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    2_Cost-Volume-Profit-Analysis

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    Krisya Mae Beduyas
    Management Advisory Services summary of notes

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    2_Cost-Volume-Profit-Analysis

    Uploaded by

    Krisya Mae Beduyas
    4 views2 pages
    Management Advisory Services summary of notes

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    © © All Rights Reserved

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    Management Advisory Services summary of notes

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    4 views2 pages

    2_Cost-Volume-Profit-Analysis

    Uploaded by

    Krisya Mae Beduyas
    Management Advisory Services summary of notes

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
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    MANAGEMENT ADVISORY SERVICES

    I. COST-VOLUME PROFIT ANALYSIS


    - a systematic examination of the relationships among costs, cost driver, and profit.
    Elements of CVP ANALYSIS
    1. Sales
    a. selling price
    b. units or volume
    2. Total fixed costs
    3. Variable costs per unit
    4. Sales mix

    Application of CVP Analysis


    Planning and decision-making, which may involve choosing the:
    1. type of product to produce and sell;
    2. pricing policy to follow,
    3. marketing strategy to use, and
    4. type of productive facilities to acquire.

    THE CONTRIBUTION MARGIN INCOME STATEMENT


    - The costs and expenses in the Contribution Margin Income Statement are classified as to behavior (variable and fixed).
    The amount of contribution margin, which is the difference between sales and variable costs is shown. The format is as
    follows:

    Sales XXX
    Less: Variable Cost (XXX)
    Contribution Margin XXX
    Less: Fixed Cost (XXX)
    Income before Tax XXX

    The contribution margin income statement is prepared for management's own use. The format facilitates cost-volume-profit
    analysis.

    INHERENT SIMPLIFYING ASSUMPTIONS OF CVP ANALYSIS


    1. All costs are classifiable as either variable or fixed.
    2. Cost and revenue relationships are predictable and linear over a relevant range of activity and a specified period of time.
    3. Total variable costs change directly with the cost driver, but variable costs per unit are constant over the relevant range.
    4. Total fixed costs are constant over the relevant range, but fixed costs per unit vary inversely with the cost driver.
    5. Selling prices per unit and market conditions remain unchanged.
    6. Production equals sales, i.e., there is no change in inventory.
    7. If the company sells multiple products, sales mix is constant.
    8. Technology, as well as productive efficiency, is constant.
    9. The time value of money is ignored.

    II. BREAK-EVEN ANALYSIS

    BREAK-EVEN POINT
    - the sales volume level (in pesos or in units) where total revenues equals total costs, that is, there is neither profit nor
    loss.

    FORMULA:
    a. Single -Product Break-even Calculations

    1. Break-even Point in Pesos:

    2. Break-even Point in Units

    b. Multiple-Product/Service Break-even Calculations


    1. Break-even Point in Pesos:
    2. Break-even Point in Units

    III. THE MARGIN OF SAFETY

    MARGIN OF SAFETY
    - the amount of peso-sales or the number of units by which actual or budgeted sales may be decreased without resulting
    into a loss.

    FORMULA:
    1. Margin of safety in pesos

    2. Margin of safety in units

    3. Margin of safety ratio

    4. Break-even sales ratio

    IV. THE OPERATING LEVERAGE

    OPERATING LEVERAGE
    - The extent to which a company uses fixed costs in its cost structure.
    Leverage is achieved by increasing fixed costs while lowering variable costs.

    OPERATING LEVERAGE FACTOR (OLF) or DEGREE OF OPERATING LEVERAGE


    DOL - used to measure the extent of the change in profit before tax resulting from the change in sales.

    FORMULA:

    Or

    V. REQUIRED SALES WITH DESIRED PROFIT


    The break-even formula may be expanded to compute for the required sales (in units or in pesos) to earn a desired amount of
    profit.

    VI. PROBLEM SOLVING:


    1. Basic Illustration Corp. produces and sells a single product. The selling price is P25 and the variable costs is P15 per unit.
    The corporation's fixed costs is P100,000 per month. Average monthly sales is 11,000 units.
    a. Contribution margin per unit?
    b. Contribution margin ratio?
    c. Break-even Point in Pesos?
    d. Break-even Point in Units?
    e. Margin of safety in Pesos?
    f. Margin of safety in Units?
    g. Margin of safety Ratio?
    h. Break-even Sales Ratio?
    i. At the present average monthly sales level of 11,000 units, the corporation’s degree of operating leverage (DOL) is?
    j. If the fixed cost will increase by 20,000, the break-even point in units will increase (decrease) by?
    k. If variable costs per unit will go up by P5, the peso break-even sales will increase (decrease) to?

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