Basic CVP Analysis

By: Fritz Perez
Learning Objectives:
 To know the relationship among cost, volume
and profit.
 To identify the importance of CVP Analysis
and how do companies use CVP information
in decision-making
 To observe the difference of CVP Analysis for
single-product and multiproduct firms.
 To familiarize with the use of Margin of safety
and operating leverage in business
Main Objective of Finance
Maximization of Shareholder’s
Wealth
C
O
P
S
R
O T
F S
I (Minimize)
T
(Maximize)
Cost Volume Profit
• Analyzing the effects of changes in selling prices on
profits
• Analyzing the effects of changes in costs on profits
• Analyzing the effects of changes in volume on profits
• Setting selling prices
• Selecting the mix of products to sell

Elements
 Fixed Costs (in Total)
 Unit Variable Cost
 Sales Mix
 Unit Selling Price
 Number of Units Sold
Fixed Costs (in Total)
 Total fixed costs are assumed to remain constant,
and, as such, per-unit fixed cost decreases as
volume increases. Fixed costs include both fixed
manufacturing overhead and fixed selling and
administrative expenses.
Unit Variable Cost
 On a per-unit basis, variable costs are assumed
to remain constant. Therefore, total variable cost
fluctuates in direct proportion to level of activity or
volume.
This is the excess of unit Formula
selling price over unit
variable cost and the
amount each unit sold
Contribution contributes toward
Margin covering fixed cost and
providing operating
profits
This is the percentage of

Contribution contribution margin to
Margin Ratio total sales
Breakeven Point
Variable Costs + Fixed

Revenues/Sales
Costs
Breakeven Point
Is the level of sales volume where total
revenues and total expenses are equal
neither profit or loss
Assumptions
1. Relevant Range Assumption
 Work WITHIN capacity
 Linear Relationship
 Valid Relationship
2. Time Value of money is ignored

3. Linear Relationship
Identifying Breakeven Cost
 Formula Approach
 Graphical Approach
 Income Statement Approach
I. Formula Approach
 uses an algebraic equation to calculate the
BEP.
R(X) - VC(X) – FC = P
R= revenue (selling price) per unit

X= volume (number of units)
R(X) = total revenue
VC = variable cost per unit
VC(X) = total variable cost
FC = total fixed cost
P= total profit
Example:
Sy Nak Tang Corporation has the following data at year end:
 Selling Price …………………………...……. $ 40.00/unit
 Variable Manufacturing Cost per unit…..…. $ 25.00/unit
 Variable Selling and Admin Cost per unit…. $ 4.00/unit
 Fixed Manufacturing Costs……………........ $ 3,200,000.00
 Fixed Selling and Admin Costs…………….. $ 1,200,000.00
Solution: BEP in units
$40(X) - $29(X) - $4,400,000 = $0
$40(X) - $29(X) = $0 + $4,400,000
$11(X) = $4,400,000
X = $4,400,000
$11.00
X= 400,000 Units or
BEP in units = 400 ,000 Units
Solution: BEP in Peso
X = FC ÷ (SP/u – VC/u)
R
X = 4,400,000 ÷ ($40 – $29)
$ 40
X = $4,400,000
($11 ÷ $40)
X= $16,000,000 or
BEP in Peso = $16,000,000
II. Graphical Approach
The profit-volume (PV) graph provides a
depiction of the amount of profit or loss
associated with each sales level.
 X Axis (Horizontal)  Sales Volume

 Y Axis (Vertical)  Profit/Loss in
$
III. Income Statement Approach
Sales XX
Variable Costs (M and S/A) XX
Contribution Margin XX
Fixed Costs (M and S/A) XX
Operating Income 00
Breakeven point can be computed as follows :
1. Break-even point (units)
2. Break-even point (pesos)

Illustration:
Regular Sales Breakeven Sales
Units 600,000 Units 400,000 Units
Sales $40/u $ 24,000,000 $16,000,000
VC:
Manufacturing $25/u (15,000,000) (10,000,000)
VSA $4/u (2,400,000) (1,600,000)
Contribution Margin $11/u $ 6,600,000 $ 4,400,000
FC
(3,200,000)
Manufacturing (3,200,000)
(1,200,000)
FSA (1,200,000)
Operating Income $ 2,200,000 $0
BEP in Units = ($3.2M + $1.2M)

