📘 COST-VOLUME-PROFIT (CVP) ANALYSIS REVIEWER

🔑 I. DEFINITION & PURPOSE

Cost-Volume-Profit (CVP) Analysis is a managerial accounting technique used to determine how changes
in costs and volume affect a company’s operating income and net income.

It helps in decision-making regarding:

 Pricing of products

 Product mix

 Utilization of production facilities

 Selection of marketing strategies

📚 II. CVP FORMULAS

1. Contribution Margin (CM):

o 🧮 CM per unit = Selling Price per unit – Variable Cost per unit

o 🧮 CM Ratio = CM per unit ÷ Selling Price per unit

o 🧮 Total CM = Total Sales – Total Variable Costs

2. Break-Even Point (BEP):

o In units:
🧮 BEP (units) = Fixed Costs ÷ CM per unit

o In sales:
🧮 BEP (₱) = Fixed Costs ÷ CM Ratio

3. Target Net Income:

o In units:
🧮 Required Sales Units = (Fixed Costs + Target Income) ÷ CM per unit

o In ₱:
🧮 Required Sales ₱ = (Fixed Costs + Target Income) ÷ CM Ratio

4. Margin of Safety:

o 🧮 Margin of Safety (₱) = Actual or Budgeted Sales – Break-Even Sales

o 🧮 Margin of Safety (%) = Margin of Safety ₱ ÷ Actual Sales ₱

o 🧮 DOL = Total CM ÷ Net Operating Income

o It shows the sensitivity of net income to changes in sales volume.

📋 III. UNDERLYING ASSUMPTIONS OF CVP ANALYSIS

1. Linearity:

o Costs are either variable or fixed.

o Revenue and cost behavior are linear within the relevant range.

2. Constant Selling Price:

o The price per unit remains the same regardless of sales volume.

3. Constant Variable Cost per Unit:

o Variable cost per unit does not change with volume.

4. Fixed Costs Are Constant:

o Total fixed costs remain unchanged within the relevant range.

5. Production = Sales:

o No changes in inventory levels; all units produced are sold.

6. Sales Mix Is Constant (for multi-product firms):

o The relative proportion of each product sold remains the same.

🧠 IV. KEY TERMS TO REMEMBER

Term Description

Contribution Margin Income remaining after variable costs are deducted from sales

Break-Even Point Sales level at which total revenue = total costs (no profit/loss)

Fixed Costs Costs that do not change with volume (e.g., rent, salaries)

Variable Costs Costs that vary directly with production volume

Relevant Range The activity level within which cost behavior assumptions are valid

Operating Leverage The degree to which a firm uses fixed costs to magnify profits
💡 V. COMMON EXAM QUESTIONS & CONCEPTS

1. Computational:

o Calculate break-even point in units or sales ₱

o Determine required sales to earn a target income

o Compute contribution margin per unit or ratio

o Analyze the impact of changes in cost or price on BEP or profit

2. True or False / Theory-Based:

o CVP assumes fixed cost changes with volume – (False)

o A higher CM ratio indicates higher profitability – (True)

o DOL increases as fixed costs increase – (True)

3. Multiple Choice:

o Questions may mix up fixed/variable cost behaviors, formula choices, etc.

4. Word Problems / Situational:

o A company plans to introduce a new product; determine BEP or analyze profitability

📈 VI. MULTI-PRODUCT CVP ANALYSIS

If the company sells more than one product:

1. Calculate Weighted Average CM (WACM):

o 🧮 WACM = ∑ (Product CM per unit × Sales Mix %)

2. Break-Even Point (using WACM):

o 🧮 BEP (units) = Fixed Costs ÷ WACM

3. Allocate Sales Volume:

o Multiply total units by sales mix to get unit requirements per product.

📝 VII. TIPS FOR ANSWERING CVP QUESTIONS

 Identify type of cost first: fixed or variable.

 Label known values: FC, VC/unit, SP/unit, CM/unit, CM ratio.

 Watch for multi-product questions — check for sales mix.

 Use clear and labeled solution steps — even if it’s a theory question, understand where the
answer came from.

📘 Cost-Volume-Profit (CVP) Analysis Reviewer

🔍 What is CVP Analysis?

CVP Analysis helps managers understand the interrelationships between cost, volume, and profit in an
organization by focusing on how changes in costs and volume affect a company’s operating income and
net income.

🧠 Key Concepts

1. Fixed Costs – Costs that remain constant regardless of production or sales volume (e.g., rent,
salaries).

2. Variable Costs – Costs that vary directly with the level of production (e.g., raw materials, direct
labor).

3. Sales Price per Unit – The amount charged to customers for each unit of a product.

4. Contribution Margin (CM) – The amount remaining from sales revenue after variable expenses
have been deducted.

o Formula:

 Per Unit: CM = Selling Price - Variable Cost

 Total: CM = Total Sales - Total Variable Costs

5. Contribution Margin Ratio (CMR)

o CM Ratio = CM per Unit / Selling Price per Unit

o Shows the portion of each sales dollar that contributes to covering fixed costs.

6. Break-Even Point (BEP) – The sales volume at which total revenues equal total costs (no profit,
no loss).

o In Units:
BEP (units) = Fixed Costs / CM per Unit

o In Sales Pesos/Dollars:
BEP (sales) = Fixed Costs / CM Ratio
 7. Target Profit Analysis – Determines the sales needed to achieve a specific profit.

o In Units:
Required Units = (Fixed Costs + Target Profit) / CM per Unit

o In Sales Value:
Required Sales = (Fixed Costs + Target Profit) / CM Ratio

8. Margin of Safety (MOS) – The excess of actual or projected sales over the break-even sales.

o In Amount:
MOS = Actual Sales - BEP Sales

o In %:
MOS % = MOS / Actual Sales

9. Operating Leverage – A measure of how sensitive net income is to a change in sales volume.

o Degree of Operating Leverage = CM / Net Operating Income

o High operating leverage = greater risk and potential reward.

🧱 Underlying Assumptions of CVP Analysis

These are commonly asked in exams!

1. Costs can be classified accurately as either fixed or variable.

2. The behavior of costs and revenues is linear within the relevant range.

3. Sales price, variable cost per unit, and total fixed costs are constant.

4. In multiproduct companies, the sales mix remains constant.

5. All units produced are sold (no inventory changes).

6. Volume is the only factor that affects cost and profit—external factors are ignored.

📈 Graphical Representation (Optional but Good for Visual Learners)

CVP Graph:

 X-axis = Volume (Units)

 Y-axis = Costs and Revenues

 Fixed Cost = horizontal line

 Total Cost = starts at fixed cost, slopes up

 Revenue = starts at origin, slopes up

📋 Sample Questions You Might Encounter

1. Theory-Based

o What is the definition of CVP analysis?

o What are the assumptions underlying CVP analysis?

o How does a change in fixed costs affect the break-even point?

2. Problem Solving

o Calculate the break-even point in units and pesos.

o Determine the number of units to be sold to earn a target profit.

o Calculate the margin of safety given sales and break-even data.

o Evaluate the effect of changing selling prices or costs on the break-even point.

3. Scenario Analysis

o If a company wants to increase its profit, should it increase selling price, decrease
variable cost, or decrease fixed cost?

o A company has high fixed costs and low variable costs. What does this imply about its
operating leverage?

💡 Tips for Solving CVP Problems

 Always identify what you’re solving for: BEP, profit, sales, etc.

 Break down the given data: Fixed Costs, Variable Costs, Selling Price.

 Know your formulas—practice rearranging them for different unknowns.

 For multiproduct cases, use weighted average CM.

 Be careful with units (especially when switching from unit-based to peso-based).