CHAPTER 5: Margin of Safety Ratio =

MOS
Actual or planned sales
COST VOLUME PROFIT AND BREAK EVEN ANALYSIS
Operating Income
Cost Volume Profit Analysis – a systematic Profit =
Actual Sales
Profit after Tax
examination of the relationships among costs, Profit before Tax (100%) =
100%−Tax Rate
activity levels or volume, and profit. 𝐹𝐶 + 𝑃𝑟𝑜𝑓𝑖𝑡 𝐵𝑒𝑓𝑜𝑟𝑒 𝑇𝑎𝑥
* Selling Price
Cost Behavior - refers to the way costs change with 𝐶𝑀𝑈

respect to a change in the activity level, such as

FC + Desired Profit FC+Desired Profit
production or sales volume, labor or machine hours, RS(u) = RS(p) =
CMU CMR
etc. RS(u) =
FC
RS(p) =
FC
Adj. CMU Adj. CMR
 Fixed Cost - cost that do not change
 Variable Cost – cost that change directly
 Mixed Cost - Ex. 5-6
Total Cost = Fixed Cost + Variable Cost Nancy Corporation
Fixed Cost = Total Cost – Variable Cost Income Statement

Relevant Range – refers to the band of activity Sales (20,000 units) 300,000
within which the identified cost behavior patterns Less: Cost of Goods Sold 180,000
are valid. Gross Income 120,000
High-Low Method – techniques used to segregate Less: Selling and Admin Expense 80,000
mixed cost components. Operating Income 40,000
Formula: Other Data:
difference in cost (high−low)  1⁄3 of the cost of goods sold is fixed
Variable Rate per Unit =
difference in activity level
 75% of the selling and admin expense is
Fixed Cost = Total Cost – (Activity Level * VRU)
variable
Required:
Check:
a. Total Fixed Cost = P80,000
Sales = (SP x No. of Units)
180,000 * 1⁄3 = 60,000 80,000 8 25% = 20,000
Less: Variable Cost = (VC x No. of Units)
Contribution Margin = (CMU x No. of Units)
Break Even Analysis b. VC/u and VC Ratio = P9 and 60%
180,000 9
BES/units =
Fixed Cost
BES/pesos =
Fixed Cost VC/u = =9 VCR = = .6 or 60%
20,000 15
CMU CMR
BES
BESR =
sales
c. CMU and CMR = 6 and 40%
6
CMU = 15 – 9 = 6 CMR = = .4 or 40%
Contribution Margin = Sales – VC or FC + P 15

Contribution Margin Unit = SP – VC

Contribution Margin Ratio =
CMU d. BEP in Units & Pesos = 13,333.33 & P200,000
SP 80,000 80,000
Variable Cost BEP/u = = 13,333.33 BEP/p= =200,000
Variable Cost Ratio = 6 40% 𝑜𝑟 .4
Sales
𝑉𝐶 Check:
VCR =
𝑆𝑃 Sales (13,333.33 * 15) = 200,000
𝐶𝑂𝐺𝑆
VC/u = Less: (13,333.33 * 9) = 120,000
𝑠𝑎𝑙𝑒𝑠 𝑖𝑛 𝑢𝑛𝑖𝑡𝑠

Sales =
Variable Cost
or
CM Contribution Margin = 80,000
Variable Cost Ratio CMR
Less: Fixed Cost = 80,000
BEP =0
Margin of Safety – the difference between actual or
planned sales volume and break even sales. It
e. MOS in units & pesos = 6,666.67 & P100,000
indicates the amount by which actual or planned
MOS/u = 20,000 – 13,333.33 = 6,666.67
sales may be reduced without incurring loss.
MOS/p = 300,000 – 200,000 = 100,000
Margin of Safety = sales – break even sales
f. MOSR & BESR = 33.33% and 66.67% 27,500 5,850
MOSR =
100,000
= 33.33% 9,300 2,889
300,000
200,000 15,000 4,200
BESR = = 66.67%
300,000 Highest 5,580 27,500
Lowest 2,889 9,300
g. Required Sales in units and in pesos if the Difference 2,961 18,200
2,961
company desires to earn operating income Rate of Variability = = 0.163 VC/MH
18,200
of P60,000 = 23,333.33 and 350,000
80,000+60,000 80,000+60,000
Highest
RS/u = RS/p = = 350,000 TC = FC + VC
6 40% 𝑜𝑟 .4
Check: FC = 5,850 – (27,500 * 0.163) = 1,367.5
Sales (23,333.33 * 15) = 350,000 Lowest
Less: (23,333.33 * 9) = 210,000 FC = 2,889 – (9,300 * 0.163) = 1,373
Contribution Margin = 140,000 Highest 4,200 15,000
Less: Fixed Cost = 80,000 Lowest 2,889 9,300
Profit = 60,000 Difference 1,311 5,700
1,311
Rate of Variability = = 0.23 VC/MH
5,700
h. Required Sales in units and in pesos if the Highest
company wants to earn profit of 20% of sales FC = 4,200 – (15,000 * 0.23) = 750
= 26,666.67 and P400,000 Lowest
80,000 80,000
RS/u = = 26,666.67 RS/p = = 400,000 FC = 2,889 – (9,300 * 0.23) = 750
3 20% 𝑜𝑟 .2
SP – 20% = 3 CMU (6-3) = 3 CMR 40%-20%
5-5 High-Low Method and Break-Even Computation
i. Assuming that the tax rate is 35%, the
required sales in units and in pesos if the Total Cost Units
company projects income after tax of July 31,700 6,000
65,000 = 30,000 and P450,000 August 26,800 4,100
65,000
80,000+( 65% ) September 32,740 5,800
= 30,000 x 15 SP = 450,000 October 39,600 7,300
6
November 35,200 5,340
j. The profit ratio for the year ended = 13.33% December 37,000 5,300
40,000
= 13.33 %
300,000
Highest 39,600 7,300
Lowest 26,800 4,100
5-3 High-Low Method Difference 12,800 3,200
Highest Lowest 12,800
Rate of Variability = = 4 VC/MH
Monthly Cost 24,600 18,750 3,200

Machine Hours 32,000 12,500 Highest

Difference 5,850 19,500 FC = 39,600 – (7,300 * 4) = 10,400
5,850 Lowest
Rate of Variability = = 0.30 VC/MH
19,500
FC = 26,800 – (4,100 * 4) = 10,400
SP = 9(Given) VC = 4
Highest = 10,400
BEP/u = 2,080
TC = FC + VC 5

FC = 24,600 – (9,600 * 0.30) = 15,000 FC (2,080 x 9) = 18,720

Lowest Less: VC (2,080 x 4) = 8,320
FC = 18,750 – (12,500 * 0.30)= 15,000 CM = 10,400
Less: FC = 10,400
BEP =0
5-4 High-Low Method
Sales Volume Shipping Expense
10,300 3,090 - Deth ♥