## CVP, Breakeven, Differential Analysis

Hi Kuya Joseph. 3rd yr na po ako (from AMV), 1st subject ko sa MAS. Quiz na namin this week sa CVP Analysis kaya linubos-lubos ko na. Di ko kasi makuha yung sagot na nasa answer key at medyo nangangapa pa sa mga ganitong klaseng problem. Lifted to sa MAS quizzer ni Sir Larry Tan.

Sari-Sari Grocery is currently open only on Mondays to Saturday. It is considering opening on Sundays. The annual incremental costs of Sunday opening are estimated at P124800. Its gross margin is 20%. It estimates that 60% of Sunday sales to customers would be on other days if its stores were not open on Sundays. The Sunday sales would be necessary for Sari-Sari to attain the same weekly operating income is ????? .

30000Tonykinn Company is contemplating of marketing a new product. Fixed costs will be P800000 for production of 75000 units or less and P1200000 if production exceeds 75000 units. The variable cost ratio is 60% on the first 75000. Contribution margin will increase to 50% for units in excess of 75000. If the product is expected to sell for P25 per unit, how many units must Tonykinn sell at breakeven ?????

111000

A retail company determines its selling price by marking up variable costs 60%. In addition, the company uses frequent selling price markdowns to stimulate sales. If the mark-downs average 10%, what is the company’s contribution margin ratio ?????

30.6%During 1996, RPS corporation supplied hospitals with a comprehensive diagnostic kit for P120. At a volume of 80000 kits, RPS has fixed costs of P1000000 and a profit before income taxes of P200000. Due to an adverse legal decision, RPS’s 1997 liability insurance increased by P1200000 over 1996. Assuming the volume and other costs are unchanged, what should the 1997 price be if RPs is to make the same P200000 profit before income taxes ?????

135

Magandang araw! Ako’y natutuwa dahil sa wakas ay may nagtanong na! Hehehe. Let’s get straight to the business.

**MAS – CVP, Breakeven analysis Differential Analysis.**

Sa MAS, ang technique, usually, inaapplyan ng mga natutunan nyo sa algebra. Malaking tulong ang algebra sa MAS. Kung wala naman masyadong natutunan sa algebra, hindi naman ibig sabihin nun mahihirapan ka, basta intindihin lang ang problema, madali nalang sagutan ang problems!

Before we start answering the problems, let’s have some lecture muna about CVP analysis. Cost-Volume-Analysis is “a method for analyzing the relationships among costs, volume, and profits” (Louderback and Holmen, 2003). Pag inaaral natin ang CVP analysis, may dalawang klase ng costs, the VARIABLE COSTS and FIXED COSTS.

**Variable Costs**. The TOTAL of variable costs, from the name itself, changes/varies as the quantity produced changes. For example, nagmamanufacture tayo ng yema. Pag gumawa ka ng yema, kakailanganin mo ng itlog, condensed milk, asukal, mani, cellophane (pambalot), pangsahod sa mga gagawa/magbebenta ng yema. Mas marami kang yemang gagawin, mas marami kang kakailanganing itlog, condensed milk, asukal, mani, cellophane, pasahurin. So, kung ang isang cost, nag-iba (whether product cost or period cost) basta nagchange siya sa pagchange ng quantity, it is considered as a variable cost.

**Fixed Costs**. On the other hand, habang gumagawa ka ng yema, gagamit ka ng ilaw, magbabayad ng renta, et cetera. Ito yung mga gastos na hindi mag-iiba sa pag-iba ng dami ng quantity produced, thus, called as FIXED COST. Ang fixed cost naman, hindi forever fixed. Usually, mag-iiba sya kapag nag-iba ang production capacity mo(in the long run). Kung dati, sa bahay ka lang gumagawa ng yema, then eventually, nagpatayo ka ng factory ng yema, nag-increase ang production capacity mo and, tataas ang fixed cost mo.

**Contribution Margin. **Sabi sa libro, ang contribution margin daw is the difference between The Sales Price and the Variable Costs. Eh bakit “Contribution” Margin? Ano bang kino-contribute nya? Malamang, kita. Pero, bakit nga tinawag na “contribution”? Kasi ganito yan, pag nagbenta tayo, tumataas yung income natin equal sa “contribution margin **per unit**” kada isang additional quantity na ibebenta mo, regardless sa fixed cost.

