Cost-Volume-Profit Analysis
MODULE 4
COST-VOLUME-PROFIT ANALYSIS
THEORIES:
1. To which function of management is CVP analysis most applicable?
A. Planning
C. Directing
B. Organizing
D. Controlling
7. Which of the factors is (are) involved in studying cost-volume-profit relationships?
A. Levels of production
C. Fixed costs
B. Variable costs
D. All of these
8. At the breakeven point, fixed cost is always
A. Less than the contribution margin
B. Equal to the contribution margin.
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2. The systematic examination of the relationships among selling prices, volume of sales and
production, costs, and profits is termed:
A. contribution margin analysis
C. budgetary analysis
B. cost-volume-profit analysis
D. gross profit analysis
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3. The term contribution margin is best defined as the:
A. difference between fixed costs and variable costs.
B. difference between revenue and fixed costs.
C. amount available to cover fixed costs and profit.
D. amount available to cover variable costs.
C. More than the contribution margin
D. More than the variable cost
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9. At the break-even point:
A. net income will increase by the unit contribution margin for each additional item sold
above break-even.
B. the total contribution margin changes from negative to positive
C. fixed costs are greater than contribution margin
D. the contribution margin ratio begins to increase
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10. In cost-volume-profit analysis, the greatest profit will be earned at
A. One hundred percent at normal productive capacity.
B. The production point with the lowest marginal cost.
C. The production point at which average total revenue exceeds average marginal cost.
D. The point at which marginal cost and marginal revenue are equal.
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4. Cost-volume-profit analysis allows management to determine the relative profitability of a
product by
A. Highlighting potential bottlenecks in the production process.
B. Determining the contribution margin per unit and projected profits at various levels of
production.
C. Assigning costs to a product in a manner that maximizes the contribution margin.
D. Keeping fixed costs to an absolute minimum.
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5. Cost-volume-profit analysis cannot be used if which of the following occurs?
A. Costs cannot be properly classified into fixed and variable costs.
B. The per unit variable costs change.
C. The total fixed costs change.
D. Per unit sales prices change.
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11. Which of the following is not an assumption underlying C-V-P analysis?
A. The behavior of total revenue is linear.
B. Unit variable expenses remain unchanged as activity varies.
C. Inventory levels at the beginning and end of the period are the same.
D. The number of units produced exceeds the number of units sold.
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12. Which of the following assumptions is inherent to C-V-P analysis?
A. In manufacturing firms, the beginning and ending inventory levels are the same.
B. In a multi-product organization, the sales mix varies over time.
C. The behavior of total revenue is curvilinear.
D. he relevant range is not a consideration.
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6. The most useful information derived from a breakeven chart is the
A. Amount of sales revenue needed to cover enterprise variable costs.
B. Amount of sales revenue needed to cover enterprise fixed costs.
C. Relationship among revenues, variable costs, and fixed costs at various levels of activity.
D. Volume or output level at which the enterprise breaks even.
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13. Which of the following assumptions is closely relevant to cost-volume-profit analysis?
A. for multiple product analysis, the sales mix is not important
B. inventory levels remain unchanged
C. total fixed costs and unit variable costs can be identified and remain constant over the
relevant range
D. B and C
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Cost-Volume-Profit Analysis
20. As projected net income increases the
A. degree of operating leverage declines.
B. margin of safety stays constant.
14. Advocates of cost-volume-profit analysis argue that:
A. Fixed costs are irrelevant for decision making.
B. Fixed costs are mandatory for CVP decision making.
C. Differentiation between the patterns of variable costs and fixed costs is critical.
D. Fixed costs are necessary to calculate inventory valuations.
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15. With respect to fixed costs, C-V-P analysis assumes total fixed costs
A. per unit remains constant as volume changes
B. remain constant from one period to the next
C. vary directly with volume
D. remain constant across changes in volume
21. Given the following notations, what is the breakeven sales level in units?
SP = selling price per unit
FC = total fixed cost
VC = variable cost per unit
A. SP / (FC/VC)
C. VC/(SP – FC)
B. FC/(VC/SP)
D. FC/(SP – VC)
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22. A company increased the selling price for its product from P1.00 to P1.10 a unit when total
fixed costs increased from P400,000 to P480,000 and variable cost per unit remained
unchanged. How would these changes affect the breakeven point?
A. The breakeven point in units would be increased.
B. The breakeven point in units would be decreased.
C. The breakeven point in units would remain unchanged.
D. The effect cannot be determined from the information given.
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16. The CVP model assumes that over the relevant range of activity:
A. only revenues are linear.
C. unit variable cost is not constant. Bobadilla
B. total fixed cost changes.
D. revenues and total costs are linear.
17. Which of the following is not a limiting factor of Cost-Volume-Profit analysis?
A. The process assumes a linear relationship among the variables.
B. The process assumes variable costs per unit are available.
C. Efficiency is assumed to be constant.
D. Inventory levels are assumed to not change.
C. break-even point goes down.
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D. contribution margin ratio goes up.
23. On January 1, 2007, Incremental Company increased its direct labor wage rates. All other
budgeted costs and revenues were unchanged. How did this increase affect Incremental
Company’s budgeted break-even point and budgeted margin of safety?
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A.
B.
C.
D.
Budgeted Break-even Point
Increase
Increase
Decrease
Decrease
Expected Margin of Safety
Increase
Decrease
Decrease
Increase
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18. Cost-volume-profit analysis is a technique available to management to understand better the
interrelationships of several factors that affect a firm's profit. As with many such techniques,
the accountant oversimplifies the real world by making assumptions. Which of the following is
not a major assumption underlying CVP analysis?
A. All costs incurred by a firm can be separated into their fixed and variable components.
B. The product’s selling price per unit is constant at all volume levels within a relevant range.
C. Operating efficiency and employee productivity is constant at all volume levels.
D. For multi-product situations, the sales mix can vary at different volume levels. Bobadilla
24. As the variable cost increases but the selling price remains constant, the
A. Degree of operating leverage declines
C. Breakeven point goes down
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B. Margin of safety stays constant
D. Contribution margin ratio goes up
25. A very high degree of operating leverage (DOL) indicates that a firm:
A. has high fixed costs.
C. has high variable costs.
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B. has a high net income.
D. is operating close to its breakeven point.
19. Pines Company has a higher degree of operating leverage than Tagaytay Company. Which of
the following is true?
A. Pines has higher variable expense.
B. Pines is more profitable than Tagaytay Company’s.
C. Pines is more risky than Tagaytay is.
D. Pines' profits are less sensitive to percentage changes in sales.
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26. With the aid of computer software, managers can vary assumptions regarding selling prices,
costs, and volume and can immediately see the effects of each change on the break-even
point and profit. Such an analysis is called
A. “What if” or sensitivity analysis.
C. Computer aided analysis.
B. Vary the data analysis.
D. Data gathering.
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Cost-Volume-Profit Analysis
27. If a company raises its target peso profit, its
A. break-even point rises.
B. fixed costs increase.
C. required total contribution margin increases.
D. selling price rises.
32. On a cost-volume-profit chart (break-even graph), where are the total fixed costs shown?
A. As the point where the sales line intersects the vertical axis (pesos)
B. As the point where the sales line crosses the total cost line
C. As the point where the sales line crosses the horizontal axis (volume)
D. As the point where the total cost line intersects the vertical axis (pesos)
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28. Broadway Company sells three products: A, B and C. Product A's unit contribution margin is
higher than Product B's which is higher than Products C's. Which one of the following events is
most likely to increase the company's overall break-even point?
A. The installation of new automated equipment and subsequent lay-off of factory workers.
B. A decrease in Product C's selling price.
C. An increase in the overall market demand for Product B.
D. A change in the relative market demand for the products, with the increase favoring
Product A relative to Product B and Product C.
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33. When using conventional cost-volume-profit analysis, some assumptions about costs and
sales prices are made. Which of the following is one of those assumptions?
A. The contribution margin will change as volume increases
B. The variable cost per unit will decrease as volume increases
C. The sales price per unit will remain constant as volume increases
D. Fixed cost per unit will remain the same as volume increases
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34. Classifying a cost as fixed or variable depends on how it behaves
A. per unit, as the volume of activity changes.
B. in total, as the volume of activity changes.
C. both A and B are correct.
D. none of the above.
29. Which of the following is not a benefit of using sensitivity analysis?
A. More people can see the impact of their ideas on the project.
B. The use of a spreadsheet program increases the accuracy of the projections.
C. What will happen is not known in advance so a variety of options can be explored prior to
making a decision.
D. A well-written spreadsheet will allow for a variety of questions to be answered in a minimal
amount of time.
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35. A fixed cost is the same percentage of sales in three different months. Which of the following
is true?
A. The company had the same sales in each of those months.
B. The cost is both fixed and variable.
C. The company is operating at its break-even point.
D. The company is achieving its target level of profit.
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30. A Cost-Volume-Profit graph contains an "Area of Loss" and an "Area of Profitability". Which of
the following best explains the difference between the two points on the graph?
A. The area of loss represents the difference between Sales and Variable Cost.
B. The area of loss begins with the concept that fixed costs have to be recovered prior to
sales contributing to profit.
C. The area of profit represents the difference between Sales and Variable Cost.
D. The area of profit begins with the concept that no company would have any level of sales
below the break-even point.
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36. Per-unit variable cost
A. remains constant within the relevant range.
B. increases as volume increases within the relevant range.
C. decreases as volume increases within the relevant range.
D. decreases if volume increases beyond the relevant range.
31. Which of the following best describes the impact of selling more units?
A. The increase in sales volume increases total variable cost.
B. The increase in sales volume means an increase in total fixed cost.
C. The increase in sales increases contribution margin, causing net income to decrease.
D. The increase in sales increases contribution margin per unit causing the break-even point
to decrease.
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37. In planning product mix for maximum profit, CVP analysis would stimulate sales of the product
by increasing the:
A. sales price
C. contribution margin
B. variable cost per unit
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38. A relatively low margin of safety ratio for a product is usually an indication that the product:
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Cost-Volume-Profit Analysis
A.
B.
C.
D.
is losing money
has a high contribution margin
is riskier than higher margin of safety products
is less risky than higher margin of safety products
A. the break-even point.
B. contribution margin.
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39. Within the relevant range, total revenues and total costs
A. increase, but at a decreasing rate.
C. remain constant.
B. decrease.
D. can be graphed as straight lines. Bobadilla
40. An assumption in a CVP analysis is that a change in costs is caused by a change in
A. unit direct material cost
C. sales commission per unit
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B. the number of units
D. efficiency due to learning curve effect
41. In CVP analysis, when the number of units changes, which one of the following will remain the
same?
