 The cost volume profit analysis, commonly referred to

as CVP, is a planning process that management uses to

predict the future volume of activity, costs incurred, sales
made, and profits received.
 The separation of fixed costs from variable costs
contributes to an understanding of how revenues, costs,
and volume interact to generate profits. With this
understanding, managers can perform any number of
analyses that fit into a broad category called COST-
VOLUME-PROFIT.
 CVP is used to determine how changes in costs and volume
affect a company's operating income and net income. In
performing this analysis, there are several assumptions
made, including: Sales price per unit is constant. Variable
costs per unit are constant. Total fixed costs are constant.
 Cost - means the expenses involved in producing
or selling a product or service.
 Volume - which means the number of units
produced in the case of a physical product, or
the amount of service sold.
 Profit - which means the difference between the
selling price of a product or service minus the
cost to produce or provide it.
 Activity level. This is the total number of units sold in the
measurement period.
 Price per unit. This is the average price per unit sold,
including any sales discounts and allowances that may reduce
the gross price. The price per unit can vary substantially from
period to period based on changes in the mix of products and
services; these changes may be caused by old product
terminations, new product introductions, product promotions,
and the seasonality of sales for certain items.
 Variable cost per unit. This is the totally variable cost per
unit sold, which is usually just the amount of direct
materials and the sales commission associated with a unit
sale. Nearly all other expenses do not vary with sales volume,
and so are considered fixed costs.
 Total fixed cost. This is the total fixed cost of the business
within the measurement period. This figure tends to be
relatively steady from period to period, unless there is a step
cost transition where management has elected to incur an
entirely new cost in response to a change in activity level.
 The basic CVP formula is the price per unit
multiplied by the number of units sold, which
equals the sum of total variable costs, total
fixed costs and accounting profit.
 CVP analysis can help companies determine their
contribution margin, which is the amount
remaining from sales revenue after all variable
expenses have been deducted. The amount that
remains is first used to cover fixed costs, and
whatever remains afterward is considered profit.
 Cost-volume-profit (CVP) analysis is used to
determine how changes in costs and volume
affect a company's operating income and net
income. In performing this analysis, there are
several assumptions made, including: Sales price
per unit is constant. Variable costs per unit are
constant. Total fixed costs are constant.
 The break-even point refers to the revenues needed to cover a company's
total amount of fixed and variable expenses during a specified period of
time. The revenues could be stated in dollars (or other currencies), in
units, hours of services provided, etc.

 Breakeven point is the price level at which the market price of a security
is equal to the original cost. For options trading, the breakeven point is
the market price that an underlying asset must reach for an option buyer
to avoid a loss if they exercise the option.
 TARGET PROFIT ANALYSIS
=is about finding out the estimated business
activities to perform to earn a target profit during a
certain period of time.

FORMULA
TARGET PROFIT IN UNITS:
# UNITS= FIXED COST+ TARGET PROFIT
CONTRIBUTION MARGIN

CONTRIBUTION MARGIN=PRICE- UNIT VARIABLE COST

 HOW MUCH OUTPUT OR SALES LEVEL CAN FALL BEFORE A
BUSINESS REACHES ITS BREAK EVEN POINT (BEP).

 FORMULA : DIFFERENCE BETWEEN ACTUAL OR EXPECTED SALES

AND BREAK EVEN POINT(BEP)
 BLAZIN BOARD COMPANY PLANS TO SELL 10,000 SNOWBOARDS AT
$400 EACH IN THE COMING YEAR.
PRODUCT COST INCLUDE:
1. CALCULATE THE NUMBER OF UNITS BLAZIN-BOARDS MUST SELL TO BREAK
EVEN.PREPARE AN INCOME STATEMENT FOR CALCULATED UNITS.
2.CALCULATE NO. OF UNITS BLAZIN MUST SELL TO ACHIEVE TARGET INCOME
OF P240,000

3. CALCULATE NUMBER OF MARGIN IN SAFETY IN UNITS FOR THE COMING

YEAR.

4. CALCULATE THE BREAK EVEN SALES AND MARGIN OF SAFETY IN SALES FOR
THE COMING YEAR.

5. WHAT IS THE MARGIN OF SAFETY PERCENTAGE?

1.BEP=TFC/(P-UVC)
=P1,200,000/(P400-P240)
=7500
*1,200,000
=800,000(FIXED FACTORY OVER HEAD)+400,000(FIXED SELLING AND
ADMINISTRATIVE EXPENSE.
*240
=80(DM)+125(DL)+15(VOH)+20(COMM.EXP. 5% OF 400(PRICE)

SALES(7500units@ P400) P3,000,000

LESS:VARIABLE EXPENSES P1,800,000
(7500@P240)
CONTRIBUTION MARGIN P1,200,000
LESS:FIXED EXPENSES P1,200,000
(800,000+400,000)
OPERATING INCOME P0
2.# UNITS= FIXED COST+ TARGET PROFIT
CONTRIBUTION MARGIN

=(P1,200,000+P240,000)
(400-240)