**Breakeven point. **Pag sinabing break-even point, ito yung point kung saan ang kita mo ay ZERO (0). Hindi positive, hindi negative. Zero. Therefore,

Total Sales minus Total Variable Costs minus Total Fixed Costs = Zero

Knowing all of these, the CVP Analysis Formula is:

*Analysis*nga ito, let’s analyze the factors affecting Contribution Margin.Ang

**TOTAL SALES PRICE,**nag-iincrease at nagdedecrease sa pag-increase/decrease ng quantity sold. Ang Sales Price PER UNIT naman ay constant. Meaning to say, kahit na 10,000 units ang ibenta mo at $20 sya per yunit, kahit na 200,000 units ang ibenta mo, $20 parin sya per unit, unless sabihin ng problem na nag-increase or nagdecrease ang Sales Price Per unit.

Ang **TOTAL VARIABLE COST**, nag-iincrease at nagdedecrease sa pag-increase/decrease ng quantity sold. Ang VARIABLE COST PER UNIT naman ay constant. Same reasoning with the Sales Price.

Therefore, Total Contribution Margin changes with the change in quantity. On the other hand, CONTRIBUTION MARGIN PER UNIT never change unless Sales Price per unit or Variable Cost per unit changes.

What about** FIXED COSTS**??

TOTAL Fixed Costs remain constant within a a range of Production Capacity. So, hangga’t hindi pa lumalagpas sa current capacity ang production capacity mo, FIXED ang Fixed Costs. On the other hand, Fixed Costs PER UNIT

decreases up0n increase of quantity sold and

Increase upon the decrease of quantity sold.

TOTAL FIXED COSTS / quantity sold = FIXED COST PER UNIT

Bakit ganon? Since constant ang fixed costs, habang dumadami ang units na nabenta mo, dumadami ang nagshashare sa costs (tumataas ang denominator).

Claro?

**BREAKEVEN ANALYSIS**

The breakeven point is the where INCOME is equal to Zero. Kaya nga “breakeven”, meaning, “bawi” ka lang sa puhunan mo. Usually, sa Breakeven analysis, hinahanap ang number of Breakeven Units (o yung quantity na ibebenta mo para mag-breakeven ka lang) or the Breakeven Sales.

Tignan nyo ulit ung formula. Pagkatapos, isipin nyo, ano dapat ang Contribution margin para Zero ang income. Isn’t it that it should be:

TOTAL CONTRIBUTION MARGIN = TOTAL FIXED COSTS

Kung equal ang Contribution Margin sa Total Fixed costs, zero ang magiging income nyo, thus, breakeven.

It is important to take note of the Total Fixed Costs in Breakeven Aanalysis.

Okay let’s try solving some problems!

*note: knowledge in algebra will be really a BIG help AND a good reading comprehension. Intindihin mabuti ang problem, it’s the key to all problem solving lalo na sa boards.*

First Problem:

Sari-Sari Grocery is currently open only on Mondays to Saturday. It is considering opening on Sundays. The annual incremental costs of Sunday opening are estimated at P124800. Its gross margin is 20%. It estimates that 60% of Sunday sales to customers would be on other days if its stores were not open on Sundays. The Sunday sales would be necessary for Sari-Sari to attain the same weekly operating income is ????? .

P30,000

Nadiscuss nyo na ba ang differential analysis? This problem involves a bit of Diffferential Costing kasi.

Let’s analyze the Problem. Sabi sa problem, magbubukas daw ng sila ng SUNDAY so dapat malaman kung anong magiging effect nun sa total income.

Sabi, ang ANNUAL **incremental **costs daw ay P124,800. Ang ibig sabihin noon, tataas ang costs nila ng 124800 sa **isang taon** kung magbubukas sila every sunday kaya nga “INCREMENTAL” cost.

Ano naman ung 60% of Sunday Sales na sinasabi? Ang sabi, kung magbubukas daw sila every sundays, 60% ng sales nila every sunday ay manggagaling sa Weekday Customers. So, bababa ang sales nila every WEEKDAYS equal to 60% of the Sunday sales. Kasi imbis na Mon-Sat sila bibili, linggo nalang bumibili ung mga customers. So yung sales ng Mon-Sat, bumaba, napunta sa Sunday. So, yung pagbaba ng weekday sales ay considered as a incremental cost din.

