufacturing margin
P x
Less: Variable expenses
x
Contribution margin
P x
Less: Fixed cost and expenses
x
Income before income tax
P x

Basic Principles

Variable production costs refer to direct materials,


direct labor, and variable overhead
Variable expenses are those expenses incurred not
related to production; examples are delivery expenses,
salesmens commission, and packing supplies
Fixed costs and expenses can be direct or indirect;
examples are rent of factory and office building, salaries
expense, and taxes and insurances

Relevant formulas
Contribution margin (CM) = ?
CM = Sales Variable costs

CM = Sales x CMR

CM Ratio (CMR) = ?
CMR = 100% - VC Ratio
CMR = UCM / USP

Unit CM (UCM) = ?
UCM = USP UVC
UCM = FC / BEP (units)
UCM = CM / Quantity sold

Profit (EBIT) = ?
Profit = CM Fixed costs
Profit = Sales x ROS
Profit = CM - in FC
Profit = CM + in FC

Break-even point (BEP) = ?


BEP (units) = FC / UCM
BEP (pesos) = FC / CMR
Comp. BEP (units) = FC / Ave.
UCM
Comp. BEP (pesos) = FC / Ave.
CMR

Relevant formulas
At BEP:
Profit (loss) = 0
Sales = Total costs
Contribution margin = Total
fixed costs
Fixed costs (FC) = ?
FC = CM Profit
FC = BEP (units) x UCM

VC Ratio (VCR) = ?
VCR = VC / Sales
VCR = UVC / USP
VCR = 100% - CMR
VCR = Costs / Sales
Margin of Safety (MS) = ?
MS = Actual sales Actual
breakeven sales
MS = Budgeted sales Budgeted
breakeven sales
MS = Sales x MS Ratio (MSR)

Relevant formulas
MSR = MS / Actual (budgeted)
sales
MSR = 1 (BE Sales / Actual
sales)
Degree of operating leverage (DOL):
DOL = CM / EBIT
DOL = % in EBIT / % in Sales

Exercise Problems
Matador Company produces a merchandise that has the following data:
Unit sales price
Unit variable costs
Total fixed costs
Units sold during the current year

P80 per unit


P48 per unit
P640,000 per year
25,000 units

Required:
a.
Unit contribution margin, contribution margin ratio, and variable cost ratio
b.
Break-even point in units and in pesos
c.
Margin of safety in units and in pesos, and margin of safety ratio
d.
Net profit ratio (ROS)
e.
The amount of profit using the margin of safety
f.
If sales increase by P300,000, how much would you expect income to increase?

Solution Guide
a.

Units

Unit price

Amount

Rate

Sales

25,000

P80

P2,000,000

100%

Less: Variable costs

25,000

48

1,200,000

60%

Contribution margin

25,000

P32

P 800,000

40%

Less: Fixed costs


Income before income tax

640,000
P 160,000

UCM = P32 ; CMR = 40% ; VCR = 60%


b. BEP (units) = FC / UCM = P640,000 / P32 = 20,000 units
BEP (pesos) = FC / CMR = P640,000 / 40% = P1,600,000
To prove: Contribution margin (P1,600,000 x 40%)
P640,000
Less: Fixed costs
640,000
Profit
0

Solution Guide
c.

Actual sales
Less: Break-even sales
Margin of safety

Amount

Units

Rate

P2,000,000

25,000

100%

1,600,000

20,000

80%

P 400,000

5,000

20%

d. Net profit ratio (ROS) = P160,000 / P2,000,000


= 8%
e. Profit = MS x CMR = P400,000 x 40% = P160,000

f. Increase in CM (increase in profit) = increase in sales x CMR


= P300,000 x 40% = P120,000

Exercise Problems
Emperador Corporation produces three products, namely, products L, B and M.
Multi-product sales mix are based on units. The following data are related to the
three products:
L
Unit sales price
Unit variable costs
Sales mix

P 200

P 50

P 120

120

20

90

Total fixed costs = P800,000

Required:
a.
Weighted average unit contribution margin (WAUCM)
b.
Composite BEP in units and allocation of CBEP
c.
Composite BEP in pesos
d.
Sales per mix and composite BEP
e.
The number of units to be sold if the company wants a profit of P400,000.

Solution Guide
a.

UCM

Sales mix ratio

WAUCM

P80

2/10

P16

30

5/10

15

30

3/10

9
P40

b. Composite BEP (units) = FC / WAUCM = P800,000 / P40


= 20,000 units

Allocation of Comp. BEP (units):


L = 20,000 x 2/10 = 4,000 units
B = 20,000 x 5/10 = 10, 000 units
M = 20,000 x 3/10 = 6,000 units

Solution Guide
c. Composite BEP (pesos) = FC / WACMR = P800,000 / P 39.604 = P 2,020,000
WACMR = WAUCM / WAUSP = P40 / P101 = P 39.604
WAUSP = ?
L = P200 x 2/10 = P 40
B =
50 x 5/10 =
25
M = 120 x 3/10 =
36
WAUSP
P101
d. Sales per mix = FC / Comp. UCM = P800,000 / P400 = 2,000 units

UCM

Sales mix

WAUCM

P80

P160

30

150

30

90
P400

Solution Guide
Composite BEP (units)
L = 2,000 x 2 =
4,000 units
B = 2,000 x 5 =
10,000 units
M = 2,000 x 3 =
6,000 units
Composite BEP (units) 20,000 units

e. Composite sales = FC + Target Profit / Ave. UCM


= (P800,000 + 400,000) / P40
= 30,000 units

End