12/9/19

UNIVERSITY OF SAN JOSE-RECOLETOS

COST VOLUME PROFIT ANALYSIS
AY 2019 – 2020

COST VOLUME PROFIT QUESTIONS

q How many units will the Company sell in order to
achieve a certain profit?
q How much should be the desired selling price to
achieve a profit?
q How many units to break-even?
q How many units will the Company sell if the
purchase costs increase to 20% and the Company
wants to achieve a certain profit?

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COST VOLUME PROFIT ANALYSIS

Quantity SP / UC Total
Sales 100,000 120.00 12,000,000
Less: Cost of Sales 100,000 80.00 8,000,000
FUNCTIONAL Gross Profit 100,000 40.00 4,000,000
Less: Selling expenses (890,000)
Less: Administrative (540,000)
Net income 2,570,000

Numbers in the illustration are assumed

CLASSIFICATION OF COSTS
FUNCTIONAL / ACTIVITY BEHAVIORAL
q Direct materials q Fixed costs
q Direct labor q Variable costs
q Overhead
q Cost of sales
q Selling expenses
q Administrative expenses

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BEHAVIORAL COSTS
FIXED COSTS VARIABLE COSTS
q Independent from the q Directly related to the
changes in the level of sales changes in level of sales
a. Monthly rentals a. Materials
b. Depreciation expenses b. Labor
c. Sales commissions
c. Insurance

FIXED COSTS
ACTIVITY LEVEL TOTAL FIXED PER ACTIVITY
COSTS LEVEL
INCREASE CONSTANT DECREASE

DECREASE CONSTANT INCREASE

PRODUCTION FIXED COSTS FC/UNIT

10,000 UNITS Php 10,000.00 Php 1.00

15,000 UNITS 10,000.00 0.67

20,000 UNITS 10,000.00 0.50

Numbers in the illustration are assumed

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VARIABLE COSTS
ACTIVITY LEVEL TOTAL VARIABLE PER ACTIVITY
COSTS LEVEL
INCREASE INCREASE CONSTANT

DECREASE DECREASE CONSTANT

PRODUCTION VC/UNIT TOTAL VARIABLE

COSTS
10,000 UNITS Php 5.00 Php 50,000
15,000 UNITS 5.00 75,000
20,000 UNITS 5.00 100,000

Numbers in the illustration are assumed

VARIABLE I/S OR CONTRIBUTION MARGIN I/S

QUANTITY SP / UC TOTAL
SALES 100,000 120.00 12,000,000
LESS: VARIABLE COST 100,000 85.00 8,500,000
CONTRIBUTION MARGIN 100,000 35.00 3,500,000
LESS: FIXED COSTS 930,000
NET INCOME 2,570,000

Numbers in the illustration are assumed

HOW MANY UNITS TO SELL SO THAT THE

COMPANY OPERATES AT A BREAK-EVEN POINT?

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BREAKEVEN POINT
q The point at which the Company neither makes a
profit nor suffers a loss.

BREAKEVEN POINT
q The point at which the Company neither makes a
profit nor suffers a loss.

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ILLUSTRATION I
q How many units will UAG, Inc. sell in order to
breakeven with the following information:

ITEM AMOUNT
UNIT SELLING PRICE PHP 350
VARIABLE COST RATIO 72%
FIXED COSTS PHP 872,350

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ANSWER TO ILLUSTRATION I
Units USP Total
SALES 350.00 GIVEN
VARIABLE COST 252.00 CAN BE COMPUTED
CONTRIBUTION MARGIN 98.00 872,350.00
FIXED COSTS 872,350.00 GIVEN
INCOME BEFORE TAX -

SALES PER UNIT – VARIABLE COSTS PER UNIT

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ANSWER TO ILLUSTRATION I
Units USP / UC Total
SALES 8,901.53 350.00 3,115,535.50
VARIABLE COST 8,901.53 252.00 2,243,185.56
CONTRIBUTION MARGIN 8,901.53 98.00 872,350.00
FIXED COSTS 872,350.00
INCOME BEFORE TAX -

BREAKEVEN FORMULA
IN PESOS FIXED COSTS DIVIDED BY CONTRIBUTION MARGIN RATIO
IN UNITS FIXED COSTS DIVIDED BY CONTRIBUTION MARGIN PER UNIT

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ILLUSTRATION II
q How many units will UAG, Inc. sell in order to
realize a profit before tax of Php 360,000 with the
following information:

