C-V-P Analysis

PRESENTED BY: ERNEST LOLINCO

Cost-Volume-Profit (CVP)
Analysis
is

the study of the effects of changes of

costs and volume on a companys
profits.
is one of the fundamental financial
analysis tools for ascertaining the
underlying profitability of a business

How the volume affects the

COSTS and PROFIT of the
company?

Relationship among cost-volumeprofit

Sales Level

1. Variable
2. Fixed

Net Income

Components of CVP Analysis

Volume
Unit

or activity level

selling price

Variable
Total

cost per unit

fixed costs

Sales

mix

CVP Assumptions
The

behavior of both costs and revenues is

linear throughout the relevant range.

All

costs can be classified as either variable or

fixed.

Changes

in activity are the only factors that

affect costs.

All

units produced are sold.

When

more than one type of product is sold,

total sales will be in a constant sales mix.

Income Statement Preparation

Income Statement Preparation

Gross Margin
Sales

P xx

COGS

(xx)

GM/GP

xx

S&A
NI

Contribution Margin

(xx)
xx

Sales

xx
Variable Cost
Contribution Margin
Fixed Cost
Net Income

(xx)
xx
(xx)
xx

Contribution Margin Approach

Sales P xx (SP x Sales units)
Variable Cost

(xx) (VC/u x Sales units)

Contribution Margin
Fixed Cost
Net Income

(xx)
xx

xx (CM/u x Sales units)

Uses of C-V-P Analysis

Break-even
Analysis

What comes to your

mind when your heard
BREAK-EVEN?
ANSWER: THE
SCRIPT

Break-even point
the

level of activity where total

revenues equals total costs,
both fixed and variable.

Scenario

loss.

wherein no income nor

Break even point can be

expressed..

Method used in computing Breakeven point

I. Mathematical Equation
In

its simplest form, the equation for

break-even sales is:

Example:
P. Francis Corporation sells
only one product with a
selling price of P200 and a
variable cost of P80 per unit.
The companys monthly fixed
expense is P60,000.

Solution:
BEP

V.C

P200x
60,000

P80x

P200x-80x =
P120x

Required: Determine the

breakeven point in units sold
and sales peso.

F.C
+

60,000

= 60,000
= 500 units

Sales peso = P200(500

units)

II. Contribution Margin

Sales
Variable Cost
units)
Contribution Margin
units)
Fixed Cost
Net Income

P xx
(xx)
xx
(xx)
xx

(SP x Sales units)

(VC/u x Sales
(CM/u x Sales

Example:
P. Francis Corporation sells
only one product with a
selling price of P200 and a
variable cost of P80 per unit.
The companys monthly fixed
expense is P60,000.

Solutions:
Sales

P100,000 (P200

V.C.

x ?)

40,000 (P80 x ?)

C.M

P60,000

F.C.

P60,000

N.I

-0-

Required: Determine the

breakeven point in units sold BEP(u)
and sales peso.
BEP(P)

=
=

(P120

x ?)

F.C/Cmu
F.C/CMr

III. Graphical Presentation

An

effective way to derive the break-even

point is to prepare a break-even graph.

The

graph is referred to as a cost-volume-profit

(CVP) graph since it shows costs, volume, and
profits.

Q: What is the
importance of Breakeven Analysis?

What if the company

offers multiple
products, how do we
compute B.E.P?

Uses of C-V-P Analysis

Sales Mix
The

relative amounts
purchased of each of the
products or services a
company sells.

Example:
P. Francis Corporation sells 4
windows in every door with
selling price of P50 and
P150 while variable cost of
P20 and P70 per unit
respectively. The companys
monthly fixed expense is
P60,000.
Required: Determine the break
even point in units sold and
sales peso.

Step 1: Compute the CM

per composite
unit.
SP
VC
CMu
Sales Mix

Window Doors
s
P50.00
P150.0
0
P20.00
P
70.00
P30.00
P
80.00
4
1

Step 2: Compute break-even

point
in composite units.
Fixed costs
Break-even point
= Contribution margin
in composite units
per composite unit
=

P60,000
P200 per composite
unit

Break-even point
in composite units

300 units

Step 3: Determine the number of

windows and doors that
must
be sold to break even.
Product
Window
Door

Sales
Mix
4
1

Composite
Units
300 units
300 units

Units
1,200
300

Step 4: Verify the results.

Selling Price
Variable cost
CM/u
Sales Volume
Total Contribution
Fixed Cost
Income

Windows

Doors

P50.00
20.00
30.00
1,200
units
P36,000

P150.00
70.00
80.00
300
units
P24,000

Combine
d

P60,000
P60,000
-0-

Q: What is the
importance of Sales Mix?

Importance of Sales Mix

1.

To determine how many units you need to sell

in every product you offer at Break even point.

2.

The company should deemphasize or even stop

selling a low-profit product or service.

3.

Company can focus on increasing sales of a

high-profit product or service

Q: Can we used BEP

Analysis with Target
Income?

Uses of C-V-P Analysis

Target Income
It

indicates the sales necessary

to achieve a specified level of
income.

How

many units do I need to

sold to achieve this level of
income?

Method used in computing Breakeven point with Target Net Income

I. Mathematical Equation
a. Break Even Point

b. Target Net Income

Required
Sales

Variable
Costs

Fixed
Costs

Target Net
Income

Example:
P. Francis Corporation sells only
one product with a selling price
of P200 and a variable cost of
P80 per unit. The companys
monthly fixed expense is
P60,000 and target Net Income
is P120,000.

Solution:

Req. Sales = V.C + F.C + NI

P200x
= P80x
+60k+120k
P200x-80x = 180,000
P120x

Required: Determine the

required units sold and sales
peso to achieve target Net
Income

x
Sales peso
units)

= 180,000
= 1500 units
= P200(1,500

Method used in computing Breakeven point with target Net Income

Example:
P. Francis Corporation sells only
one product with a selling price
of P200 and a variable cost of
P80 per unit. The companys
monthly fixed expense is
P60,000 and target Net Income
is P120,000.
Required: Determine the
required units sold and sales
peso to achieve target Net
Income

Solutions:
Sales
V.C.

P300,000 (P200

120,000 (P80 x ?)

C.M

P180,000 (P120

F.C.

P60,000

N.I

x ?)
x ?)

120,000

Req. (u) = F.C+ NI/Cmu

Req. (P) = F.C+ NI/CMr

Margin of Safety
the

difference between actual or expected

sales and sales at the break-even point

This

relationship measures the breathing

room or cushion that management has
in order to break even if actual sales fail to
materialize.

may

be expressed in peso or as a ratio.

Assuming that actual (expected) sales for P.

Francis Corp. are P250,000, the computations
are:
Margin of Safety in Peso
Actual (Expected)
Sales

P250,000

Break-even Sales

Margin of Safety
in Peso

P100,000

P150,000

Margin of Safety in Ratio

Margin of Safety
in Peso

P150,000

Actual (Expected)
Sales

Margin of Safety
in Ratio

P250,000

60%

~END~
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