Variable Costing Sales XX XXX Less: Variable Costs + (x.xxx) Contribution Margin XX XXX Less: Fixed Costs (x,.xxx) Net Income XX XXX SS Uae kL SS + A powerful tool that helps managers understand the relationships among cost, volume, and profit. CVP analysis focuses on how profits are affected by the following five (5) factors: . ST DTU CLS) i. + Break-even point is the point where operationally, there is no profit and no loss. This is the point where all sales are equal to total variable costs and total fixed costs, thereby presenting a net income of zero. Contribution margin is the difference between the entity's sales and total variable costs. If selling price per unit is deducted with the variable cost per unit, it becomes contribution margin per unit. When contribution margin is divided to sales, a percentage is obtained called contribution margin ratio. Sales 400,000 Less: Variable Costs __ 280,000 Contribution Margin 120,000 Less: Fixed Costs 120,000 Net income = Sales 400,000 Lese: Variable Costs 20,000 CContrbution Maron 120.000 12 Less: Fixed Costs 120,000 Net income = Sir Chua's Accounting Lessons PHDefinition of terms e.. Margin of safety is the difference between actual or budgeted sales and break-even sales. This is the amount that represents at how s1seo00 $100,000 much can sales go down before the entity can * Margin of safety ratio is MOS divided by the BasDe actual or budgeted sales or by dividing profit ratio by the contribution margin ratio. ar ea) ELA CLS * Sales mix is the combination of products that, in total, will compose the reported sales of an entity, applicable to multiple product line companies. « Costs are classified as variable or fixed. PE rer Een tele Key Assumptions Fixed costs remains unchanged within the relevant range. SUT e Ue cen UUM oe Stine)Key Assumptions in CVP Analysis k om fram ergot eu usually remains constant OURS U eC a tee sy Benn era) Sales in units x Contribution margin per unit = Total Contribution Margin Contribution margin / CM per unit = Number of units sold Therefore, Fixed cost / CM per unit = Break-even point in units. Sir Chua's Accounting Lessons PH PCR UE ISLC CSUR EUS ial Sir Chua's Accounting Lessons PHProblem 1 hake 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 amounts to P90,000. 1. How much is the CM per unit? CMR? 2. How many units should the entity sell every month to break-even? 3. How much sales should the entity achieve every month to break-even? 4, Compute BEP through equation approach. Benner) Problem 1 Tiddy Company is a manufacturer of teddy bears which currently sells at P250 per unit. Sclling price per unit 250 Variable cost per unit includes P80 in Less: Variable costs per unit materials, P50 in labor, P20 in variable Materials 80 overhead, and P10 in variable selling and — Labor 50 administrative expenses. Fixed costs per Overhead 20 period amounts to P90,000. Selling and administrative 10.160 1. How much is the CM per unit? CMR? Contribution margin per unit 90, 2. How many units should the entity sell every month to break-even? 3. How much sales should the entity achieve every month to break-even? Compute BEP through equation approach. Problem 1 Tiddy Company is @ manufacturer of teddy Fixed cost bears which currently sells at P250 per unit. Divide by: Contribution margin per unit Variable cost per unit includes P80. in Breakeven point in units materials, P50 in labor, P20. in variable overhead, and PIO in variable selling and Contribution margin ratio P90/P250 36% Total amount Per wit administrative expenses. Fixed costs per period amounts to P90,000. eee 1. How much s the CM per unt? CMR? Contin nar sor 2 How many units should the entity sell Les: Fiaed eo 000 every month to break-even? Llama : How much sales should the entity achieve ayat ner coe every manth to break-even? Merit ” 4, Compute BEP through equation approach, Bienen) Breakeven point in unitsProblem 1 Tiddy Company is @ manufacturer of teddy bears which currently sells at P250 per uit. 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 amounts to P90,000. 