A. Total sales revenues
C. Total fixed costs
B. Total variable costs
D. Total contribution margin
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47. The most likely strategy to reduce the breakeven point would be to
A. Increase both the fixed costs and the contribution margin.
B. Decrease both the fixed costs and the contribution margin.
C. Decrease the fixed costs and increase the contribution margin.
D. Increase the fixed costs and decrease the contribution margin.
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48. The break-even point in total sales decreases when:
A. variable cost increases and sales remain unchanged
B. variable cost increases and sales increase
C. fixed cost increases
D. fixed cost decreases
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49. Which of the following best describes the impact of an increase in fixed cost?
A. The increase in fixed cost will result in an increase in selling more units.
B. The increase in fixed cost will cause an increase in variable cost.
C. The increase in fixed cost causes net income to decrease and the break-even point to
decrease.
D. The increase in fixed cost causes net income to decrease and the break-even point to
increase.
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42. As fixed costs for a firm rise, all other things held constant, the breakeven point will
A. be unchanged
C. increase
B. not be affected by fixed costs
D. decrease
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43. Which of the following would not affect the breakeven point?
A. Number of units sold.
C. Total fixed costs.
B. Variable cost per unit.
D. Sales price per unit.
C. total variable costs.
D. unit selling price.
50. A company’s breakeven point in peso sales may be affected by equal percentage increases in
both selling price and variable cost per unit (assume all other factors are equal within the
relevant range). The equal percentage changes in selling price and variable cost per unit will
cause the breakeven point in peso sales to
A. Decrease by less than the percentage increase in selling price.
B. Decrease by more than the percentage increase in the selling price.
C. Increase by less than the percentage increase in selling price.
D. Remain unchanged.
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44. The margin of safety is a key concept of CVP analysis. The margin of safety is
A. The contribution margin rate.
B. The difference between budgeted contribution margin and actual contribution margin.
C. The difference between budgeted contribution margin and breakeven contribution margin
D. The difference between budgeted sales and breakeven sales.
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45. A technique for determining what would happen in a decision analysis if a key prediction or
assumption proves to be wrong is called:
A. CVP analysis.
C. Post-audit analysis.
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B. Sensitivity analysis.
D. Contribution-margin variation analysis.
51. If the fixed costs attendant to a product increase while variable costs and sales price remains
constant, what will happen to contribution margin (CM) and breakeven point (BEP)?
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A.
B.
C.
D.
CM
Increase
Decrease
Unchanged
Unchanged
BEP
Decrease
Increase
Increase
Unchanged
46. An increase in the unit variable cost will generally cause an increase in all of the following
except
52. Which of the following will decrease the breakeven point?
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Cost-Volume-Profit Analysis
A.
B.
C.
D.
Decrease in Selling Price
YES
YES
NO
NO
Increase in Direct Labor
YES
NO
NO
NO
57. Which of the following decreases per-unit contribution margin the most for a company that is
currently earning a profit?
A. A 10% decrease in selling price.
C. A 10% increase in fixed costs. Bobadilla
B. A 10% increase in variable cost per unit. D. A 10% increase in fixed cost per unit.
Increase in Fixed Cost
YES
YES
YES
NO
53. Which of the following is an incorrect statement?
A. The contribution income statement that is prepared for internal users is better than the
traditional income statement as a management tool to predict the results of increases or
decreases in sales volume, variable costs, and fixed costs.
B. The greater the proportion of fixed costs in a firm's cost structure, the smaller will be the
impact on profit from a given percentage change in sales revenue.
C. In an economic recession, the highly automated company with high fixed costs will be less
able to adapt to lower consumer demand than will a firm with a more labor-intensive
production process.
D. A major difference between income statements prepared under the traditional format and
those prepared under the contribution format is that expenses under the traditional format
are shown by function, while the expenses shown under the contribution format are
shown by function and cost behavior.
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54. If a company is operating at a loss,
A. fixed costs are greater than sales.
B. selling price is lower than the variable cost per unit.
C. selling price is less than the average total cost per unit.
D. fixed cost per unit is greater than variable cost per unit.
55. As volume increases, average cost per unit
A. increases.
B. decreases.
C. remains constant.
D. increases in proportion to the change in volume.
56. If all goes according to plan except that unit variable cost falls,
A. total contribution margin will be lower than expected.
B. the contribution margin percentage will be lower than expected.
C. profit will be higher than expected.
D. per-unit contribution margin will be lower than expected.
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58. If variable cost as a percentage of sales increases, the
A. contribution margin percentage increases.
B. selling price increases.
C. break-even point in pesos increases.
D. fixed costs decrease.
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59. Introducing income taxes into cost-volume-profit analysis
A. raises the break-even point.
B. lowers the break-even point.
C. increases unit sales needed to earn a particular target profit.
D. decreases the contribution margin percentage.
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60. If a company is earning a profit, its fixed costs
A. are less than total contribution margin.
B. are equal to total contribution margin.
C. are greater than total variable costs.
D. can be greater than or less than total contribution margin.
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61. A cost-volume-profit graph reflects relationships
A. that are expected to hold over the relevant range.
B. of results over the past few years.
C. that the company's managers would like to have happen.
D. likely to prevail for the industry.
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62. The following diagram is a cost-volume-profit graph for a manufacturing company.
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E
P
C
D
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A
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B
Cost-Volume-Profit Analysis
A. expected mix
B. least desirable mix
O
Volume
The difference between line AB and line AC (area BAC) is the
A. contribution ratio.
C. total variable cost.
B. contribution margin per unit.
D. total fixed cost.
64. In a cost-volume-profit graph
A. the total revenue line crosses the horizontal axis at the breakeven point.
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B. beyond the breakeven sales volume, profits are maximized at the sales volume where
total revenues equal total costs.
C. an increase in unit variable costs would decrease the slope of the total cost line.
D. an increase in the unit selling price would shift the breakeven point in units to the left.
PROBLEMS:
1. Green Corporation expects to sell 3,000 plants a month. Its operations manager estimated the
following monthly costs:
Variable costs
P 7,500
Fixed costs
15,000
What sales price per plant does she need to achieve to begin making a profit if she sells the
estimated number of plants per month?
A. P7.51
C. P5.00
B. P7.50
D. P2.50
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2. An organization's break-even point is 4,000 units at a sales price of P50 per unit, variable cost
of P30 per unit, and total fixed costs of P80,000. If the company sells 500 additional units, by
how much will its profit increase?
A. P25,000
C. P10,000
B. P15,000
D. P12,000
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66. If the sales mix shifts toward higher contribution margin products, the break-even point
A. decreases.
B. increases.
C. remains constant.
D. it is impossible to tell without more information.
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67. Target costing is
A. a substitute for CVP analysis.
B. used by companies that cannot classify their costs by behavior.
C. inappropriate if a company has already established a target profit.
D. used in decisions to offer a new product or enter a new market.
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69. Which of the following is a true statement about sales mix?
A. Profits may decline with an increase in total peso of sales if the sales mix shifts to sell
more of the high contribution margin product.
B. Profits may decline with an increase in total peso of sales if the sales mix shifts to sell
more of the lower contribution margin product.
C. Profits will remain constant with an increase in total peso of sales if the total sales in units
remains constant.
D. Profits will remain constant with a decrease in total peso of sales if the sales mix also
remains constant.
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63. Select the answer that best describes the labeled item on the diagram.
A. Area CDE represents the area of net loss.
B. Line AC graphs total fixed costs.
C. Point D represents the point at which the contribution margin per unit increases.
D. Line AC graphs total costs.
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65. An increase in the income tax rate
A. raises the break-even point.
B. lowers the break-even point.
C. decreases sales required to earn a particular after-tax profit.
D. increases sales required to earn a particular after-tax profit.
C. most desirable mix
D. traditional mix
3. The Red Lions Brotherhood is planning its annual Riverboat Extravaganza. The Extravaganza
committee has assembled the following expected costs for the event:
Dinner per person
P 70
Programs and souvenir per person
30
Orchestra
15,000
Tickets and advertising
7,000
Riverboat rental
48,000
Floor show and strolling entertainment
10,000
The committee members would like to charge P300 per person for the evening’s activities.
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68. In order for the break-even computation to be meaningful to management, sales mix should be
computed using the
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Cost-Volume-Profit Analysis
Assume that only 250 persons are expected to attend the extravaganza, what ticket price must
be charged to breakeven?
A. P420
C. P320
B. P350
D. P390
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4. Consider the following:
Fixed expenses
Unit contribution margin
Target net profit
How many unit sales are required to earn the target net profit?
A. 15,000 units
C. 12,800 units
B. 10,000 units
D. 20,000 units
9. The sales price per unit will increase from P32 to P40. The variable cost per unit will remain at
P24, and the fixed costs will remain unchanged at P400,000. How many fewer units must be
sold to break-even at the new sales price of P40 per unit?
A. 25,000
C. 10,000
B. 2,500
D. 12,500
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P78,000
12
42,000
10. The Hard Company sells widgets. The company breaks even at an annual sales volume of
80,000 units. At an annual sales volume of 100,000 units the company reports a profit of
P220,000. The annual fixed costs for the Hard Company are:
A. P 880,000
C. P 800,000
B. P1,100,000
D. P1,000,000
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11. Albatross Company has fixed costs of P90,300. At a sales volume of P360,000, return on
sales is 10%; at a P600,000 volume, return on sales is 20%. What is the break-even volume?
A. P225,000
C. P301,000
B. P258,000
D. P240,000
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5. Carribean Company produces a product that sells for P60. The variable manufacturing costs
are P30 per unit. The fixed manufacturing cost is P10 per unit based on the current level of
activity, and fixed selling and administrative costs are P8 per unit. A selling commission of
10% of the selling price is paid on each unit sold.
The contribution margin per unit is:
A. P24.
C. P30.
B. P36.
D. P54.
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12. An entity has fixed costs of P200,000 and variable costs per unit of P6. It plans on selling
40,000 units in the coming year. If the entity pays income taxes on its income at a rate of
40%, what sales price must the firm use to obtain an after-tax profit of P24,000 on the 40,000
units?