So magkano nga ba ang dapat sales nila para even lang, given na tataas yung costs pag nag-bukas sila ng sunday? Tandaan, ang tanong, “SUNDAY SALES” so, sales lang sa loob ng isang sunday ang tinatanong, hindi yung pang-buong taon. Given this, yung P124,800 dapat idivide sa 52 WEEKS (THERE ARE 52 WEEKS IN A YEAR). So ang **weekly incremental costs** nila ay:

WEEKLY INCREMENTAL COSTS:

2,400 + 60% of Sunday Contribution Margin (ito yung total sales na nawala from Mon-Sat sales)

So, para ma-breakeven kayo, dapat:

CONTRIBUTION MARGIN = WEEKLY INCREMENTAL COSTS

So, sabi, ang GROSS MARGIN daw ay 20% (assuming ang COGS ay lahat variable, unless sinabi na may fixed portion yun)

So, CONTRIBUTION MARGIN = 0.2 * SUNDAY SALES

eto ang Solution:

Malinaw? Kung may tanong, please itanong lang.

Second Problem:

Tonykinn Company is contemplating of marketing a new product. Fixed costs will be P800,000 for production of 75,000 units or less and P1,200,000 if production exceeds 75,000 units. The variable cost ratio is 60% on the first 75000. Contribution margin will increase to 50% for units in excess of 75000. If the product is expected to sell for P25 per unit, how many units must Tonykinn sell at breakeven ?????

111,000

Lets analyze the problem by summarizing the important data:

Sabi, kung 75,000 lang daw ang Units na ibebenta, P800,000 lang ang fixed costs. On the other hand, pag lumagpas na (ito ung sinasabi kong nag-iba ang production capacity), tataas ang total fixed costs to P1,200,000.

Kung icocompute mo yung breakeven units ng P800,000 fixed costs for the first 75,000 units:

So, given the FIXED costs ng first 75,000 units, hindi enough ung 75,000 units lang to cover up for the 800,000 Fixed Costs. SO, malamang sa malamang, lalagpas ka ng 75,000 units. Ergo, ang magiging Fixed cost mo ay P1,200,000 dapat.

So, bilangin natin kung ilan dapat ang excess sa 75,000 units para macover yung 1,200,000 na fixed costs at saka yung breakeven units.

Par mag-breakeven, dapat:

Contribution margin ng first 75,000 units + Contribution Margin ng excess units = Total Fixed Costs

Third Problem:

A retail company determines its selling price by marking up variable costs 60%. In addition, the company uses frequent selling price markdowns to stimulate sales. If the mark-downs average 10%, what is the company’s contribution margin ratio ?????

30.6%

Tandaan: Pag sinabing **Mark-up**, ibig sabihin, nilagyan mo ng “patong”. Sabi sa problem, “marking up variable cost 60%” so ang ibig sabihin nito, ibebenta mo yung producto in such a way na may patong ka na 60% sa Variable costs. Therefore:

SP 160%

VC 100%

CM 60%

kung “icoconvert natin yang formula na yan in such a way na 100% ang SP, eto sya:

SP 100%

VC 62.50% (or 100/160)

CM 37.50% (or 60/160)

Sabi sa prolem, ang average markdown daw ay 10%. Edi babaan natin ng 10% ung CM:

so, instead na 160%, ninety percent nalang nun ang gagamitin natin so eto yung data sa problem:

SP 144% (160% * 90%)

VC 100 %

CM 44%

therefore, kung ang tanong ay CM Ratio, dapat ang base nyo (yung sales percentage) ay 100% so…

SP 100%

VC 69.4 % (or 100% /144%)

**CM 30.6% (or 44%/144%)**

Fourth Problem:

During 1996, RPS corporation supplied hospitals with a comprehensive diagnostic kit for P120. At a volume of 80,000 kits, RPS has fixed costs of P,1000,000 and a profit before income taxes of P200,000. Due to an adverse legal decision, RPS’s 1997 liability insurance increased by P1,200,000 over 1996. Assuming the volume and other costs are unchanged, what should the 1997 price be if RPs is to make the same P200000 profit before income taxes ?????