1. How much isthe CM per unit? CMR? 2. How many units should the entity sell every month to break-even? 3. How much sales should the entity achieve every month to break-even? 4, Compute BEP through equation approach, Benn enna) Fixed cost 90,000 Divide by: Contribution margin ratio 36% Breakeven point in peso sales 250,000 Breakeven point in units 1,000 ‘Muhtiple by: Selling price per unit Breakeven point in peso sales Talent % Saks Less: Vari cont Corba ar Les: Fed oot ‘onp00 sap09 cM atneP eM Breakeven poit in peso sales Tiddy Company is @ manufacturer of teddy bears which currently sells at P250 per unit. Net income = Sales 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 amounts to P90,000. 1. How much isthe CM per unit? CMR? 2 How many units should the entity sell every month to break-even? 3. How much sales should the entity achieve every month to break-even? 4, Compute BEP through equation approach. ont 3s Accounting Lessons PH - Variable cost - Fixed cost = 250x - 160x - 90,000 0= 90x - 90,000 -90x = -90,000 aphing CVP Relationships Sales Total Revenue Total Cost Break-Even Point Bienen) Units Soldee Prepare the break-even graph for Meow Company based on the following information. Total om at Sos 500,000 Pro Vari coss 300,000 6 (Catron marin 700,000 ‘ Fixed costs 150,000 3 etiam 50,00 1 Benn ena) Unis sold 50,000 units [Units sold 8 10,000] 20,000] 30,000] 40,000] —_ 50,000 Sales revenue = | 400,000.00 | 200,000.00 | "300,000.00 | 400,000.00 | "$00,000.00 [Variable cost = | 60,000.00 | 120,000.00 | 180,000.00 | 240,000.00 |” 300,000.00 Fixed cost 150,000.00 | 150,000.00 | 150,000.00 | 150,000.00 | 150,000.00 | 150,000.00, [Total cost 150,000.00 | 210,000.00 | 270,000.00 | 330,000.00 | 390,000.00 | 450,000.00 ee (Die sota = [10.000 | 20,000 | 30.00, santo sales revenue open. 00 | 26500000 | oR; 000 00 00.0 | [vanabie cos e,00 00 120.400.00 | 189.00000 300,00.00| Fixed cost | 35000000] 15,000.00 | 150,000 00 | 15,000 00 0,000.00 [etaicost | 3500000] 71,000 00 | 77,000 co | 330,000 00 259.0000] DeelAnalysis with target net income lads Cec Required sales = Benn era) eS Fixed cost+Target net income rete rete etry ieee eed aed ora rete ate ey 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 manufacturing costs per period amounts to P90,000. The entity's desired net income is 270,000. ‘L How many units should the entity sell every month to achieve the target net income? 2. How much sales should the entity achieve every month to achieve the target net income? Sir Chua's Accounting Lessons PH eS 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 manufacturing costs per period amounts to P90,000. The entity's desired net income is 270,000. ‘L How many units should the entity sell every month to achieve the target net income? 2. How much sales should the entity achieve every month to achieve the target net income? Sten ea) Fixed cost 90,000 Add: Desired net income 270000 ‘Conteution margin to achieve 360.000 Divide by: Contribution margin per wit 0 ‘Target sales in units £000_units Saks 250 Less: Variable cost 160 ‘Contribution margin 360,000.00 90 Less: Fixed cost 90,000.00 Net income 270,000.00 CM target 360,000 CM per 0 ‘Target sales in units Fixed cost Add: Desired net income Contrbution mar Divide by: Contribution margin ratio ‘Target sales in peso sales “Target sales nits Mati by: Seng pre Target sales in peso sales Sales 1,000,000.00 100% Less: Variable cost re Contrbution margin TAO 36% Less: Fixed cost 90,000,008 Net income 270,000.00 CM urge 360000 CM per unt get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. EUR pe Ceo Ca Ye ie a TY arr Problem 4 Charlotte Manufacturing Company's budget for the coming year revealed the following unit data: oe a = aa wae ram om 2 ‘= =m za a ean = Compute for the margin of safety in peso amount and percentage. Problem 4 : Sling price per sit $000 10000"% Charlotte Manufacturing Company's budget uble cost per unit 1675 3350% for the coming year revealed the following Toei a ee unit data: Net income per nit ereeeaee Roar Unitests Budeted et come 75,000.00 Dine by:N 875 Variote Fed SS Moniocurg PLEO. POO 50.00 Selig 250 550 Budpeted sakes Spa0000 00 Ceerl 0% 700 . Unit seling pce 0 Faod cost 124 $0. 