Profit Planning and CVP Analysis

Profit Planning
Is the process of
anticipating profit under
varying conditions and
analyzing the effects of
variables affecting it.
Variable Costing
 The variable costing system is
preferred by management in
profit planning.
 In this model, costs are
classified as fixed or variable
Contribution Margin
 Sales and variable costs directly
and similarly relate with sales
volume.
 The difference in sales and
variable costs is originally called
as profit/volume, but now
popularly referred to as the
contribution margin.
The contribution margin format
Condensed Format:
Sales Px
Less:Variable costs and expenses x
Contribution margin x
Less: Fixed costs and expenses x
Profit Px
Expanded Format
Sales Px
Less: VC of goods sold x
Manufacturing margin x
Less: Var marketing & admin ex. x
Contribution margin x
Less: Fixed costs and expenses x
Profit Px
Cost-Volume-Profit Analysis
Management can control
costs.
The process of managing
costs and sales volume as
they impact profit is known
as cost-volume-profit
analysis.
The Basic CVP Analysis
 The basic CVP analysis covers
the study on contribution
margin, breakeven point,
margin of safety, profit setting,
sales mix and degree of
operating analysis.
Sample problem
Pilot Company establishes the following
information for its profit planning
activities:
Unit sales price P200
Unit variable costs 120
Total FC 400,000
Units sold 8,000 units
Solutions:
1. The contribution margin is
P80(P200-P120).
The contribution margin rate is
40% (P80/P200).
The variable cost rate is 60%
(P120/P200).
Determine the following for Pilot
Company’s profit analysis:
1. Unit contribution margin,
contribution margin rate, and variable
cost rate.
2. Breakeven point in units and in
pesos.
3. Margin of safety in units and in pesos,
and margin of safety rate.
 Now, focus in the contribution
margin. You should have noticed it
could be computed in so many
ways, as follows:
CM= Sales- VC
CM= Fixed costs+ Income
CM=Units sold x UCM
CM= Sales x CMR
 Likewise,you should have observed
the following important relationships:
Operating income= CM-Fixed costs
VCR= variable cost/sales
=unit vc/ unit sales price
CMR= CM/Sales
= unit CM/ unit sales price
=100%-VCRatio
2. Breakeven point in units and in
pesos.
• The breakeven point in units is
5,000.
• The breakeven point in pesos is
P1,000,000.
3. Margin of safety in units and in pesos,
and the margin of safety rate.
• Margin of safety is the difference
between budgeted sales and
breakeven sales.
• It is the maximum amount of
reduction in sales before a loss is
incurred.
• The margin of safety in units is 3,000,
the margin of safety pesos is P600,000
and the margin of safety rate is 37.5%.
Sales with profit
 Business organizations should
operate with profit.
Otherwise, they are not in
business.
 The question is: how much
sales should a business
generate to achieve a target
profit?
Sample problem
Mayaman Company determines its
sales price and costs structure as
follows:
Unit sales price P400
Unit variable costs 240
Total fixed costs 800,000
How much is sales if profit is expressed
as:
1. Profit before tax of P400,000.
2. Profit after tax of P480,000, tax rate
is 40%.
3. Profit is 20% of sales, before tax.
4. Profit is P25 per unit, before tax.
5. Profit is 20% of sales, after tax of
40%.
6. Profit is 20% of CMR, before tax.
7. Profit is 20% of CMR, after tax.
Expression Solutions
of profit
1. Profit Sales (u)=(800,000+400,000)/160
before tax
= 7,500 units
Sales (p)=(800,000+400,000)/40%
=3,000,000
Expres Solutions
sion of
profit
2. Profit Sales (u)= 800+(480/.60)/160
after tax =10,000 units
Sales (p) =800+(480/.60)/40%
=4,000,000
3. Profit Sales (p) =800/(40%-20%)
% = 4,000,000
before Sales (u) = 800/(160-25)
tax = 5,926 units
Expres Solutions
sion of
profit
4. Profit Sales (u) = 800,000/(160-25)
per unit = 5,926 units
before
tax
5. Profit Sales (p) = 800,000___
% after [40%-(20%/60%)]
tax =12,000,000
Expressi Solutions
on of
profit
6. Profit % Sales (p) =800,000/40%(1-20%)
based on =2,500,000
CMR
before
tax
7. Profit % Sales (p) = 800,000___
based on [(40%[1-(20%/60%)]
CMR =3,000,000
after tax
Multi-product sales
 If there are two or more
products considered, the
composite BEP is computed.
 The basic breakeven point
formula is used. Except that in
multi-product sales, the
denominator is the average
contribution margin.
Sample problem
Nagadu Corporation produces and sells
three products and has provided you the
following operating data:
Products
x y z Total
Unit sales price 400 600 700
Unit VC 100 350 500
Budgeted sales (u) 500 300 200 1,000
Budgeted sales (p) 200k 180k 140k
Total FC 795k
Calculate the following:
1. Composite breakeven point (CBEP)
in units and in pesos.
2. Allocated CBEP.
3. Composite sales profit before tax is
P2,000,000.
Solutions:
2. CBEP allocation:
X= 3,000 x 5/10 =1,500
Y= 3,000 x 3/10 = 900
Z= 3,000 x 2/10 = 600
CBEP 3,000
Solutions:
1. CBEP (u) =795,000/265
= 3,000 units
CBEP (p) =795,000/50.9615%
=1,560,000
Solutions:
3. CSP = 795,000+2,000,000
50.9615%
=5,484,532
 Average UCM
Product CMR Sales mix ratio Ave. CMR
X 75.00% 200/520 28.8462%
Y 41.67% 180/520 14.4231%
Z 28.57% 140/520 7.6919%
50.9615%
 CVP Sensitivity Analysis
 Sales prices change, variable
costs rate and total fixed costs
also change. The process of
considering the impact of these
changes to profit and related
information is called as CVP
Sensitivity Analysis.
 CVP sensitivity analysis concerns
about predicting the outcome of
profit given the changes in the
variable affecting profit such as the
unit sales price, unit variable costs,
total fixed costs, unit sold and sales.
 Not only is the effect of these
changes in profit determined but
also that of contribution margin,
margin of safety and breakeven
point.
Sample problem
Timoteo Enterprises produces and
sells product KE and makes available
to you the following data:
Unit sales price P80
Unit variable costs 50
Total FC 600,000
Unit sold 45,000
 What would be the new CMR, BEP
(pesos), and operating profit be if:
1. Unit sales price increases by 20%?
2. Unit variable costs increase by 10%?
3. Total fixed costs decrease to
P450,000?
4. Unit sold increase by 20%
5. Unit sales price increases to P100,
unit variable costs increase by 15%;
and total fixed costs increase by 5%?