ITEM AMOUNT
UNIT SELLING PRICE PHP 350
VARIABLE COST RATIO 72%
FIXED COSTS PHP 872,350

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ANSWER TO ILLUSTRATION II
Units USP / UC Total
SALES 350.00 GIVEN
VARIABLE COST 252.00 CAN BE COMPUTED
CONTRIBUTION MARGIN 98.00 1,232,350.00
FIXED COSTS 872,350.00 GIVEN
INCOME BEFORE TAX 360,000.00

SALES PER UNIT – VARIABLE COSTS PER UNIT

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ANSWER TO ILLUSTRATION II
Units USP / UC Total
SALES 12,575 350.00 4,401,250.00
VARIABLE COST 12,575 252.00 3,168,900.00
CONTRIBUTION MARGIN 12,575 98.00 1,232,350.00
FIXED COSTS 872,350.00
INCOME BEFORE TAX 360,000.00

FIXED COSTS + PROFIT BEFORE TAX

CONTRIBUTION MARGIN PER UNIT

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ILLUSTRATION III
q How many units will UAG, Inc. sell in order to
realize a profit after tax of Php 658,000 with the
following information:

ITEM AMOUNT
UNIT SELLING PRICE PHP 350
VARIABLE COST RATIO 72%
FIXED COSTS PHP 872,350
Tax Rate 30%

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ANSWER TO ILLUSTRATION III

Units USP Total
SALES 18,493.37 350.00 6,472,678.57
VARIABLE COST 18,493.37 252.00 4,660,328.57
CONTRIBUTION MARGIN 18,493.37 98.00 1,812,350.00
FIXED COSTS 872,350.00
INCOME BEFORE TAX 940,000.00
INCOME TAX (30%) 282,000.00
NET INCOME (70%) 658,000.00

FIXED COSTS + PROFIT AFTER TAX / (1-TAX RATE)

CONTRIBUTION MARGIN PER UNIT

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ILLUSTRATION IV
q How many units will UAG, Inc. sell in order to
realize a profit after tax of 20% of the
contribution margin with the following
information:
ITEM AMOUNT
UNIT SELLING PRICE PHP 350
VARIABLE COST RATIO 72%
FIXED COSTS PHP 872,350
Tax Rate 30%

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ANSWER TO ILLUSTRATION IV
Let X = Contribution Margin

20% X = (X - Fixed costs)*70%

20% X = (X - 872,350)*70%
20% X = 70%X - 610,645
610,645.00 = 50% X
1,221,290.00 = X

Units USP Total

SALES 12,462.14 350.00 4,361,749.00
VARIABLE COST 12,462.14 252.00 3,140,459.28
CONTRIBUTION MARGIN 12,462.14 98.00 1,221,290.00
FIXED COSTS 872,350.00
INCOME BEFORE TAX 348,940.00
INCOME TAX (30%) 104,682.00
NET INCOME (70%) 20% of CM 244,258.00

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MARGIN OF SAFETY
q The excess of actual sales over breakeven sales.
q The presence of margin of safety indicates profit.
q The amount of sales in excess of breakeven point.

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ILLUSTRATION V
q The following information pertains to the financial
performance of Globe Co.

UNITS USP / UC TOTAL

SALES 125,000 60.00 7,500,000.00
VARIABLE COSTS 125,000 42.00 5,250,000.00
CONTRIBUTION MARGIN 18.00 2,250,000.00
FIXED COSTS 1,215,000.00
PROFIT 1,035,000.00

COMPUTE FOR :

1. BEP IN UNITS AND IN PESOS

2. MARGIN OF SAFETY IN UNITS AND IN PESOS

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ANSWER TO ILLUSTRATION V
UNITS USP SALES
ACTUAL SALES 125,000 60.00 7,500,000.00
BEP 67,500 60.00 4,050,000.00
MARGIN OF SAFETY 57,500 60.00 3,450,000.00

MOS IN UNITS 57,500

CONTRIBUTION MARGIN / UNIT 18.00
PROFIT 1,035,000.00

NET PROFIT RATIO – MARGIN OF SAFETY RATIO X CONTRIBUTION

MARGIN RATIO

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MULTIPLE PRODUCT SALES

q Composite breakeven point is computed
q Average contribution margin (Ave. CM/unit or Ave
CMR) will be used
q Ave CM/unit is the sum of individual product
CM/unit multiplied by their sales mix ratio based
on units.
q Ave CM Ratio is the sum of individual product CMR
multiplied by their sales mix ratio based on total
sales

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ILLUSTRATION VI
MERCURY VENUS EARTH TOTAL

Units sold 5,000 3,000 2,000 10,000

Unit sales price 250.00 300.00 450.00

Variable cost per unit 125.00 175.00 225.00

CM / unit 125.00 125.00 225.00

Fixed costs of Php 180,000

Sales mix ratio (units) 50.00% 30.00% 20.00%

(Units sold / total unit sales)

