H. Cost Volume Profit Analysis

Cost-Volume-Profit Analysis

A powerful tool that helps managers understand the relationships among cost, volume, and profit.

Selling prices Sales volume Variable cost per unit Total fixed costs Product mix

CVP analysis focuses on how profits are affected by the following five (5) factors:

Breakeven sales after allocation as to sales mix for Product C is 675k Formula: Product: A, B, C Selling price: 150, 210, 360 Less: Variable Cost/Unit: 90, 140, 160 Contribution Margin/Unit: 60, 70, 170 Multiply by: Sales Mix Ratio: 20%, 20%, 60% Weighted Average Contribution Margin: 12, 14, 102 Fixed Cost of 400k Divide by: ∑WACM of 12 + 14 + 102 = 128 Breakeven point in units, whole company of 400k/128 = 3,125 units 3,125 units: Sales Mix Ratio: 60% Breakeven sales after allocation as to sales mix for Product C is 3,125 units x 60% = 1,875 units Multiply by: The selling price of Product C 1,875 units x 360 = 675k

Calculate the breakeven sales after allocation as to sales mix for the Product C

Breakeven units after allocation as to sales mix for Product B is 625 units Formula: Product: A, B, C Selling price: 150, 210, 360 Less: Variable Cost/Unit: 90, 140, 160 Contribution Margin/Unit: 60, 70, 170 Multiply by: Sales Mix Ratio: 20%, 20%, 60% Weighted Average Contribution Margin: 12, 14, 102 Fixed Cost of 400k Divide by: ∑WACM of 12 + 14 + 102 = 128 Breakeven point in units, whole company of 400k/128 = 3,125 units Multiply by: Sales Mix Ratio: 20% Breakeven units after allocation as to sales mix for Product B is 3,125 units x 20% = 625 units

Calculate the breakeven units after allocation as to sales mix for the Product B

Breakeven point in units, whole company of 3,125 units Formula: Product: A, B, C Selling price: 150, 210, 360 Less: Variable Cost/Unit: 90, 140, 160 Contribution Margin/Unit: 60, 70, 170 Multiply by: Sales Mix Ratio: 20%, 20%, 60% Weighted Average Contribution Margin: 12, 14, 102 Fixed Cost of 400k Divide by: ∑WACM of 12 + 14 + 102 = 128 Breakeven point in units, whole company of 400k/128 = 3,125 units

Calculate the breakeven units for the whole company

Margin of Safety is 1,315,789.47 Formula Selling price/unit of 50 Less: Variable cost/unit of 16.75 Contribution Margin per unit 33.25 Less: Fixed cost/unit of 24.5 Net Income/ unit of 8.75 Budgeted Income of 875k Divide by: Net Income/ unit of 8.75 Number of units sold of 100k Multiply by: Selling price/unit of 50 Budgeted sales of 5m Number of units sold of 100k Multiply by: Fixed cost/unit of 24.5 Divide by: CM ratio of 33.25/50 = 66.5% Breakeven sales of 3,684,210.53 Budgeted sales of 5m Less: Breakeven sales of 3,684,210.53 Margin of Safety is 1,315,789.47

Compute for Margin of Safety (round off the Breakeven in sales to the nearest hundredths ) Budgeted Income of 875k Variable cost/unit of 16.75 Fixed cost/unit of 24.5 Selling price/unit of 50

Margin of safety ratio is 26.32% Formula Selling price/unit of 50 Less: Variable cost/unit of 16.75 Contribution Margin per unit 33.25 Less: Fixed cost/unit of 24.5 Net Income/ unit of 8.75 Budgeted Income of 875k Divide by: Net Income/ unit of 8.75 Number of units sold of 100k Multiply by: Selling price/unit of 50 Budgeted sales of 5m Number of units sold of 100k Multiply by: Fixed cost/unit of 24.5 Divide by: CM ratio of 33.25/50 = 66.5% Breakeven sales of 3,684,210.53 Budgeted sales of 5m Less: Breakeven sales of 3,684,210.53 Margin of Safety is 1,315,789.47 Divide by: Budgeted sales of 5m Margin of safety ratio is 26.32%

Compute for Margin of Safety Ratio (round off the Breakeven in sales to the nearest hundredths ) Budgeted Income of 875k Variable cost/unit of 16.75 Fixed cost/unit of 24.5 Selling price/unit of 50

Required sales is 1m Formula Selling price per unit of 250 Less: Total Variable Cost of 160 Contribution Margin Per Unit is (250-160) = 90 Divide by: Selling price per unit of 250 Contribution Margin Per Ratio of (90/250) = 36% Desired Net Income of 270,000 Add: FIxed Cost of 90,000 Required sales is (270k+90k) / 36% = 1m

How much are the required sales to reach the desired net income? Tiddy Company is a manufacturer of teddy bears which currently sells at P250 per unit. Variable cost per unit includes P80 in materials, P50 in labor, P20 in variable overhead, and P10 in variable selling and administrative expenses. Fixed costs per period amount to P90,000. The entity's desired net income is P270,000.

