Cost-Volume-Profit Analysis
Theories: (1-10)
Item #
Question:
Answer: Explanation:
1
If inventories are expected to change, the type of costing
that provides the best information for breakeven analysis is
a. Job order costing
b. Variable (direct) costing
c. Joint costing
d. Absorption (full) costing
B
A variable (direct) costing system is needed to
perform CVP analysis because variable costing
separates fixed costs from variable costs.
2
The breakeven point in units increases when unit costs
a. Increase and sales price remains unchanged.
b. Decrease and sales price remains unchanged.
A
The breakeven point in units is calculated by
dividing total fixed costs by the unit contribution
margin. If selling price is constant and costs
increase, the unit contribution margin will
decline, resulting in an increase of the
breakeven point.
If the sales mix shifts toward the higher contribution margin
products, what will happen to the break even point ?
a. Decreases
b. Increases
c. Remain constant
d. Require additional information
A
The Break even point is affected by the three
factors: Selling Price, Variable Cost and
Volume of Sales. Any changes of these will
definitely change the BEP.
c. Remain unchanged and sales price increases.
d. Decrease and sales price increases.
3
If the sales mix shifts towards the higher
contribution margin product then the BEP will
increase.
4
CVP analysis allows management to determine the relative
profitability of a product by
a. Determining potential bottlenecks in the production
C
Cost-volume-profit analysis is used to
determine whether there is an economic
justification for a product to be manufactured.
process
b. Determining the contribution margin per unit and
projected profits at different levels of production.
c. Assigning costs to a product in a manner that
maximize the contribution margin
d. keeping the fixed cost in the absolute minimum
5
A target profit margin is added to the
break-even sales volume, which is the number
of units that need to be sold in order to cover
the costs required to make the product, to
arrive at the target sales volume needed to
generate the desired profit.
It is the excess of sales price over the related variable cost,
contributing to the recovery of fixed expenses.
a. Gross Margin
b. Margin of Safety
c. Contribution Margin
d. Gross Profit
C
Gross margin and gross profit refer to the
excess of sales over cost of sales.
6
Cost-volume-profit relationships that are curvilinear may be
analyzed linearly by considering only
a. a relevant range of activity
b. the variable costs
c. the fixed costs
d. the relevant costs
A
Within the relevant range and a specified time
period, sales, variable costs, and fixed costs
are assumed to be linear. Within such range,
selling price, variable cost per unit and total
fixed cost are assumed to be constant.
7
At break-even point, sales is always equal to
a. Margin of Safety
b. Contribution Margin less Fixed Cost
c. Contribution Margin less Variable Cost
d. Variable Cost plus Fixed Cost
D
Following the variable costing format:
Margin of safety is the excess of sales over
break-even sales. It is the amount by which
sales may be reduced without resulting into a
loss.
-
Sales
Variable Cost
Contribution Margin
Fixed Cost
Net Income
It can be deduced where profit is zero, all costs
incurred are covered with sales, both variable
and fixed portions.
Other scenarios will not always equate to sales
at break-even point.
8
To reduce the break-even point, the company must
B
a. Increase the Fixed Cost and decrease the
Contribution Margin
b. Decrease the Fixed Cost and increase the
Contribution margin
c. Decrease both the Fixed Cost and Contribution
Margin
d. Increase both the Fixed Cost and Contribution
Margin
9
Which of the following factors can be used in computing for
the multi product break-even point
a.
b.
c.
d.
10
a.
b.
c.
d.
So if the company wishes to reduce BEP, they
should reduce FC (direct) and increase CM
(inverse) which would result in favorable and
lower BEP.
D
weighted average contribution margin per unit
weighted average contribution ratio
Neither A nor B
Both A and B
It is the use of fixed cost to get higher percentage chances
in profit as sales changes. It is computed by dividing the
contribution margin to the operating income.
Variable Cost
Break-even Analysis
Operating Leverage
Degree Ratio
When FC increases, BEP also increases
meaning they have a direct relationship. On the
other hand, when CM increases, BEP
decreases resulting in an inverse relationship.
C
Weighted average contribution margin per unit
and weighted average contribution ratio can be
both used in computing for the break-even
point in a multiple product. Weighted average
contribution margin per unit is used to find the
BEP in units and the weighted average
contribution ratio to find the BEP units in pesos.
The operating leverage is concerned with the
relative mix of fixed cost and variable cost in an
organization. Companies with lower variable
costs by increasing the proportion to fixed cost
will benefit with greater increases in profit as
sales increases. On the other hand, it is also
true that companies with a higher operating
leverage will experience greater reduction in
profit as sales decrease.