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ANSWER TO ILLUSTRATION VI
q STEP 1A: Determine the Average CM / Unit

MERCURY VENUS EARTH TOTAL

Unit Selling Price 250.00 300.00 450.00
Variable cost per unit 125.00 175.00 225.00
Contribution margin per unit 125.00 125.00 225.00
Sales mix ratio in units 50.00% 30.00% 20.00%

Average CM per unit 62.50 37.50 45.00 145.00

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ANSWER TO ILLUSTRATION VI
q STEP 1B: Determine the Average CM Ratio

MERCURY VENUS EARTH TOTAL

Unit Selling Price 250.00 300.00 450.00 1,000.00
Variable cost per unit 125.00 175.00 225.00
Contribution margin per unit 125.00 125.00 225.00

Contribution margin ratio 50.00% 41.67% 50.00%

X Sales mix ratio in pesos 25.00% 30.00% 45.00%
Ave. contribution margin ratio 12.50% 12.50% 22.50% 47.50%

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ANSWER TO ILLUSTRATION VI
q STEP 2: Determine the Composite BEP in units
and in pesos
COMPOSITE BREAKEVEN
IN UNITS IN PESOS

Fixed costs 180,000.00 180,000.00

Average CM/unit or Ave CM % 145.00 47.500%
Answer 1,241.38 378,947.37

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ANSWER TO ILLUSTRATION VI
q STEP 3: Allocate the Composite BEP Units into
specific products using the sales mix ratio in units
MERCURY VENUS EARTH TOTAL
SALES MIX RATIO IN UNITS 50.00% 30.00% 20.00% 100.00%
COMPOSITE BEP IN UNITS 1,241.38 1,241.38 1,241.38
ALLOCATED UNITS 620.69 372.41 248.28 1,241.38
USP 250.00 300.00 450.00
TOTAL SALES 155,172.41 111,724.14 111,724.14 378,620.69
VARIABLE COSTS 77,586.21 65,172.41 55,862.07 198,620.69
CONTRIBUTION MARGIN 77,586.21 46,551.72 55,862.07 180,000.00
FIXED COSTS 180,000.00
NET INCOME -

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ILLUSTRATION VII
q The following information pertains to MAS, Inc.
Shampoo Conditioner
BEP in units 360 240
Unit selling price Php 4,500 Php 14,250
Variable costs Php 2,250 Php 5,000

DETERMINE THE FOLLOWING:

1. Average Contribution margin per unit

2. Total fixed costs

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ANSWER TO ILLUSTRATION VII

q Average Contribution margin per unit
SHAMPOO CONDITIONER TOTAL

Unit selling price 4,500.00 14,250.00

Variable cost 2,250.00 5,000.00

Contribution margin per unit 2,250.00 9,250.00

X Sales mix ratio in units 60.00% 40.00%

Average CM 1,350.00 3,700.00 5,050.00

q Total fixed costs = BEP units * CM/Unit

= Php 3,030,000

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SENSITIVITY ANALYSIS
q The process of considering the outcome of profit
given the changes to profit, costs and volume.
q Concerns about predicting the outcome of profit
given the changes in price, variable costs, fixed
costs, sales mix ratio.

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ILLUSTRATION VIII
q The following information pertains to Maria Co.

Unit sales price Php 80

Variable cost per unit 50
Total fixed costs 600,000
Units sold 45,000

What is the new CMR, BEP in Php and operating profit will
be?

1. Sales price increases by 20%

2. Fixed costs decrease to Php 450,000

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ANSWER TO ILLUSTRATION VIII

UNIT SALES PRICE INCREASES BY 20%

Sales 96.00 45,000 4,320,000.00

Variable costs 50.00 45,000 2,250,000.00
Contribution margin 46.00 45,000 2,070,000.00
Fixed costs 600,000.00
Net income 1,470,000.00

CMR 47.92%
BEP PESOS 1,252,173.91

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ANSWER TO ILLUSTRATION VIII

FIXED COSTS DECREASE TO PHP 450,000

Sales 80.00 45,000 3,600,000.00

Variable costs 50.00 45,000 2,250,000.00
Contribution margin 30.00 45,000 1,350,000.00
Fixed costs 450,000.00
Net income 900,000.00

CMR 37.50%
BEP PESOS 1,200,000.00

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OPERATING LEVERAGE
q Refers to the ability of the business to increase its
profit in relation to its contribution margin.
q It is computed as Contribution margin over Profit

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PRACTICE DRILL I

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PRACTICE DRILL II

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END OF PRESENTATION

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