135

Base sa problem, tumaas lang daw ung Liability nila (in other words, tumaas ang expense) ng 1,200,000, magkano daw dapat ang ippresyo nila para ma-cover up yung bagong gastos at ma-maintain yung income?

Base sa original Data:

So alam na natin na ang CM per unit ay P15. Diba sabi ko kanina, ang Contribution Margin per unit ay ang increase sa income kada unit na dagdag na nabebenta? So dapat nating increase yung CM per unit natin para macover yung increase in expense.

Since hindi naman nag-iba yung other data, 80,000 units parin ang ibebenta natin. So,

1,200,000 increase in Liability insurace / 80,000 units = P15 per unit dapat ang iincrease ng contribution margin per unit.

Ang itinatanong ay ang Selling Price per unit daw dapat para mamaintain yung kita. Since hindi naman nag-iba yung ibang costs, Variable Costs will remain as P105. So:

Did I answer your questions?

If there are any further questions regarding this topic, please feel free to contact me!

Thanks!

Thanks po… pero medyo naguguluhan parin po ako sa Differential analysis… Uhmmm..di ko parin magets yung rationale dun sa formula na CM = Incremental Costs

Tapos additional tanong po, tungkol naman sa Indifference Profit(Medyo naguguluhan parin)… Ang tinuro kasi samin eh basta change in fixed costs/change in contibution margin = units with indifference profit.

LXQ Turo-Ruro stores are open for 15 hours a day (from 6am to 9pm). It sells packaged meals a price of P40 per meal. Variable cost per meal is P30 while total fixed costs for operation of all the stores amounted to 200000 monthly. It is thinking to reduce its store hours to only 12 hours a day as this would reduce fixed costs (utilities and wages) by 6000 a month. It is expected that the reduced store hours would result in a loss of 1500 packed monthly sales. The reduction in store hours would result in ??????

Answer: a prospective increase in monthly income of 45000

Yung nasa questionnaire eh 6000 lang, pero feeling ko typo to..kasi parang may another 0 after ng 6…

kuya nasolve ko na po..typo lang pala… ibang tanong nalang… ano po ba relationship ng margin of safety sa Contrbution Margin Ratio (o meron nga ba?)… Censya na po ang dami kong tanong.. (hehe)

Bell Company has a 25 percent margin of safety. Its before tax return on sales is 6% , and its tax rate is 40 %. Assuming the current sales are P120000, what is Bell’s total fixed costs ?????

21600

Tapos tungkol po sa sales mix po.. ano po ba ang ibig sabihin pag composite units?

Kasi sa problem pong ito:

A company sells two products X and Y. The sales mix consists of a composite unit of two units of X for every five units of Y (2:5). Fixed costs are 49500. The unit contribution margins for X and Y are P2.50 and P1.20 respectively. Considering the company as a whole , the number of composite units to break-even is ????

4500

If the company had a profit of 22000, the unit sales must have been???

13000A, 32500B

Ang pagkakaintindi ko po kasi eh dapat (2/7*2.50) + (5/7*1.20) = 1.57

Tapos idivide sa fixed costs 49500/ 1.57 = 31529 units…, ayun hindi ko po makuha yung 4500..

censya na po linubos-lubos ko na yung tanong..sa friday na test 😀

Incremental CM pala

Yung CM = Incremental Costs, since pinaghalong Differential Analysis saka Breakeven Analysis, kung baga, kung iisipin mo, to cover up for the additional costs, kelangan mong taasan yung income mo. Pano mo malalaman kung gano kalaking income ang itataas mo para ma-cover up yung cost? Edi alamin mo yung contribution margin. Diba sabi ko ang “Contribution Margin” ay ang increase sa income mo per increase in quantity of product sold. Kaya nga sya “Contribution”

Klaro po sya? 😀

masmalinaw po..tnx! 😀

wow! thank you kuya! ang laking tulong nito. 😀

ikakalat ko po yung site niyo ah. hehe. thank you ulit!

Kuya pwede po paki discuss fully yong Periodic Inventory System and Perpetual Inventory System.. just insights lang po kasi dito ako medyo mahina…