Problems: (11-20)
Item #
11
NFJPIA is planning another Regional Midyear Convention.
The budget committee has assembled the following
expected costs for the event:
Answer:
Explanation:
D
Sales = Variable cost + Fixed cost + Profits
P30Q = P10Q + P8,000 +P0
P20Q = P8,000
Q = P8,000/P20 per person
Q = 400 𝑝𝑒𝑟𝑠𝑜𝑛𝑠; or, at P30 person, P12,000
D
Variable cost per person (P7 + P3)
P10
Fixed cost per person (P8,000/ 250 persons)
32
Registration price
𝑃42
B
𝐵𝑟𝑒𝑎𝑘 𝐸𝑣𝑒𝑛 𝑃𝑜𝑖𝑛𝑡 =
Meals(per person)...............................................P 7
Favors and Program (perperson)………..………...3
Accommodation…………...…….………………4800
Transporation………………..……………………700
Merch……………………………………………..1500
Floorshow and strolling entertainers……..….. 1000
The committee members would like to charge P30 per
person for the evening’s activities.
The break-even point for the Convention (in terms of
the number of persons that must attend) is
a. 300 persons
b. 350 persons
c. 450 persons
d. 400 persons
12
13
Assume that only 250 persons attended the midyear
convention last year. If the same number attends this
year, what price per registration must be charged to
break even?
a. P45
b. P40
c. P43.50
d. P42
The Koo-o Company is trying to do CVP Analysis with the
following information for the month of August
𝑇𝑜𝑡𝑎𝑙 𝐹𝑖𝑥𝑒𝑑 𝐶𝑜𝑠𝑡
𝑆𝑎𝑙𝑒 𝑃𝑟𝑖𝑐𝑒− 𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝐶𝑜𝑠𝑡/𝑢𝑛𝑖𝑡
Sales
Total Fixed Cost
Total Variable Cost
Unit Price
𝑈𝑛𝑖𝑡 𝑆𝑜𝑙𝑑 = 1, 100, 000/40
𝑈𝑛𝑖𝑡 𝑆𝑜𝑙𝑑 = 27, 500 𝑢𝑛𝑖𝑡𝑠
𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝐶𝑜𝑠𝑡/𝑢𝑛𝑖𝑡 = 660, 000/ 27500 𝑢𝑛𝑖𝑡𝑠
𝑉𝐶/𝑢𝑛𝑖𝑡 = 24. 00
280,000
𝐵𝑟𝑒𝑎𝑘 𝐸𝑣𝑒𝑛 𝑃𝑜𝑖𝑛𝑡 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡 = 40−24
P1,100,000
280,000
660,000
40
𝐵𝐸𝑃/𝑢𝑛𝑖𝑡 = 17, 500
What is the Break-even point in units?
a. 14,000 units
b. 25,000 units
c. 17,500 units
d. 35,000 units
14
With the information given above, compute the operating
income of the Koo-o Company
a. 160,000
b. 190,000
c. 240,000
d. 440,000
A
Sale Price
Variable Cost
Contribution Margin
Fixed Cost
Operating Income
15
Beloved Summer Corp. produces and sells a single
product. The selling price is P25 and the variable cost is
P15 per unit. The corporation’s fixed cost is P100,000 per
month. Average monthly sales is 11,000 units.
C
BEP = Fixed Cost / Contribution Margin per unit
BEP = 100,000 / 10
BEP = 10,000
The margin of safety ratio (MSR) and the break-even sales
ratio (BESR) are:
a.
b.
c.
d.
MSR= 40% , BESR= 60%
MSR= 60% , BESR= 40%
MSR= 9% , BESR= 91%
MSR= 91% , BESR= 9%
1,100,000
(660,000)
440,000
(280,000)
160,000
Margin of Safety (MS) = Su - BEPu
MS = 11,000 - 10,000
MS= 1,000
𝑀𝑆𝑅 =
𝑀𝑎𝑟𝑔𝑖𝑛 𝑜𝑓 𝑆𝑎𝑓𝑒𝑡𝑦
𝑆𝑎𝑙𝑒𝑠
MSR = 1,000 / 11,000
MSR = 9%
𝐵𝐸𝑆𝑅 =
𝐵𝑟𝑒𝑎𝑘−𝑒𝑣𝑒𝑛 𝑠𝑎𝑙𝑒𝑠
𝑆𝑎𝑙𝑒𝑠
BESR = 10,000 / 11,000
BESR = 91%
16
Based on #15. At the present average monthly sales level
of 11,000 units, the corporation’s operating leverage factor
(OLF) is
a.
b.
c.
d.