A. P11.60
C. P12.00
B. P11.36
D. P12.50
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6. Seal Yard Ornaments sells lawn ornaments for P15 each. Seal's contribution margin ratio is
40%. Fixed costs are P32,000. Should fixed costs increase 30%, how many additional units
will Seal have to produce and sell in order to generate the same net profit as under the current
conditions?
A. 1,600.
C. 6,933.
B. 5,333.
D. 1,067.
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13. The following is the Lux Corporation's contribution format income statement for last month:
Sales
P2,000,000
Less variable expenses
1,400,000
Contribution margin
600,000
Less fixed expenses
360,000
Net income
P 240,000
The company has no beginning or ending inventories. A total of 40,000 units were produced
and sold last month. What is the company's degree of operating leverage?
A. 0.12
C. 2.50
B. 0.40
D. 3.30
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7. At a break-even point of 5,000 units sold, variable expenses were P10,000 and fixed expenses
were P50,000. The profit from the 5,001st unit would be?
A. P10
C. P15
B. P50
D. P12
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8. Galactica Company has fixed costs of P100,000 and breakeven sales of P800,000. Based on
this relationship, what is its projected profit at P1,200,000 sales?
A. P 50,000
C. P150,000
B. P200,000
D. P400,000
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14. Delmar Company has the opportunity to increase its annual sales by P125,000 by selling to a
new, riskier group of customers. The uncollectible expense is expected to be 10%, and
collection costs will be 10%. The company’s manufacturing and selling expenses are 70% of
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Cost-Volume-Profit Analysis
sales, and its effective tax rate is 40%. If Delmar were to accept this opportunity, the
company’s after tax profits would increase by
A. P 7,500
C. P12,500
B. P 6,000
D. P15,000
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20. The following economic data were provided by the corporate planning staff of Heaven, Inc.:
Sales volume
30,000 units
Sales price per unit
P30
Unit variable costs:
Variable manufacturing
P13
Other variable costs
8
Unit variable costs
P21
Unit contribution margin
P 8
15. In 2006 Lucia Company had a net loss of P8,000. The company sells one product with a
selling price of P80 and a variable cost per unit of P60. In 2007, the company would like to
earn a before-tax profit of P40,000. How many additional units must the company sell in 2007
than it sold in 2006? Assume that the tax rate is 40 percent.
A. 1,600
C. 2,000
B. 2,400
D. 5,400
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Fixed costs:
Manufacturing
P150,000
Other fixed costs
P 50,000
Total fixed costs
P200,000
The management is considering installing a new, automated manufacturing process that will
increase fixed costs by P50,000 and reduce variable manufacturing cost by P3 per unit. The
management set a target a profit of P70,000 before and after the acquisition of the automated
machine. After installation of the automated machine, what will be the change in the units
required to achieve the target profit?
A. 6,667 unit increase
C. 3,333 unit decrease
B. 5,667 unit decrease
D. 4,333 unit decrease
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16. Bulusan Company has sales of P400,000 with variable costs of P300,000, fixed costs of
P120,000, and an operating loss of P20,000. How much increase in sales would Bulusan
need to make in order to achieve a target operating income of 10% of sales?
A. P400,000
C. P500,000
B. P462,000
D. P800,000
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17. The following data apply to Diva Corporation for the year 2006:
Total variable cost per unit
P3.50
Contribution margin/sales
30%
Breakeven sales (present volume)
P1,000,000
Diva wants to sell an additional 50,000 units at the same selling price and contribution margin
per unit. By how much can fixed costs increase to generate a gross margin equal to 10% of
the sales value of the additional 50,000 units to be sold?
A. P 50,000
C. P 67,500
B. P 57,500
D. P125,000
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21. In planning its operations for next year based on a sales forecast of P6,000,000, Herran, Inc.
prepared the following estimated costs and expenses:
Variable
Fixed
Direct materials P1,600,000
Direct labor
1,400,000
Factory overhead
600,000
P 900,000
Selling expenses
240,000
360,000
Administrative expenses
60,000
140,000
P3,900,000
P1,400,000
What would be the amount of peso sales at the breakeven point?
A. P2,250,000.
C. P4,000,000.
B. P3,500,000.
D. P5,300,000.
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18. Marsman Company had a margin of safety ratio of 20%, variable costs of 60% of sales, fixed
costs of P240,000, a break-even point of P600,000, and an operating income of P60,000 for
the current year. What are the current year's sales?
A. P 500,000
C. P 750,000
B. P 600,000
D. P 900,000
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19. Regal, Inc. sells Product M for P5 per unit. The fixed costs are P210,000 and the variable
costs are 60% of the selling price. What would be the amount of sales if Regal is to realize a
profit of 10% of sales?
A. P700,000
C. P525,000
B. P472,500
D. P420,000
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22. The Expressive Company currently has fixed cost of P770,500. This cost is expected to
increase by P103,500 if the company expands its production facilities. Currently, it sells its
product for P47. The product has a variable cost per unit of P24. How many more units must
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Cost-Volume-Profit Analysis
the company sell to break even, at the current sales price per unit, than it did to break even
prior to the increase in fixed cost?
A. 3,500
C. 4,500
B. 4,000
D. 6,000
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23. The Tanker Company estimated the following data for the coming year:
Fixed manufacturing costs
Variable production costs per peso of sales
Materials
Direct labor
Variable overhead
Variable selling costs per peso of sales
Tanker estimates its sales for the coming year to be P2,000,000.
The expected cost of goods sold for the coming year is
A. P1,265,000
C. P1,565,000
B. P1,115,000
D. P 700,000
26. Mercado, Inc. had the following economic data for 2007:
Net sales
Contribution margin
Margin of safety
What is Mercado’s breakeven point in 2007?
A. P360,000
C. P320,000
B. P288,000
D. P 80,000
P565,000
P 0.125
0.150
0.075
0.150
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27. Marquez Co. manufactures a single product. For 2006, the company had sales of P90,000,
variable costs of P50,000, and fixed costs of P30,000. Marquez expects its cost structure and
sales price per unit to remain the same in 2007; however total sales are expected to jump by
20%. If the 2007 projections are realized, net income in 2007 should exceed net income in
2006 by
A. 100%
C. 20%
B. 80%
D. 50%
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28. Below is the income statement for Harpo Co. for 2006:
Sales
P400,000
Variable costs
( 125,000)
Contribution margin
P275,000
Fixed costs
( 200,000)
Profit before tax
P 75,000
Assuming that the fixed costs are expected to remain at P200,000 for 2007, and the sales
price per unit and variable cost per unit are also expected to remain constant, how much profit
before tax will be produced if the company anticipates 2007 sales rising to 130% of the 2006
level?
A. P 97,500
C. P195,000
B. P157,500
D. P180,000
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24. At a sales volume level of 2,250 units, Baluarte Company’s contribution margin is one and
one-half of the fixed costs of P36,000. Contribution margin is 30% How much peso sales
should the Baluarte Company sell to earn 10 percent of sales?
A. P270,000
C. P360,000
B. P180,000
D. P540,000
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25. The Alpine Company’s year-end income statement is as follows:
Sales (20,000 units)
P360,000
Variable costs
220,000
Contribution margin
P140,000
Fixed costs
105,000
Net income
P 35,000
Alpine’s management is unhappy with the results and plans to make some changes for next
year. If management implements a new marketing program, fixed costs are expected to
increase by P19,200 and variable costs to increase by P1 per unit. Unit sales are expected to
increase by 15 percent.
What is the effect on income if the foregoing changes are implemented?
A. decrease of P21,200
C. increase of P 1,800
B. increase of P13,800
D. increase of P14,800
P400,000
160,000
40,000
29. Almos Corporation produces a product that sells for P10 per unit. The variable cost per unit is
P6 and total fixed costs are P12,000. At this selling price, the company earns a profit equal to
10% of total peso sales. By reducing its selling price to P9 per unit, the manufacturer can
increase its unit sales volume by 25%. Assume that there are no taxes and that total fixed
costs and variable cost per unit remain unchanged. If the selling price were reduced to P9 per
unit, the company’s profit would have been
A. P3,000.
C. P5,000.
B. P4,000.
D. P6,000.
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30. Information concerning the 2007 financial projections of the Silver Company is as follows:
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Cost-Volume-Profit Analysis
Net sales of P3,000,000.
Fixed costs of P800,000.
P0.65 increase in cost of sales for each peso increase in net sales.
What is the projected cost of sales for 2007?
A. P 950,000
C. P1,050,000
B. P2,750,000
D. P1,850,000
35. A firm has fixed costs of P200,000 and variable cost per unit of P6. It plans to sell 40,000
units in the coming year. If the firm pays income taxes on its income at a rate of 40%, what
sales price must the firm use to obtain an after-tax profit of P24,000?
A. P11.60
C. P11.36
B. P12.00
D. P12.50
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31. The Childless Company sells widgets. The company breaks even at an annual sales volume
of 75,000 units.
36. Below is the income statement for Blender Co. for 2007:
Sales
P400,000
Variable costs
(125,000)
Contribution margin
P275,000
Fixed costs
( 200,000)
Profit before tax
P 75,000
What is the degree of operating leverage for Blender Company for 2007?
A. 3.67
C. 5.33
B. 1.45
D. 1.67
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Actual annual sales volume was 100,000 units, and the company reported a profit of
P200,000. The annual fixed costs for the Childless Company are
A. P800,000
C. P200,000
B. P600,000
D. P150,000
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32. The costs to produce 24,000 units at 70% capacity are:
Direct materials
P36,000
Direct labor
54,000
Factory overhead, all fixed
29,000
Selling expense (35% variable, 65% fixed)
24,000
What unit price would the company have to charge to make P2,250 on a sale of 1,500
additional units that would be shipped out of the normal market area?
A. P5.10
C. P4.10
B. P5.60
D. P5.00
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37. Food Factory, Inc. sells loose biscuits for P5 per unit. The fixed costs are P210,000 and the
variable costs are 45% of the selling price. What would be the amount of sales if Food
Factory, Inc. were to realize a profit of 15% of sales?
A. P700,000
C. P525,000
B. P472,500
D. P420,000
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38. The Opposition Sales Corporation is expecting an increase of fixed costs by P78,750 upon
moving their place of business to the downtown area. The company anticipates that the
selling price per unit and the variable expenses will not change. At present, the sales volume
necessary to breakeven is P750,000 but with the expected increase in fixed costs, the sales
volume necessary to breakeven would go up to P975,000.