BEP in Units = TFC / CM/u) $11
BEP in Units = 400,000 Units
Margin of Safety
The margin of safety is the difference
between the amount of expected profitability
and the break-even point.
Margin of Safety
Margin of Safety
200,000 Units
Sales ($40) $8,000,000
VMC ($25) ($5,000,000)

VSA ($4) ($800,000)
CM ($11) $ 2,200,000
FMC 0
FSA 0
OI / EBIT $ 2,200,000
Sensitivity Analysis as to Profit
REGULAR BREAKEVEN MARGIN OF
SALES SALES SAFETY
Fixed Cost INVERSE DIRECT INVERSE
Unit Variable Cost INVERSE DIRECT INVERSE
Sales Mix It depends It depends It depends
Unit Selling Price DIRECT INVERSE DIRECT
No. Unit Sold DIRECT INVERSE DIRECT

(Volume)
Sample Problems with
Solution
Breakeven analysis
Fixed Cost = 10,000 Solution:

Selling Price = 7 a)
Variable Cost/Unit = 2
Requirement:
a) Calculate the Breakeven Output
b) Calculate the Revenue at breakeven point
b)
You want to open a cookie store. The selling price of each CM/unit = Price - VC
cookie is $ 3. The variable cost is $ 1.30 and the fixed cost is
$ 10,000. What is breakeven point in units.
Solution:
Selling price =$5
Variable Cost/unit =$3 CM/unit = P-VC
Fixed Cost = $ 20,000 CM Ratio = CM per unit /
Price
Requirement :
a) Breakeven point in units
b) Breakeven point in sales
Solution:
a) BEP (units)
b) BEP (Sales)
Racing Bicycle company
Contribution Income Statement
For the month of May
Total Per unit CM Ratio
Sales (500 $ 250,000 500 100%
bicycles) $150,000 300
Less: Variable 60%
Expense
CM $100,000 200 40%
Less: Fixed $80,000
Expense
Net Operating $20,000
Income
Requirements:
a) Breakeven un units
b) Breakeven in sales
Solution:
a) BEP (units)
b) BEP (Sales)
Coffee Klatch is an espresso stand in a downtown office bldg. The average selling
price of a cup of coffee is $ 1.49 and the average variable expense per cup is $ 0.36.
The average fixed expense per month is $ 1,300. An average of $ 2,100 cups are
sold each month . What is the break even sales and breakeven units ?
𝐹𝑖𝑥𝑒𝑑𝑒𝑥𝑝𝑒𝑛𝑠𝑒 1300
𝐵𝐸𝑃 𝑆𝑎𝑙𝑒𝑠= = =1,715
𝐶𝑀 𝑅𝑎𝑡𝑖𝑜 .758
𝐹𝑖𝑥𝑒𝑑 𝐸𝑥𝑝𝑒𝑛𝑠𝑒 1300
𝐵𝐸𝑃 𝑢𝑛𝑖𝑡𝑠= = =1150
𝐶𝑀 /𝑢𝑛𝑖𝑡 1.13
Thank You!!! 

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By: Fritz Perez

• Analyzing the effects of changes in costs on profits

• Analyzing the effects of changes in volume on profits

• Setting selling prices

• Selecting the mix of products to sell

This is the percentage of

Variable Costs + Fixed

2. Time Value of money is ignored

R= revenue (selling price) per unit

 X Axis (Horizontal)  Sales Volume

1. Break-even point (units)

2. Break-even point (pesos)

BEP in Units = ($3.2M + $1.2M)

VMC ($25) ($5,000,000)

Unit Variable Cost INVERSE DIRECT INVERSE

Sales Mix It depends It depends It depends

Unit Selling Price DIRECT INVERSE DIRECT

No. Unit Sold DIRECT INVERSE DIRECT

Fixed Cost = 10,000 Solution:

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