Formula Selling price per unit of 250 Less: Total Variable Cost of 160 Contribution Margin Per Unit is (250-160) = 90 units Desired Net Income of 270,000 Add: FIxed Cost of 90,000 Required Units is (270k+90k) / 90 units = 4,000 units

How much are the required units to reach the desired net income? Tiddy Company is a manufacturer of teddy bears which currently sells at P250 per unit. Variable cost per unit includes P80 in materials, P50 in labor, P20 in variable overhead, and P10 in variable selling and administrative expenses. Fixed costs per period amount to P90,000. The entity's desired net income is P270,000.

BEP in peso sales is 250,000 Formula Selling price per unit of 250 Less: Total Variable Cost of 160 Contribution Margin Per Unit is (250-160) = 90 Divide by: Selling price per unit of 250 Contribution Margin Per Ratio of (90/250) = 36% Fixed Cost per period of 90k Divide by: Contribution Margin Per of 36% BEP in peso sales is (90k/36%) = 250,000

How much is the BEP in sales Tiddy Company is a manufacturer of teddy bears which currently sells at P250 per unit. Variable cost per unit includes P80 in materials, P50 in labor, P20 in variable overhead, and P10 in variable selling and administrative expenses. Fixed costs per period amount to P90,000.

375,000

How much is the BEP in sales?

BEP in units is 1,000 Formula Selling price per unit of 250 Less: Total Variable Cost of 160 Contribution Margin Per Unit is (250-160) = 90 Fixed Cost per period of 90k Divide by: Contribution Margin Per Unit of 90 BEP in units is (90k/90) = 1k

How much is the BEP in units Tiddy Company is a manufacturer of teddy bears which currently sells at P250 per unit. Variable cost per unit includes P80 in materials, P50 in labor, P20 in variable overhead, and P10 in variable selling and administrative expenses. Fixed costs per period amount to P90,000.

37,500

How much is the BEP in units?

Variable cost ratio of 64% Formula Selling price per unit of 250 Less: Total Variable Cost of 160 Contribution Margin Per Unit is (250-160) = 90 Divide by: Selling price per unit of 250 Contribution Margin Per Ratio of (90/250) = 36% Sales of 100% Less: Contribution Margin Per Ratio of 36% Variable cost ratio of 64%

How much is the variable cost ratio Tiddy Company is a manufacturer of teddy bears which currently sells at P250 per unit. Variable cost per unit includes P80 in materials, P50 in labor, P20 in variable overhead, and P10 in variable selling and administrative expenses. Fixed costs per period amount to P90,000.

Margin of Safety = Actual or Budgeted Sales - Breakeven Sales

Margin of Safety

break-even point (BEP)

The POINT wherein the entity does NOT ENJOY A PROFIT but does NOT INCUR A LOSS, which is when the total contribution margin equals total fixed costs. This is a DETERMINANT OF HOW MANY sales or how many units are to be sold to be able to, at least, COVER ALL OPERATIONAL COSTS.

Sales Less: Variable Cost Contribution Margin Less: Fixed Cost Net Income

The formula for Contribution Margin and Net Income in CVP Analysis

BEP in sales = Fixed cost / Contribution margin per ratio

formula for BEP in sales

BEP in units = Fixed cost / Contribution margin per unit

formula for BEP in units

Margin of Safety

measures the potential effect of the risk that sales will fall short of planned sales, which is the difference between actual or budgeted sales over break-even sales.

Sales Mix

refers to the relative proportions in which a company's products are sold. The idea is to achieve the combination, or mix, that will yield the greatest amount of profits. So the contribution margin is at weighted average

Desired Net Income + Total Fixed Cost / Contribution Margin Ratio

required sales to reach the desired net income formula?

Desired Net Income + Total Fixed Cost / Contribution Margin Units

required units to reach the desired net income formula?