Key Concepts in Cost-Volume-Profit Analysis

Margin of safety (MOS)

the level of sales (in pesos or in units) by which actual or budgeted sales may be decreased without resulting into a loss.

Sensitivity analysis

"what-if" technique managers use to examine how a result will change if original predicted data not achieved or if an underlying assumption changes.

Operating Leverage

measures the extent of change in profit before tax resulting from change in sales.

Indifference Point

the level of volume at which total costs, and hence profits, are the same under both cost structures.

Break-even Point for Multiple Products

the determination of the break-even point in CVP analysis is easy once the variable and fixed components of costs have been determined.

BEP in units

To compute for the BEP in units of each product, we have to determine the sales mix.

Sales Mix

Based on the information provided in the problem, the sales mix would be 1:2:5 for product A, B, and C respectively.

Change in Sales

If it is stated that there is a change in sales, that change is referring to a change in volume (units), not change in selling price.

Change in Total Variable Cost

If variable cost increases by 30%, the main reason for that increase would be an increase in volume (units), not an increase in variable cost per unit.

Change in Selling Price

A change in selling price will be reflected as an increase or decrease in sales but it would not affect variable cost because volume would not be affected.

Fixed Costs

Total fixed cost will remain the same regardless of changes in sales volume or variable costs.

Variable Costs

Total variable cost will change with a change in sales volume, while fixed costs remain constant.

Profit Before Tax

Operating leverage answers the question: 'By how many times will operating profit increase or decrease in relation to the increase or decrease in sales?'

Cost Structures

If the company operated at the indifference point, the alternative used would not matter because income would be the same in either way.

Composite Break-even Point

A need to compute for the composite or multi-product break-even point arises when fixed costs are incurred for all products.