33. The Mandarin Company's product mix includes P720,000 in sale of X and P640,000 in sale of
Y. X's contribution margin is 60% and Y's is 40% of sales. Fixed costs amount to P505,881.
Y's sale at breakeven point should amount to
A. P640,000
C. P529,490
B. P720,000
D. P470,590
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Based on these projections, what were the total fixed costs before the increase of P78,750?
A. P341,250
C. P183,750
B. P262,500
D. P300,000
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34. Levi’s Company has revenues of P500,000, variable costs of P300,000, and pretax profit of
P150,000. Had the company increased the sales price per unit by 10%, reduced fixed costs
by 20%, and left variable cost per unit unchanged, what would the new breakeven point in
pesos have been?
A. P 88,000
C. P100,000
B. P 80,000
D. P125,000
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39. At 40,000 units of sales, Benevolent Corporation had an operating loss of P3.00 per unit.
When sales were 70,000 units, the company had a profit of P1.20 per unit. The number of
units to breakeven is
A. 35,000
C. 45,000
B. 52,500
D. 57,647
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106
Cost-Volume-Profit Analysis
40. The following information pertains to Hennin Corporation for the year ending December 31,
2006:
Budgeted sales
P1,000,000
Breakeven sales
700,000
Budgeted contribution margin
600,000
Cashflow breakeven
200,000
The margin of safety for the Hennin Corporation is:
A. P300,000
C. P500,000
B. P400,000
D. P800,000
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43. Menor Company sells two products with the following per unit data:
Standard
Deluxe
Selling price/unit
P75
P120
Variable costs/unit
45
60
Contribution margin/unit
P30
P 60
Sales mix
3
2
If fixed costs are P630,000, the number of standard and deluxe units that Menor must sell to
break even is
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A. 1,800 standard and 1,200 deluxe.
C. 9,000 standard and 6,000 deluxe.
B. 3,600 standard and 2,400 deluxe.
D. 21,000 standard and 14,000 deluxe.
41. Balboa, Inc. had the following economic information for the year 2006:
Sales (50,000 units @ P20)
P1,000,000
Variable manufacturing costs
400,000
Fixed costs
250,000
Income tax rate
40 percent
Balboa, Inc. budgets its 2007 sales at 60,000 units or P1,200,000. The company anticipates
an increased competition; hence, an additional P75,000 advertising costs is budgeted in order
to maintain its sales target for 2007.
44. The following are projections about the two products of Dorine Company, baubles and trinkets,
for the coming year:
Baubles
Trinkets
Units
Amount
Units
Amount
Total
Sales
10,000 P10,000
7,500 P10,000 P20,000
Costs
Fixed
P 2,000
P 5,600 P 7,600
Variable
6,000
3,000
9,000
P 8,000
P 8,600 P16,600
Income before taxes
P 2,000
P 1,400
P 3,400
Assuming that the customers purchase composite units of four baubles and three trinkets, the
breakeven output for the two products would be
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A.
B.
C.
D.
Baubles
6,909
6,909
5,000
5,000
Trinkets
6,909
5,182
8,000
6,000
What is the amount of peso sales needed for 2007 in order to equal the after-tax income in
2006?
A. P1,125,000
C. P1,325,000
B. P1,187,500
D. P1,387,500
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42. Mauresmo Company developed the following information for the year ended December 31,
2007:
Product A
Product B
Total
Units Sold
4,000
6,000
10,000
45. The sales mix for Dial Enterprise is as follows:
Product A: 12 units @ P5.25 sales price; P4.85 variable cost per unit.
Product B: 10 units @ P7.50 sales price; P6.95 variable cost per unit.
Product C: 6 units @ P12.25 sales price; P10.35 variable cost per unit.
Sales
P12,000
P27,000
P39,000
Variable costs
6,000
15,000
21,000
Contribution margin
P 6,000
P12,000
18,000
Fixed costs
12,600
Net income
P 5,400
If the sales mix changes to 5,000 units of Product A and 5,000 units of Product B, the effect on
the company’s break-even point would be
A. to increase it by 200 units.
C. to increase it by 1,200 units.
B. to decrease it by 200 units.
D. no change.
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Dial Enterprise's fixed costs are P75,950.
What are the composite break-even point?
A. 98,000
B. 2,000
107
C.
D.
3,500
4,000
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Cost-Volume-Profit Analysis
46. Alexandra Co. provides two products, Velvet and Cotton. Velvet accounts for 60 percent of
total sales. The variable costs as a percentage of selling prices are 60% for Velvet and 85%
for Cotton. Total fixed costs are P225,000.
A. P 72,000
B. P288,000
47. Last month, Zamora Company had an income of P0.75 per unit with sales of 60,000 units.
During the current month when the unit sales are expected to be only 45,000, there is a loss of
P1.25 per unit. Both the variable cost per unit and total fixed costs remain constant.
C. P360,000
D. P210,000
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48. Bytes Company is a retailer of video disks. The projected after-tax income for the current year
is P120,000 based on a sales volume of 200,000 video disks. Bytes has been selling the
disks at P16 each. The variable costs consist of the P10 per unit purchase price of the disks
and a handling cost of P2 per disk. Bytes’ annual fixed costs are P600,000, and Bytes is
subject to a 40% income tax rate. Management is planning for the coming year when it
expects that the unit purchase price of the video disks will increase 30%.
Bytes Company’s breakeven point for the current year in number of video disks is
A. 100,000 units
C. 50,000 units
B. 150,000 units
D. 60,000 units
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51. Glareless Company manufactures and sells sunglasses. The price and cost data are as
follows:
Selling price per pair of Sunglasses
P25.00
Variable costs per pair of sunglasses:
Raw materials
P11.00
Direct labor
5.00
Manufacturing overhead
2.50
Selling expenses
1.30
Total variable costs per unit
P19.80
Annual fixed costs:
Manufacturing overhead
P192,000
Selling and administrative
276,000
Total fixed costs
P468,000
Forecasted annual sales volume (120,000 pairs)
P3,000,000
Income tax rate
40%
Glareless Company estimates that its direct labor costs will increase 8 percent next year. How
many units will Glareless have to sell next year to reach breakeven?
A. 97,500 units
C. 101,740 units
B. 83,572 units
D. 86,250 units
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If fixed costs will increase by 30 percent, what amount of peso sales would be necessary to
generate an operating profit of P48,000?
A. P1,350,000
C. P1,135,000
B. P 486,425
D. P 910,000
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The fixed costs amounted to
A. P 80,000
B. P247,500
C. P 80,000
D. P320,000
52. Santos Company is planning its advertising campaign for next year and has prepared the
following budget data based on a zero advertising expenditure:
Normal plant capacity
200,000 units
Sales
150,000 units
Selling price
P25 per unit
Variable manufacturing costs
P15 per unit
Fixed manufacturing costs
P800,000
Fixed selling costs
P700,000
An advertising agency claims that an aggressive advertising campaign would enable Santos to
increase its unit sales by 20%. What is the maximum amount that Santos Company can pay
for advertising and have an operating profit of P200,000 next year?
A. P100,000
C. P300,000
B. P200,000
D. P550,000
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49. Alonzo Corporation had sales of P120,000 for the month of May. It has a margin of safety
ratio of 25 percent, and an after-tax return on sales of 6 percent. The company assumes its
sales being constant every month. If the tax rate is 40 percent, how much is the annual fixed
cost?
A. P 36,000
C. P 90,000
B. P432,000
D. P360,000
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50. Cultured Company is a manufacturer of its only one product line. It had sales of P400,000 for
2007 with a contribution margin ratio of 20 percent. Its margin of safety ratio was 10 percent.
53. Adventurous Co. is considering dropping a product. Variable costs are P60.00 per unit. Fixed
overhead costs, exclusive of depreciation, have been allocated at a rate of P3.50 per unit and
What are the company’s fixed costs?
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Cost-Volume-Profit Analysis
will continue whether or not production ceases. Depreciation on the equipment is P60,000 a
year. If production is stopped, the equipment can be sold for P270,000, if production
continues, however, it will be useless at the end of 1 year and will have no salvage value. The
selling price is P100 a unit. Ignoring taxes, the minimum number of units to be sold in the
current year to break even on a cash flow basis is
A. 1,500 units.
C. 8,250 units.
B. 6,750 units.
D. 9,750 units
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Plastic Frames
Glass Frames
Sales price
P10.00
P15.00
Direct materials
( 2.00)
( 3.00)
Direct labor
( 3.00)
( 5.00)
Fixed overhead
( 3.00)
( 2.75)
Net income per unit
P 2.00
P 4.25
Budgeted unit sales
100,000
300,000
The budgeted unit sales equal the current unit demand, and total fixed overhead for the year is
budgeted at P975,000. Assume that the company plans to maintain the same proportional
mix.
54. Pansipit Company had a 25 percent margin of safety. Its after-tax return on sales is 6 percent.
The company’s income is subject to tax rate of 40 percent. If fixed costs amount to P320,000,
how much peso sales did Pansipit make for the year?
A. P1,066,667
C. P1,280,000
B. P1,000,000
D. P 800,000
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The total number of units that MultiFrame needs to produce and sell in order to break even is
A. 150,000 units
C. 153,947 units
B. 100,000 units
D. 300,000 units
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55. The management of Mesa Company has performed cost studies and has projected the
following annual costs based on 60,000 units of production and sales:
Total Annual Costs
Percent of Variable Portion of Total Annual Costs
Direct material
P600,000
100
Direct labor
720,000
80
Mfg. Overhead
400,000
50
Selling costs
192,500
25
What selling price will yield a 15 percent profit from sales of 60,000 units?
A. P41.67
C. P27.30
B. P37.50
D. P35.42
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58. During 2006, St. Paul Lab supplied hospitals with a comprehensive diagnostic kit for P120. At
a volume of 80,000 kits, St. Paul had fixed costs of P1,000,000 and operating income before
income taxes of P200,000. Because of an adverse legal decision, St. Paul’s 2007 liability
insurance increased by P1,200,000 over 2006. Assuming the volume and other costs are
unchanged, what should the 2007 price be if St. Paul is to make the same P200,000 operating
income before income taxes?
A. P120
C. P150
B. P135
D. P240
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59. The following data relate to Herbert Company which sells a single product:
Unit selling price
P 20.00
Purchase cost per unit
11.00
Sales commission, 10% of selling price
2.00
Monthly fixed costs
P80,000
The firm’s salespersons would like to change their compensation from a 10 percent
commission to a 5 percent commission plus P20,000 per month in salary. Currently, they only
receive commissions as their compensation.
