COST-VOLUME-PROFIT (CVP) ANALYSIS

CVP analysis examines the behavior of total revenues, total costs and
operating income as changes occur in the output level, selling price,
variable cost per unit or fixed costs of a product.
BREAK-EVEN SALES that point of activity level (sales volume) where
total revenues equal total costs, i.e., there is neither profit nor
loss.
Methods of computing break-even point
1. Equation method or algebraic method
2. Contribution margin method or formula approach
3. Graphical
Assumptions of CVP Analysis
1. Changes in the level of revenues and cost arise only because of
changes in the number of product (or service) units produced and
sold.
2. Total costs can be separated into fixed component that does not
vary with the output level and a component that is variable with
respect to the output level.
3. When represented graphically, the behavior of total revenues and
total costs are linear (represented as a straight line) in
relation to output level within a relevant range and time period.
4. The selling price, variable cost per unit and fixed costs are
known and constant.
5. The analysis either covers a single product or assumes that the
sales mix, when multiple products are sold, will remain constant
as the level of total units sold changes.
6. All revenues and cost can be added and compared without taking
into account the time value of money.
Exercises:
1. Apple Zarucki Company produces a single product. The projected
income statement for the coming year follow:
Sales (50,000 units @ 45)
2,305,000
Less: variable cost
1,305,000
Contribution margin
945,000
Less: fixed costs
812,700
Operating income
132,300
Required:
a. Compute unit contribution margin and the unit that must be
sold to break even.
b. Suppose that 30,000 units are sold above breakeven. What is
the operating income?
c. Compute the contribution margin ratio and the breakeven point
in pesos. Suppose that revenues are P 200,000 more than
expected, what would the total operating income be?
Refer to the original data in answering each of the following
questions:
d. Determine the number of units sold that must be sold to earn
before tax profit of P 158,760.
e. Compute the amount of peso sales that must be generated to
earn after tax profit of P 138,915. (The income tax rate is
30%)

f. Compute the amount of peso sales that the company must

generate to earn before tax profit of 22% of sales.
g. How many units must be sold to earn before tax profit per unit
of P 3.90?
h. Compute the margin of safety in units and in pesos. What is
the margin of safety ratio?
2. The Doral Company manufactures and sells pens. Currently, 5,000
units are sold per year at P .50 per unit. Fixed costs are
P 900,000 per year. Variable costs are P .30 per year. (consider
each case separately)
a. What is the current annual operating income?
b. What is the present breakeven point in revenues?
Compute the new operating income for each of the following
changes:
c. A P. 40 per unit increase in variable costs
d. A 10% increase in fixed costs and a 10% increase in units
sold.
e. A 20% decrease in fixed cost, a 20% decrease in selling price,
a 10% decrease in variable cost per unit and a 40% increase in
units sold
Compute the new breakeven point in units for each of the
following changes:
f. A 10% increase in fixed costs
g. A 10% increase in selling price and a P 20,000 increase in
fixed costs