1000 unis 24s0am000 i i Dis by: CM eto 650% Compute for the margin of safety in peso Learnt a amount and percentage. Sten een)Problem 4 Charlotte Manufacturing Company's budget for the coming year revealed the following unit data: = fi Vorisle Fixed Manufacturing Puoo P00 Seling 250 550 General 025 700 it aig price Poo Compute for the margin of safety in peso amount and percentage. Benner) Budgeted sakes Less: Breakeven sakes Margin of safety Margin of safety Divide by: Budgeted sales Margin of safety ratio Problem 4 Charlotte Manufacturing Company's budget for the coming year revealed the following unit data: fo Fed Maeufactaring Puoo Pr200 Seling 250 550 Genera 02 700 at aling price Poo Compute for the margin of safety in peso amount and percentage. Saks (100000 ws x PO) Less: Variable Cost (100000 unis x P1675) Profit Ratio (875000 $000,000) 190% ‘Contruton Marga Rati (3.328000 $00,000) sn Margin of Safety Ratio (17.50% / 650%) 26.3% Problem 4 Charlotte Manufacturing Company's budget for the coming year revealed the following unit data: fo Fixed P00 550 700 it elig price Poo Compute for the margin of safety in peso amount and percentage. Compute for the profit using the MS and CMR Maran of Safety 1315,789.47 “Malti by: CM Ratio 6.50% Net Income 375000.00 The contribution margin from the sales attributable to the margin of safety becomes the profit because at break-even point, all fixed costs had already been recovered. With that, any contribution margin in the sales above the break- even point become the net income. Bien ea)Sales Mix and Weighted Aver: ELT 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. Brennen) Problem 5 eeeneR EEG Calculate the break-even point Schnee 1021030 ; : ; c 014010 inthe following sales mix, both = Grim oe in units and peso sales. aM Sangre a a) a a waco pmo Puan fan Sales mix am pope me s75- nis Tel fed ast ana 93,750 « 131250 67500 eal Ore a ey cues) + Operating leverage represents the relationship between the entity's fixed costs and variable costs. * An entity with high fixed costs tends to have a high operating leverage, like airline industries. Usually its fixed costs are higher than its variable costs. + An entity with a high operating leverage can expect net income going up when sales do increase, because fixed costs will still remain the same. * Similarly, an entity with a high operating leverage can expect net income going down when sales do decrease because it will still incur fixed costs, up until they suffer losses. Sten ea)eT Weed ce : + Operating leverage represents the relationship between the entity's fixed costs and variable costs. + An entity with high fixed costs tends to have a high operating leverage, like airline industries. Usually its fixed costs are higher than its variable costs. + Anentity with a high operating leverage can expect net income going up when sales do increase, because fixed costs will still remain the same. + Similarly, an entity with a high operating leverage can expect net income going down when sales do decrease because it will still incur fixed costs, up until they suffer losses. Brennen) eee + The degree of operating leverage measures how well an entity generates profit using its fixed costs. Bree ad | Sir Chua's Accounting Lessons PH Problem 6 | Determine the DOL of the following entities and interpret. A B Sales 3,000,000.00 3,000,000.00. Less: Variable costs 300,000.00 900,000.00 Contribution margin 2,700,000.00 2,100,000.00 Less: Fixed costs 1,000,000.00 400,000.00 Net income 1,700,000.00 _1,700,000.00 Bien ealLi” .. Determine the DOL of the following entities oe ccmeee ues! and interpret. ot ‘» vs + If both Company A and Company B Sales ‘experience 10% increase in sales, Company Ns net income will increase by 1590% while Company B's net income will Increase by only 2.40%. + Simitary, if both entities experience 10% decrease in sales, Company As net income will decrease by 15.90% and Company B's net income wil decrease by ony 12.40%. Less: Variable costs Contribution margin Loss: Fixed costs Net income Sir Chua's Accounting Lessons PH Next Lesson