56. The following data relate to Harvester Company which sells a single product:
Unit selling price
P 80.00
Purchase cost per unit
55.00
Sales commission 15 % of selling price
12.00
Monthly fixed costs
P180,000
The firm’s two salespersons would like to change their compensation from a 15 percent
commission to a 7.5 percent commission plus P15,000 each per month in fixed salary.
Currently, they only receive commissions as their compensation.
At what sales volume in units would the two cost structures be indifferent?
A. 2,500 units
C. 4,000 units
B. 3,000 units
D. 5,000 units
The change in compensation plan should change the monthly breakeven point by
A. 1,071 Increase
C. 1,538 Increase
B. 1,071 Decrease
D. 1,538 Decrease
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60. The manager of Naughty Food Company reviewed the following data:
Fruits
Meat
Canned Products
57. MultiFrame Company has the following revenue and cost budgets for the two products it sells:
109
Cost-Volume-Profit Analysis
Contribution margin ratio
40%
Sales mix in pesos
20%
Fixed costs, P1,290,000 per month.
The breakeven sales for each month is
A. P1,677,000
B. P3,000,000
50%
30%
B. P 8.25
40%
50%
C. P4,500,000
D. P6,000,000
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64. During the month of June, Armani Corporation produced 12,000 units and sold them for P20
per unit. Total fixed costs for the period were P154,000, and the operating profit was P26,000.
The variable cost per unit for June was
A. P4.50
C. P6.00
B. P5.00
D. P7.17
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61. The Oregano Watch Company manufactures a line of ladies’ watches which are sold through
discount houses. Each watch is sold for P1,500; the fixed costs are P3,600,000 for 30,000
watches or less; variable cost is P900 per watch.
What is Oregano’s degree of operating leverage at sales of 12,000 watches?
A. 2.0X
C. 0.5X
B. 5.0X
D. 0.2X
D. P 9.75
65. Stone Company plans to sell 400,000 laundry hangers. The fixed costs are P600,000, and the
variable cost is 60% of the selling price. If the company wants to realize a profit of P120,000,
the selling price of each laundry hanger must be
A. P2.50
C. P4.50
B. P3.75
D. P5.00
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66. The unit contribution margin of Product A is P20 and of Product B is P16. If six units of Product
A and eight units of Product B can be produced per machine hour, the contribution margin of
the products per machine hour is
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A. Product A, P160; Product B, P96
C. Product A, P3.33; Product B, P2.00
B. Product A, P120; Product B, P128
D. Product A, P32.00; Product B, P30.00
62. Duke, Inc. owns and operates a chain of food centers. The management is considering
installing machines that will make popcorn on the premises. These machines are available in
two different sizes with the following details:
Economy
Regular
Annual capacity
20,000
50,000
Costs: Annual machine rental
P60,000.00
P82,500.00
Popcorn cost per box
3.90
3.90
Cost of each box
0.80
0.80
Other variable cost per box
6.60
4.20
The level of output in boxes at which the Economy and the Regular would earn the same profit
(loss) is
A. 20,000 boxes
C. 15,000 boxes
B. 9,375 boxes
D. 12,500 boxes
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67. The Bittersweet Company is a wholesale distributor of candy. The company services various
grocery, convenience, and drug stores in Metro Manila. Small, but steady growth in sales, has
been achieved by the company over the past few years while candy prices have been
increasing. The company is formulating its plans for the coming fiscal year. Presented below
are the data used to project the current year’s after-tax net income of P110,400.
Average selling price
P4.00 per box
Average variable costs
Cost of candy
P2.00 per box
Selling expenses
0.40 per box
Total
P2.40 per box
63. The Harper Corporation manufactures and sells T-shirts imprinted with college names and
slogans. Last year, the shirts sold for P7.50 each, and the variable cost to manufacture them
was P2.25 per unit. The company needed to sell 20,000 shirts to break even. The net income
last year was P5,040. Harper’s expectations for the coming year include the following:
1. The sales price of the T-shirts will be P9
2. Variable cost to manufacture will increase by one-third
3. Fixed costs will increase by 10%
4. The income tax rate of 40% will be unchanged
The selling price that would maintain the same contribution margin rate as last year is
A. P 9.00
C. P10.00
Annual fixed costs:
Selling
P 169,000
Administrative
280,000
Total
P 440,000
Expected annual sales volume (390,000 boxes)
P1,560,000
The manufacturers of candies have announced that they will increase prices of their products
an average of 15% in the coming year due to increases in raw material (sugar, cocoa,
110
Cost-Volume-Profit Analysis
peanuts, etc.) and labor costs. Bittersweet Company expects that all other costs will remain at
the same rates or levels as the current year. Bittersweet is subject to 40 percent tax rate.
Sunday openings are estimated at P31,200. Round’s gross margin on sales is 25 percent.
Round estimates that 75 percent of its Sunday sales to customers would be made on other
days if the store were not open on Sundays.
If net income after taxes would remain the same after the cost of candy increases but no
increase in the sales price is made, how many boxes of candy must Bittersweet sell?
A. 480,000
C. 400,000
B. 27,600
D. 29,300
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The one-day volume of Sunday sales that would be necessary for Round to attain the same
weekly operating as the current six-day week is
A. P2,400
C. P9,600
B. P3,200
D. P9,984
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68. Larz Company produces a single product. It sold 25,000 units last year with the following
results:
Sales
P625,000
Variable costs
P375,000
Fixed costs
150,000
525,000
Net income before taxes
P100,000
Income taxes
40,000
Net income
P 60,000
In an attempt to improve its product in the coming year, Larz is considering replacing a
component part in its product that has a cost of P2.50 with a new and better quality costing
P4.50 per unit. A new machine will also be needed to increase plant capacity. The machine
would cost P18,000 with a useful life of 6 years and no salvage value. The company uses
straight-line depreciation method on all plant assets.
71. Ailu Company has the following operating data for its manufacturing operations:
Unit selling price
P 250
Unit variable cost
100
Total fixed costs
840,000
The company’s decision to increase the wages of hourly workers will increase the unit variable
cost by 10 percent. Increases in the salaries of factory supervisors and property taxes for the
factory will increase fixed costs by 4 percent. If sales price is held constant, the next breakeven point for Ailu Company will be
A. Increased by 640 units.
C. Decreased by 640 units.
B. Increased by 400 units.
D. Increased by 800 units.
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72. Solar Company sells two products, Biggs and Boggs. Last year, Solar Company sold 12,000
units of Biggs and 24,000 units of Boggs.
If Larz wishes to maintain the same contribution margin ratio after implementing the changes,
what selling price per unit of product must it charge next year to cover the increased material
costs?
A. P27.00
C. P25.00
B. P32.50
D. P28.33
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Related data for last year are:
Product
Unit Selling Price
Unit Variable Cost
Unit Contribution Margin
Biggs
P120
P80
P40
Boggs
80
60
20
Assuming that last year’s fixed costs totaled P910,000, what was Solar Company’s composite
break-even point?
A. 34,125
C. 11,375
B. 27,302
D. 9,101
Bobadilla
69. BM Motors, Inc. employs 40 sales personnel to market its line of economy automobiles. The
average car sells for P1,200,000 and a 6% commission is paid to the salesperson. BM Motors
is considering a change to a commission arrangement that would pay each salesperson a
salary of P24,000 per month plus a commission of 2% of the sales made by that salesperson.
73. River and Co., maker of quality pipes, has experienced a steady growth in sales for the past
five years. However, increase in competition has led River Co. to believe that an aggressive
advertising campaign will be necessary next year to maintain the company’s present growth.
The amount of total car sales at which the two expense structures would be indifferent is
A. P22,500,000
C. P30,000,000
B. P24,000,000
D. P12,000,000
Bobadilla
To prepare for next year’s advertising campaign, the company’s accountant has prepared and
presented the management with data for the current year, 2006, as presented below:
Cost Schedule
70. Round Company is a grocery store that is currently open only Monday through Saturday.
Round Company is considering opening on Sundays. The annual incremental costs of
111
Cost-Volume-Profit Analysis
Variable costs:
Direct labor
Direct materials
Variable overhead
Total variable costs
Fixed costs:
Manufacturing
Selling
Administrative
Total fixed costs
Other fixed costs
32,000
Total
P396,000
The company is considering changing the compensation plan for sales personnel. If the
organization increases the commission to 10% of revenues and reduces salaries by P80,000,
what revenues must the organization have to raise in order to earn the same net income as
last year?
A. P1,600,000
C. P1,350,000
B. P1,150,000
D. P1,630,000
Bobadilla
P 80.00/pipe
32.50/pipe
25.00/pipe
P137.50/pipe
P 250,000
400,000
700,000
P1,350,000
76. Tactless Manufacturing Company produces two products for which the following data have
been tabulated. Fixed manufacturing cost is applied at a rate of P1.00 per machine hour.
Per Unit
XY-7
BD-4
Selling price
P4.00
P3.00
Variable manufacturing cost
P2.00
P1.50
Fixed manufacturing cost
P0.75
P0.20
Variable selling cost
P1.00
P1.00
The sales manager has had a P160,000 increase in the budget allotment for advertising and
wants to apply the money to the most profitable product. The products are not substitutes for
one another in the eyes of the company’s customers.
Selling price, per pipe
P 250.00
Expected sales, 2007 (20,000 units)
P5,000,000
Tax rate: 40%
The company has set the sales target for 2007 at a level of P5,500,000 (or 22,000 pipes).
If an additional P112,500 have to be spent for advertising in 2007, what is the required sales
level in pesos to equal 2006’s after-tax income?
A. P4,750,000
C. P5,250,000
B. P5,750,000
D. P4,250,000
Bobadilla
The manager may devote the entire P160,000 to increased advertising for either XY-7 or BD4.
74. Adobe Company sold 100,000 units of its product at P20 per unit. Variable costs were P14
per unit, consisting of manufacturing costs of P11 and selling costs of P3. Fixed costs, which
were incurred uniformly throughout the year, amounted to P792,000 (manufacturing costs of
P500,000 and selling expenses of P292,000). There had been no beginning or ending
inventories.
Suppose Tactless has only 100,000 machine hours that can be made available to produce
additional units of XY-7 and BD-4. If the potential increase in sales units for either product
resulting from advertising is far in excess of this production capacity, which product should be
advertised and what is the estimated increase in contribution margin earned?