17
B
6
11
9.09
90.9
Sales (11,000 x P25)
x CMR
CM
Fixed cost
Profit before tax
𝑂𝐿𝐹 =
P275,000
40%
P100,000
(100,000)
P10,000
𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑀𝑎𝑟𝑔𝑖𝑛
𝑃𝑟𝑜𝑓𝑖𝑡 𝐵𝑒𝑓𝑜𝑟𝑒 𝑇𝑎𝑥
OLF = 110,000 / 10,000
OLF = 11
A company sells products X, Y, and Z.
B
Calculate Sales Mix Percentages.
Sales Mix
Product X
Product Y
Product Z
Sales Price
200
300
500
Variable
Costs
80
90
150
Units Sold
875
1225
1400
Fixed Cost is equal to 974,000.
Compute for Total Weighted Contribution Margin.
a. 245. 3
b. 243.5
c. 234.5
d. 235.4
X
Y
Z
TOTAL
Units
Sold
875
1225
1400
3500
Sales
%
(Produ
ct
Units
Sold
/Total
Units
Sold
875/35
00
= 25%
1225/3
500
=
35 %
1400/3
500
=
40%
100%
Calculate CM for each product.
Product
SP-VC=CM
X
200 - 80 = 120
Y
300 - 90 = 210
Z
500 - 150 = 350
Product
Sales Mix
( % of Sales
x CM)
Weighted
Contribution
Margin
X
25% x 120
30
Y
35% x 210
73.5
Z
40% x 350
140
Total Weighted Contribution
Margin
18
With the same problem in no. 7, Compute for Sales Mix in
Units at Break-even point
a. X= 1000, Y= 1200, Z= 1400
b. X= 1200, Y= 1400, Z= 1600
c. X= 1000, Y= 1200, Z= 1600
d. X= 1000, Y= 1400, Z= 1600
D
243.5
Compute BEP Total Units
Fixed Cost(a)
TWCM (b)
Total units @
BEP (a/b)
974,000
243.5
4000
Calculate Sales Mix in Units
19
Gintama Company produces three products: Products, I, L,
Y with the following characteristics
I
Selling Price
P20
L
Y
24
10
Variable cost per unit
12
18
8
Contribution margin per unit
8
6
2
Contribution margin ratio
40%
25%
20%
The company has a total fixed cost of P24, 000 and sales
mix of 1:2:5 for products I, L, Y respectively. Compute for
the breakeven point in units for each product.
a.
b.
c.
d.
I= 1,600 ; L= 800
I= 800 ; L= 1,600
I=4,000 ; L= 1,600
I=800 ; L=4,000
;
;
;
;
Y= 4,000
Y=4,000
Y=800
Y=1,600
B
Product
Total Units @
BEP x Sales
%
Sales Mix in
Units at BEP
X
4,000 x 25%
1,000
Y
4,000 x 35%
1,400
Z
4,000 x 40%
1,600
Computation of weighted average contribution
margin per unit
Product
CM per unit ×
Sales Mix
Ratio
I
(8 × 1/8)
L
(6 × 2/8)
Y
(2 × 5/8)
WA CM per unit
Break-even point in units
WA CM per
Unit
= P1
= 1.5
= 1.25
3.75
BEP in units =
𝑇𝑜𝑡𝑎𝑙 𝐹𝑖𝑥𝑒𝑑 𝐶𝑜𝑠𝑡
𝑊𝑒𝑖𝑔ℎ𝑡𝑒𝑑 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑀𝑎𝑟𝑔𝑖𝑛 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡
BEP in units =
24, 000
3.75
BEP in units = 6, 4000
Break-even point for each product
Product
Total BEP
Units × Sales
Mix Ratio
I
(6, 400 × 1/8)
800
L
(6, 400 × 2/8)
1, 600
Y
(6,400 × 5/8)
4, 000
Total
20
Selena Company manufactures and sells three products,
Y, A, and S, with the following characteristics
Sales
Product Y
Product A
P 5.00
8.00
Product S
9.00
C
Expected Net Income
Total Fixed Cost
Total Contribution Margin
6, 400
P200, 000
900, 000
P1,100, 000
price/unit
Variable
cost/unit
3.00
5.00
7.00
Expected
sales (units)
10, 000
10, 000
20, 000
Total fixed cost is P900,000. Assume that sales mix will be
the same at all sales levels.
Compute for the total contribution margin if the company
expects profit of P200, 000
a.
b.
c.
d.
P 2.25
P 1, 000, 000
P 1, 100, 000
P 900, 000