=P1,440,000/P160

=9,000

*must sold 9000 units of snowboard inorder to achieve

the target income .
3.MOS=ACTUAL/EXPECTED-BEP
=10,000-7500
=2,500 UNITS

4.BEPSALES=7500*P400
= P3,000,000
MOS SALES=(10,000*400)-3,000,000
=P1,000,000
5.MOS %= 4,000,000-3,000,000
4,000,000
= 1,000,000
4,000,000
=.25*100
=25%
NOTE: 100 IS CONSTANT
 Operating leverage is concerned with the relationship
between the firm’s sales revenue and its earnings
before interest and taxes (EBIT) or operating profits.
 Thedegree of operating leverage (DOL) is the
numerical measure of the firm’s operating
leverage.
 John’s Software is a leading software business, which
mostly incurs fixed costs for upfront development and
marketing. John’s fixed costs are $780,000, which goes
towards developers’ salaries and the cost per unit is $0.08.
The company sells 300,000 units for $25 each. Given that
the software industry is involved in the development,
marketing and sales, it includes a range of applications,
from network systems and operating management tools to
customized software for enterprises.
 Sales mix is the proportion in which two or more products
are sold. For the calculation of break-even point for sales
mix, following assumptions are made in addition to those
already made for CVP analysis:
 The proportion of sales mix must be predetermined.
 The sales mix must not change within the relevant time period.
 Following information is related to sales mix of product A,
B and C.
Product A B C
Sales $15 $21 $36
Price
per Unit
Variable $9 $14 $19
Cost per
Unit
Sales 20% 20% 60%
Mix
Percent
age
Total $40,000
Fixed
Cost
Step 1: Calculate the contribution margin per unit for
each product:

Product A B C
Sales $15 $21 $36
Price
per Unit
− $9 $14 $19
Variable
Cost per
Unit
Contribu $6 $7 $17
tion
Margin
per Unit
Step 2: Calculate the weighted-average contribution margin per unit for
the sales mix using the following formula:
Product A CM per Unit × Product A Sales Mix Percentage
+ Product B CM per Unit × Product B Sales Mix Percentage
+ Product C CM per Unit × Product C Sales Mix Percentage
= Weighted Average Unit Contribution Margin

Product A B C
Sales Price $15 $21 $36
per Unit
− Variable $9 $14 $19
Cost per
Unit
Contributio $6 $7 $17
n Margin
per Unit
× Sales Mix 20% 20% 60%
Percentage

$1.2 $1.4 $10.2

Sum: $12.80
Weighted
Average CM
per Unit
Step 3: Calculate total units of sales mix required to break-even using
the formula:

Break-even Point in Units of Sales Mix = Total Fixed Cost ÷

Weighted Average CM per Unit

Total Fixed Cost $40,000

÷ Weighted Average CM per Unit $12.80
Break-even Point in Units of 3,125
Sales Mix
Step 4: Calculate number units of product A, B
and C at break-even point:

Product A B C
Sales Mix 20% 20% 60%
Ratio
× Total 3,125 3,125 3,125
Break-
even
Units
Product 625 625 1,875
Units at
Break-
even
Point
Step 5: Calculate Break-even Point in dollars as follows:

Product A B C
Product 625 625 1,875
Units at
Break-
even
Point
× Price $15 $21 $36
per Unit
Product $9,375 $13,125 $67,500
Sales in
Dollars
Sum: $90,000
Break-
even
Point in
Dollars
 COST
STRUCTURE
and
PROFIT
STABILITY
- Refers to the relative proportion
of Fixed and Variable Costs in an
organization.

- Typically used to plan a business

and to communicate the costs of
a strategy or investment.
CONTRIBUTION FORMAT INCOME
STATEMENTS FOR TWO BLUEBERRY
FARMS
BOGSIDE FARM STERLING FARM
AMOUNT PERCENT AMOUNT PERCENT

SALES $100,000.00 100% $100,000.00 100%

VARIABLE EXPENSES $60,000.00 60% $30,000.00 30%
CONTRIBUTION MARGIN $40,000.00 40% $70,000.00 70%
FIXED EXPENSES $30,000.00 $60,000.00
NET OPERATING INCOME $ 10,000.00 $ 10,000.00
Assume that each farm experiences a 10%
increase in sales without any increase in fixed
costs. The new income statements would be as
follows:
BOGSIDE FARM STERLING FARM
AMOUNT PERCENT AMOUNT PERCENT

SALES $110,000.00 100% $110,000.00 100%

VARIABLE EXPENSES $66,000.00 60% $33,000.00 30%
CONTRIBUTION MARGIN $44,000.00 40% $77,000.00 70%
FIXED EXPENSES $30,000.00 $60,000.00
NET OPERATING INCOME $ 14,000.00 $ 17,000.00
What if sales drop below $100,000.00? What are the
farms’ break-even points? What are their margins of
safety?
The computation needed to answer these questions
are shown below using the contribution margin
method:
BOGSIDE FARM STERLING FARM

FIXED EXPENSES $ 30,000.00 $ 60,000.00

CONTRIBUTION MARGIN RATIO ÷ 0.40 ÷ 0.70
DOLLAR SALES TO BREAK EVEN $ 75,000.00 $ 85,714.00
TOTAL CURRENT SALES (a) $ 100,000.00 $ 100,000.00
BREAK-EVEN SALES $ 75,000.00 $ 85,714.00
MARGIN OF SAFETY IN SALES $ (b) $ 25,000.00 $ 14,286.00
MARGIN OF SAFETY PERCENTAGE (b) / (a) 25.00% 14.30%
- means that profit is in stable form.

- comes only when there is enough sales

occur.
 To summarize, without knowing the future, it is
not obvious which cost structure is better. Both
have advantages and disadvantages. Sterling
Farm, with its higher fixed costs and lower variable
costs, will experience wider swings in net operating
income as sales fluctuate, with greater profits in
good years and greater losses in bad years.
Bogside Farm, with its lower fixed costs and higher
variable costs, will enjoy greater profit stability and
will be more protected from losses during bad
years, but at the cost of lower net operating income
in good years.
End.