Bobadilla
A. Product XY-7 should be produced, yielding a contribution margin of P75,000.
B. Product XY-7 should be produced, yielding a contribution margin of P133,333.
C. Product BD-4 should be produced, yielding a contribution margin of P187,500.
D. Product BD-4 should be produced, yielding a contribution margin of P250,000.
If labor costs comprise of 50 percent variable costs and 20 percent f fixed costs, a 10 percent
increase in wages and salaries would increase the number of units required to break even to
A. 152,423
C. 143,875
B. 175,617
D. 129,938
Bobadilla
75. Mellow, Inc. sells its single product for P40 per unit. Mellow purchases the product for P20.
The salespeople receive a salary plus a commission of 5% of sales. Last year the
corporation’s net income was P100,800. The corporation is subject to 30% income tax rate.
The fixed costs of the company are:
Advertising
P124,000
Rent
60,000
Salaries
180,000
77. Drape Corp. would like to market a new product at a selling price of P15 per unit. Fixed costs
for this product are P1,000,000 for less than 500,000 units of output and P1,500,000 for
500,000 or more units of output. The contribution margin percentage is 35%. How many units
of this product must be sold to earn a target operating income of P1 million?
A. 366,667
C. 476,190
B. 380,952
D. 256,410
Bobadilla
112
Cost-Volume-Profit Analysis
78. Care Company sold 100,000 units of its product at P20 per unit. Variable costs are P14 per
unit, consisting of manufacturing costs of P11 and selling costs of P3. Fixed costs, which are
incurred uniformly throughout the year, amount to P792,000 (manufacturing costs of P500,000
and selling costs of P292,000). There were no beginning or ending inventories.
80. The total variable costs per unit for the large and small discs, respectively, are
A. P10.20 and P8.60.
C. P 9.10 and P5.30.
B. P14.40 and P8.40.
D. P11.80 and P6.60.
81. If the material costs for large and small discs are P8.50 and P5.10, respectively, and the
normal production capacity is 100,000-unit level, what is the breakeven point?
A. 91,611.
C. 79,816.
B. 87,216.
D. 82,412.
Bobadilla
If labor costs are 50% of variable costs and 20% of fixed costs, a 10% increase in wages and
salaries would increase the number of units required to breakeven (in fraction form) to
A. 807,840/5.3.
C. 807,840/14.7.
B. 831,600/5.78.
D. 831,600/14.28.
Bobadilla
Questions 82 through 86 are based on the Statement of Income of Davao, Inc. which represents
the operating results for the current fiscal year ending December 31. Davao had sales of 1,800
tons of product during the current year. The manufacturing capacity of Davao’s facilities is 3,000
tons of product. Consider each question’s situation separately.
Sales
P900,000
Variable costs
Manufacturing
P315,000
Selling costs
180,000
Total variable costs
P495,000
Contribution margin
P405,000
Fixed costs
Manufacturing
P 90,000
Selling
112,500
Administration
45,000
Total fixed costs
P247,500
Net income before income taxes
P157,500
Income taxes (40%)
(63,000)
Net income after income taxes
P 94,500
Question Nos. 79 through 81 are based on the following:
Metal Industries, Inc. operates its production department only when orders are received for one or
both of its two products, two sizes of metal discs. The manufacturing process begins with the
cutting of doughnut-shaped rings from rectangular strips of sheet metal; these rings are then
pressed into discs. The sheets of metal, each 4 feet long and weighing 32 ounces, are purchased
P13.60 per running foot. The department has been operating at a loss for the past year as shown
below.
Sales for the year
P1,720,000
Less: expenses
1,772,000
Net loss for the department
P 52,000
The following information is available.
Ten thousand 4-foot pieces of metal yielded 40,000 large discs, each weighing 4 ounces and
selling for P29, and 40,000 small discs, each weighing 2.4 ounces and selling for P14.
The corporation has been producing at less than “normal capacity” and has had no spoilage in the
cutting step of the process. The skeletons remaining after the rings have been cut are sold for
scrap at P8.00 per pound.
82. The breakeven volume in tons of product for the year is
A.
420
C. 1,100
B.
495
D.
550
The variable conversion cost of each large disc is 80% of the disc’s direct material cost, and
variable conversion cost of each small disc is 75% of the disc’s direct material cost. Variable
conversion costs are the sum of direct labor and variable overhead.
Fixed costs were P860,000.
79. The net cost per ounce of material is
A. P2.00
B. P1.60
C. P1.70
D. P1.80
Bobadilla
Bobadilla
83. If the sales volume is estimated to be 2,100 tons in the next year, and if the prices and costs
stay at the same levels and amounts next year, the after-tax income that Davao can expect for
next year is
A. P135,000
C. P110,250
B. P283,500
D. P184,500
Bobadilla
Bobadilla
113
Cost-Volume-Profit Analysis
84. Davao has a potential foreign customer that has offered to buy 1,500 tons at P450 per ton.
Assume that all of Davao’s costs would be at the same levels and rates as last year. What net
income after taxes would Davao make if it took this order and rejected some business from
regular customers so as not to exceed capacity?
A. P297,500
C. P211,500
B. P252,000
D. P256,500
Bobadilla
88. The total sales revenue at which Anilao Ski Company would make the same profit or loss
regardless of the ski model it decided to produce is
A. P880,000
C. P924,000
B. P422,400
D. P686,400
Bobadilla
89. How much would the variable cost per unit of the touring model have to change before it had
the same breakeven point in units as the mountaineering model?
A. P2.68/unit increase
C. P5.03/unit decrease
B. P4.53/unit increase
D. P2.97/unit decrease
Bobadilla
85. Without prejudice to your answers to previous questions, and assume that Davao plans to
market its product in a new territory. Davao estimates that an advertising and promotion
program costing P61,500 annually would need to be undertaken for the next two or three
years. In addition, a P25 per ton sales commission over and above the current commission to
the sales force in the new territory would be required. How many tons would have to be sold
in the new territory to maintain Davao’s current after-tax income of P94,500?
A.
307.5
C.
273.3
B. 1,095.0
D. 1,545.0
Bobadilla
90. If the variable cost per unit of touring skis decreases by 10%, and the total fixed cost of touring
skis increases by 10%, the new breakeven point will be
A. 10,730 pairs
B. 13,007 pairs
C. 12,812 pairs
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D. Unchanged from 11,648 pairs because the cost changes are equal and offsetting
86. Without prejudice to preceding questions, assume that Davao estimates that the per ton
selling price will decline 10% next year. Variable costs will increase P40 per ton and the fixed
costs will not change. What sales volume in pesos will be required to earn an after-tax income
of P94,500 next year?
A. P1,140,000
C. P1,500,000
B. P 825,000
D. P1,350,000
Bobadilla
91. If the Anilao Ski Company sales department could guarantee the annual sale of 12,000 skis of
either model, Anilao would
A. Produce touring skis because they have a lower fixed cost.
B. Produce only mountaineering skis because they a lower breakeven point.
C. Produce mountaineering skis because they are more profitable.
D. Be indifferent as to which model is sold because each model has the same variable cost
per unit.
Bobadilla
Question Nos. 87 through 91 are based on the following:
Anilao Ski Company recently expanded its manufacturing capacity to allow it to product up to
15,000 pairs of cross-country skis of either the mountaineering model or the touring model. The
sales department assures management that it can sell between 9,000 and 13,000 pairs (units) of
either product this year. Because the models are very similar, Anilao Ski will produce only one of
the two models. The following data were compiled by the accounting department.
Mountaineering
Touring
Selling price per unit
P88.00
80.00
Variable cost per unit
52.80
2.80
Fixed costs will total P369,600 if the mountaineering model is produced but will be only P316,800 if
the touring model is produced. Anilao Ski Company is subject to a 40% income tax rate.
Question Nos. 92 through 96 are based on the following:
Pullman Company is a small but growing manufacturer of telecommunications equipment. The
company has no sales force of its own; rather, it relies completely on independent sales agents to
market its products. These agents are paid a commission of 15% of selling price for all items sold.
Maui Soliman, Pullman’s controller, has just prepared the company’s budgeted income statement
for next year. The statement follows:
Pullman Company
Budgeted Income Statement
For the Year Ended December 31
Sales
Manufacturing costs:
87. If Anilao Ski Company desires an after-tax net income of P24,000, how many pairs of touring
model skis will the company have to sell?
A. 13,118
C. 13,853
B. 12,529
D. 4,460
Bobadilla
114
P16,000,000
Cost-Volume-Profit Analysis
Variable
Fixed overhead
Gross margin
Selling and administrative costs:
Commissions to agents
Fixed marketing costs*
Fixed administrative costs
Net operating income
Less fixed interest cost
Income before income taxes
Less income tax (30%)
Net income
*Primarily depreciation on storage facilities
P7,200,000
2,340,000
2,400,000
120,000
1,800,000
Total
9,540,000
6,460,000
“Super,” replied Kim. “And I note that the P2,400,000 is just what we’re paying the agents under
the old 15% commission rate.”
“It’s even better than that,” explained Maui. “We can actually save P75,000 a year because that’s
what we’re having to pay the auditing firm now to check out the agents’ reports. So our overall
administrative costs would be less.”
4,320,000
2,140,000
540,000
1,600,000
480,000
P1,120,000
“Pull all of these number together and we’ll show them to the executive committee tomorrow,” said
Kim. “With the approval of the committee, we can move on the matter immediately.”
92. What is the breakeven point in pesos for next year assuming that the agents’ commission rate
remains unchanged at 15%?
A. P10,650,000
C. P 9,000,000
B. P12,000,000
D. P10,750,000
Bobadilla
As Maui handed the statement to Kim Viceroy, Pullman’s president, she commented, “I went ahead
and used the agents’ 15% commission rate in completing these statements, but we’ve just learned
that they refuse to handle our products next year unless we increase the commission rate to 20%.”
93. What is the breakeven point in pesos for next year assuming that the agents’ commission rate
is increased to 20%?
A. P13,171,000
C. P13,714,286
B. P15,000,000
D. P12,750,000
Bobadilla
“That’s the last straw,” Kim replied angrily. “Those agents have been demanding more and more,
and this time they’ve gone too far. How can they possibly defend a 20% commission rate?”
“They claim that after paying for advertising, travel, and the other costs of promotion, there’s
nothing left over for profit,” replied Maui.
94. What is the breakeven point in pesos for next if the company employs its own sales force?
A. P15,000,000
C. P13,090,909
B. P12,954,545
D. P15,157,895
Bobadilla
“I say it’s just plain robbery,” retorted Kim. “And I also say it’s time we dumped those guys and got
our own sales force. Can you get your people to work up some cost figures for us to look at?”
95. Assume that Pullman Company decides to continue selling through agents and pays the 20%
commission rate. The volume of sales that would be required to generate the same net
income as contained in the budgeted income statement for next year would be:
A. P18,285,714
C. P19,225,000
B. P18,368,421
D. P20,414,714
Bobadilla
“We’ve already worked them up,” said Maui. “Several companies we know about pay a 7.5%
commission to their own salespeople, along with a small salary. Of course, we would have to
handle all promotion costs, too. We figure our fixed costs would increase by P2,400,000 per year,
but that would be more than offset by the P3,200,000 (20% x P16,000,000) that we would avoid on
agents’ commissions.”
The breakdown of the P2,400,000 cost figure follows:
Salaries:
Sales manager
Salespersons
Travel and entertainment
Advertising
P2,400,000
96. The volume of sales at which net income would be equal regardless of whether Pullman
Company sells through agents at a 20% commission rate or employs its own sales force:
A. P11,625,000
C. P19,200,000
B. P12,000,000
D. P18,600,000
Bobadilla
P 100,000
600,000
400,000
1,300,000
Question Nos. 97 through 102 are based on the following information:
115
Cost-Volume-Profit Analysis
San Carlos operates a general hospital but rents space and beds to separate entities for
specialized treatment such as pediatrics, maternity, psychiatric, etc. San Carlos charges each
separate entity for common services to its patients like meals and laundry and for all administrative
services such as billings, collections, etc. All uncollectible accounts are charged directly to the
entity. Space and bed rentals are fixed for the year.
The staffing levels above represent full-time equivalents, and it should be assumed that the
Pediatrics Department always employs only the minimum number of required full-time equivalent
personnel.
Annual salaries for each class of employee follow: supervising nurses, P180,000; nurses,
P130,000; and aides, P50,000. Salary expense for the year ended June 30 for supervising nurses,
nurses, and aides was P720,000, P1,560,000, and P1,100,000, respectively.
For the entire year ended June 30, the Pediatrics Department at San Carlos Hospital charged each
patient an average of P650 per day, had a capacity of 60 beds, operated 24 hours per day for 365
days, and had revenue of P10,676,250.
The Pediatrics Department operated at 100% capacity during 111 days of the past year. It is
estimated that during 90 of these capacity days, the demand average 17 patients more than
capacity and even went as high as 20 patients more on some days. The hospital has an additional
20 beds available for rent for the coming fiscal year.
Expenses charged by the hospital to the Pediatrics Department for the year ended June 30 were:
Basis of Allocation
Patient Days
Bed Capacity
Dietary
P 328,500
Janitorial
P 118,400
Laundry
197,100
Lab, other than direct charges to patients
410,625
Pharmacy
410,625
Repairs and maintenance
65,700
66,045
General administrative services
1,218,780
Rent
2,546,710
Billings and collections
689,850
Bad debt expense
246,375
Others
114,975
240,315
Total
P2,463,750
P4,190,250
The only personnel directly employed by the Pediatrics Department are supervising nurses,
nurses, and aides. The hospital has minimum personnel requirements based on total annual
patient days. Hospital requirements beginning at the minimum, expected level of operation follow:
Annual Patient Days
Aides
Nurses
Supervising Nurses
10,000 – 14,000
21
11
4
14,001 – 17,000
22
12
4
17,001 – 23,725
22
13
4
23,726 – 25,550
25
14
5
25,551 – 27,375
26
14
5
27,376 – 29,200
29
16
6
97. The contribution margin per patient day is
A. P400.00
B. P450.00
C. P500.00
D. P525.00
Bobadilla
98. How many patient days are necessary to cover fixed costs for bed capacity and for
supervisory nurses?
A. 9,500
C. 10,250
B. 9,820
D. 12,000
Bobadilla
99. The number of patient days needed to cover total costs is
A. 14,780
C. 15,820
B. 15,140
D. 16,080
Bobadilla
100. If the Pediatrics Department rented an additional 20 beds and all other factors remain the
same as in the past year, what would be the increase in revenue?
A. P 994,500
C. P1,054,500
B. P 877,500
D. P 897,500
Bobadilla
101.Continuing to consider the 20 additional rented beds, the increase in total variable cost applied
per patient day is
A. P229,350
C. P229,650
B. P229,500
D. P239,350
Bobadilla
102.What is the increase in fixed cost applied for bed capacity, given the increase in number of
beds?
A. P1,396,667
C. P1,470,000
116
Cost-Volume-Profit Analysis
B. P1,187,238
D. P1,520,000
Bobadilla
105.What is the cash flow breakeven point in number of pizzas that must be sold?
A. 19,529
C. 12,990
B. 21,284
D. 10,773
Question Nos. 103 – 105 are based on the following:
Ms. Sharkey started a pizza restaurant in 2003. For this purpose a building was rented for P40,000
per month. Two women were hired to work full time at the restaurant and six college students were
hired to work 30 hours per week delivering pizza. This level of employment has been consistent.
An outside accountant was hired for tax and bookkeeping purposes, for which Ms. Sharkey pays
P30,000 per month. The necessary restaurant equipment and delivery cars were purchased with
cash. Ms. Sharkey has noticed that expenses for utilities and supplies have been rather constant.
Ms. Sharkey increased her business between 2003 and 2006. Profits have more than doubled
since 2003. Ms. Sharkey does not understand why profits have increased faster than volume.
Question Nos. 106 through 109 are based on the following information:
Timex Sporting Goods Company, a wholesale supply company, engages independent sales
agents to market the company’s products throughout the country. These agents currently receive
a commission of 20 percent of sales, but they are demanding an increase to 25 percent of sales
made during the year ending December 31, 2007. The controller already prepared the 2007
budget before learning of the agents’ demand for an increase in commission. The budgeted 2007
income statement is shown below. Assume that cost of goods sold is 100 percent variable cost.
Sales
P10,000,000
Cost of goods sold
6,000,000
Gross margin
P 4,000,000
Selling and administrative
Commissions
P2,000,000
Other expenses (fixed)
100,000
2,100,000
Income before taxes
P 1,900,000
Income tax (30%)
570,000
Net income
P 1,330,000
Timex’s management is considering the possibility of employing full-time sales personnel. Three
individuals would be required, at an estimated annual salary of P30,000 each, plus commissions of
5 percent of sales. In addition, a sales manager would be employed at a fixed annual salary of
P160,000. All other fixed costs, as well as the variable cost percentages, would remain the same
as the estimates in the 2007 budgeted income statement.
A projected income statement for the year ended December 31, 2007, prepared by the accountant,
is shown below:
Sales
P9,500,000
Cost of food sold
P2,850,000
Wages & fringe benefits:
Restaurant help
815,000
Delivery help
1,730,000
Rent
480,000
Accounting services
360,000
Depreciation:
Delivery equipment
500,000
Restaurant equipment
300,000
Utilities
232,500
Supplies
120,000
7,387,500
Net income before taxes
P2,112,500
Income taxes (40%)
845,000
Net income
P1,267,500
Note: The average pizza sells for P250.
103.What is the tax shield on the noncash fixed costs?
A. P320,000
C. P149,500
B. P340,000
D. P540,000
Bobadilla
104.What is the breakeven point in number of pizzas that must be sold?
A. 25,929
C. 23,569
B. 18,150
D. 42,114
Bobadilla
Bobadilla
106.How much is the estimated break-even point in peso sales for the year ending December 31,
2007, based on the budgeted income statement prepared by the controller?
A. P500,000
C. P250,000
B. P400,000
D. P125,000
Bobadilla
107.How much is the estimated break-even point in peso sales for the year ending December 31,
2007, if the company employs its own sales personnel?
A. P 542,857
C. P 875,000
B. P 742,857
D. P1,000,000
Bobadilla
108.How much volume in peso sales would be required for the year ending December 31, 2007, to
yield the same net income as projected in the budgeted income statement, if Timex continues
117
Cost-Volume-Profit Analysis
to use the independent sales agents and agrees to their demand for a 25 percent sales
commission?
A. P 8,000,000
C. P10,000,000
B. P 9,533,333
D. P13,333,333
Bobadilla
113.Assuming that Step Company will just rent a manufacturing space for a month in order to
produce special order for 8,000 toys. What is the acceptable minimum selling price to Step
Company for the special sale?
A. P14.00
C. P22.00
B. P15.25
D. P24.00
Bobadilla
109.How much is the estimated volume in peso sales that would generate an identical net income
for the year ending December 31, 2007, regardless of whether Timex employs its own sales
personnel or continues to use the independent sales agents and pays them a 25 percent
commission?
A. P1,000,000
C. P1,500,000
B. P1,250,000
D. P1,800,000
Bobadilla
Question Nos. 114 through 118 are based on the following:
Bolton Company’s income statement for last month is given below:
Sales (15,000 units @ P30)
P450,000
Less variable expenses
315,000
Contribution margin
135,000
Less fixed expenses
90,000
Net income
P 45,000
The industry in which Bolton Company operates is quite sensitive to cyclical movements in the
economy. Thus, profits vary considerably from year to year according to general economic
conditions. The company has a large amount of unused capacity and is studying ways of improving
profits.
Question Nos. 110 through 113 are based on the following data:
Step Company produces toys and other items for use in beach and resort areas. A small, inflatable
toy has come onto the market that the company is anxious to produce and sell. Enough capacity
exists in the company’s plant to produce 16,000 units of the toy each month. Variable costs to
manufacture and sell one unit would be P12.50, and fixed costs associated with the toy would total
P350,000 per month.
The company’s Marketing Department predicts that demand for the new toy will exceed the 16,000
units that the company is able to produce. Additional manufacturing space can be rented from
another company at a fixed cost of P10,000 per month. Variable costs in the rented facility would
total P14 per unit, due to somewhat less efficient operations than in the main plant. The new toy
will sell for P30 per unit.
110.The breakeven units for the new toy would be:
A. 20,000
C. 21,000
B. 18,000
D. 22,500
A new equipment has come onto the market that would allow Bolton Company to automate a
portion of its operations. Variable costs would be reduced by P9 per unit. However, fixed costs
would increase to a total of P225,000 each month.
114.How much income for the month would the company earn if the new equipment is purchased?
A. P45,000
C. P60,000
B. P30,000
D. P75,000
Bobadilla
Bobadilla
115.How many units are required as increase or decrease in breakeven point if the new equipment
is purchased?
A. Zero
C. 3,200 units
B. 2,500 units
D. 4,000 units
Bobadilla
111.How many units should the company need to sell in order to earn a before-tax profit of
P150,000?
A. 9,143
C. 31,875
B. 30,375
D. 35,000
Bobadilla
116.The degree of operating leverage during the month where the new equipment is used is:
A. 3.0 times
C. 6.0 times
B. 4.5 times
D. 9.0 times
Bobadilla
112.If the sales manager receives a bonus of P1.00 for each unit sold in excess of the break-even
point, how many units must be sold each month to earn a return of 25% on the monthly
investment in fixed costs?
A. 23,344
C. 29,833
B. 27,000
D. 30,000
Bobadilla
117.Refer to the original data. Rather than purchase a new equipment, the president is thinking
about changing the company’s marketing method. Under the new method, sales would
increase by 20% each month and net income would increase by one-third. Fixed costs could
118
Cost-Volume-Profit Analysis
be slashed to only P48,000 per month. Compute the break-even point for the company after
the change in marketing method.
A. 8,000 units
C. 9,000 units
B. 12,500 units
D. 10,000 units
Bobadilla
B. P(600,000)
122.Instead of paying the manager a straight P75 per pair of shoes commission on all pairs of
shoes sold, the company is considering paying the store manager P50 commission on each
pair of shoes sold in excess of the breakeven point. If this change is made, what will be the
sales outlet’s net income or loss if 25,000 pairs of shoes are sold?
A. P 250,000
C. P1,500,000
B. P 900,000
D. P1,250,000
Bobadilla
Bobadilla
Question Nos. 119 through 124 are based on the following:
Zapatero Corporation operates a chain of shoe stores around the country. The stores carry many
styles of shoes that are all sold at the same price. To encourage sales personnel to be aggressive
in their sales efforts, the company pays a substantial sales commission on each pair of shoes sold.
Sales personnel also receive a small basic salary.
123.If the company would pay the manager P50 commission on each pair of shoes sold in excess
of the breakeven point, how many pairs of shoes are required to earn P900,000 profit?
A. 23,600
C. 25,000
B. 23,000
D. 27,500
Bobadilla
The following cost and revenue data relate to Davao sales outlet and are typical of the company’s
many sales outlets:
Selling price
P800
Variable expenses:
Invoice costs
P360
Sales commission
140
P500
Fixed expenses per year:
Rent
Advertising
Salaries
Total
124.The company is considering eliminating sales commissions entirely in its stores and increasing
fixed salaries by P2,142,000 annually.
If this change is made, what will be the number of pairs of shoes to be sold by Davao outlet to
be indifferent to commission basis?
A. 25,300
C. 21,000
B. 15,300
D. 18,505
Bobadilla
P1,600,000
3,000,000
1,400,000
P6,000,000
119.How many units are required for the company’s Davao sales outlet to breakeven?
A. 12,000 pairs
C. 20,000 pairs
B. 17,143 pairs
D. 22,000 pairs
Bobadilla
121.The company is considering paying the store manager of Davao sales outlet an incentive
commission of P75 per pair of shoes (in addition to the salesperson’s commission). If this
change is made, what will be the new breakeven in pairs of shoes?
A. 26,667
C. 20,000
B. 16,000
D. 22,000
Bobadilla
118.Assuming that during the month following the month new equipment has been started in use,
the unit sales increased by 4,500 units. The variable expenses per unit and the monthly fixed
costs as affected by the acquisition of the new equipment are expected to remain constant.
What is the expected profit of the company for that month?
A. P 81,000
C. P 85,500
B. P126,000
D. P 45,000
D. P(500,000)
The following information should be used to answer Question Nos. 125 through 131.
Due to erratic sales of its sole product - a high-capacity battery for laptop computers, Salcedo
Company has been experiencing difficulty for some time. The company’s income statement for the
most recent month is given below:
Sales (19,500 units @ P300)
P5,850,000
Less variable expenses
4,095,000
Contribution margin
1,755,000
Less fixed expenses
1,800,000
Net loss
P (45,000)
Bobadilla
120.If 18,000 pairs of shoes are sold in a year, what would be Davao sales outlet’s net income?
A. P 600,000
C. P 500,000
125.The break even in peso sales for Salcedo Company is:
119
Cost-Volume-Profit Analysis
A. P6,000,000
B. P2,571,429
C. P5,852,756
D. P7,500,000
Question Nos. 132 – 134 are based on the following:
Almo Company manufactures and sells adjustable canopies that attach to motor homes and
trailers. The market covers new unit purchases as well as replacement canopies. Almo developed
its 2007 business plan based on the assumption that canopies would sell at a price of P400 each.
The variable costs for each canopy were projected at P200, and the annual fixed costs were
budgeted at P100,000. Almo’s after–tax profit objective was P240,000; the company’s effective tax
rate is 40 percent.
Bobadilla
126.The president believes that a P160,000 increase in the monthly advertising budget, combined
with an intensified effort by the sales staff, will result in an P800,000 increase in monthly sales.
If the president is right, what will be the effect on the company’s monthly net income or loss?
A. P120,000 increase
C. P120,000 decrease
B. P 80,000 increase
D. P 80,000 decrease
Bobadilla
While Almo’s sales usually rise during the second quarter, the May financial statements reported
that sales were not meeting expectations. For the first five months of the year, only 350 units had
been sold at the established price, with variable costs as planned, and it was clear that the 2007
after-tax profit projection would not be reached unless some actions were taken. Almo’s president
assigned a management committee to analyze the situation and develop several alternative
courses of action. The following mutually exclusive alternatives, labeled A, B, and C, were
presented to the president.
127.Refer to the original data. The sales manager is convinced that a 10% reduction in the selling
price, combined with an increase of P600,000 in the monthly advertising budget, will cause
unit sales to double. What will the new profit or loss if these changes are adopted?
A. P 60,000
C. P 45,000
B. P(60,000)
D. P(45,000)
Bobadilla
128.Refer to the original data. The Marketing Department thinks that a fancy new package for the
laptop computer battery would help sales. The new package would increase packaging costs
by P7.50 per unit. Assuming no other changes, how many units would have to be sold each
month to earn a profit of P97,500?
A. 21,818
C. 25,450
B. 23,000
D. 28,000
Bobadilla
Reduce the sales price by P40. The sales organization forecast that with the significantly reduced
sales price, 2,700 units can be sold during the remainder of the year. Total fixed and variable unit
costs will stay as budgeted.
Lower the variable costs per unit by P25 through the use of less expensive materials and slightly
modified manufacturing techniques. The sales price will also be reduced by P30, and sales of
2,200 units for the remainder of the year are forecast.
129.Refer to the original data. By automating certain operations, the company could reduce
variable costs by P3 per unit. However, fixed costs would increase by P72,000 each month.
Cut fixed costs by P10,000, and lower the sales price by 5 percent. Variable costs per unit will be
unchanged. Sales of 2,000 units are expected for the remainder of the year.
How would the breakeven point in units change if the company automated the operations?
A. 1,000 units increase
C. 3,000 units increase
B. 1,000 units decrease
D. 3,000 units decrease
Bobadilla
132.Assuming no changes were made to the selling price or cost structure, how many units must
Almo sell to break even?
A.
167
C.
500
B.
250
D. 1,700
Bobadilla
130.At what level of production would the automation of the production process be indifferent to the
present process?
A. 18,000
C. 24,000
B. 21,000
D. 28,000
Bobadilla
133.Assuming no changes were made to the selling price or cost structure, how many units must
Almo sell to achieve its after-tax profit objective?
A. 1,250
C. 2,000
B. 1,700
D. 2,500
Bobadilla
131.Which of the two methods (the present or the automated) has higher income at the level of
sales of 26,000 units?
A. Manual, P60,000
C. Manual, P240,000
B. Automated, P60,000
D. Automated, P240,000
Bobadilla
134.If management decides to reduce the selling price by P40, what will Almo's after-tax profit be?
A. P157,200
C. P241,200
120
Cost-Volume-Profit Analysis
B. P160,800
D. P301,200
Bobadilla
After the break-even level, the amount of profit equals the unit contribution margin multiplied
by the number of units sold in excess of break-even units.
135.If the management can reduce the variable cost per unit by P25 through the use of less
expensive materials and slightly modified manufacturing techniques, with the sales price
reduced by P30, and sales of 2,200 units for the remainder of the year are forecast, the
amount of expected income for the year was:
A. P239,400
C. P241,200
B. P204,000
D. P399,000
Bobadilla
The candidates should remember that the profit increases by the amount of contribution
margin brought by additional units sold.
3 . Answer: A
Cost of dinner
Favors and program
Fixed costs
(15,000 + 7,000 + 48,000 + 10,000)/250
Cost to be charged
136.How much would be the expected income for the year if the management cut fixed costs by
P10,000, and lower the sales price by 5 percent, with variable costs per unit unchanged and
sales of 2,000 units are expected for the remainder of the year?
A. P239,400
C. P241,200
B. P204,000
D. P399,000
Bobadilla
1 . Answer: B
Contribution Margin = Fixed costs
= P15,000
5 . Answer: A
Selling Price
Less: Variable Manufacturing Cost
10% Commission
P 60
( 30)
( 6)
Unit Contribution Margin
P 24
6 . Answer: A
Current break-even:
Pesos: (P32,000 ÷ 0.40)
Units: [P32,000 ÷ P6)
Contribution margin per unit: P15 x 0.40
(Contribution Margin/Unit Sales) + Variable cost per unit
= Desired Minimum Sales Price
2 . Answer: C
Unit contribution margin (P50 - P30)
Additional profit (500 x P20)
320.00
P420.00
4 . Answer: B
The number of units required to earn the target profit is equal to the sum of fixed expenses
and the target profit divided by the unit contribution margin. The number of units required to
earn the target net profit is:
(P78,000 + P42,000) ÷ P12
10,000
137.If the sales price is reduced by 6.25 percent starting June 1, an analysis indicates that 2,500
unit sales can be made if the company has to spent for additional advertising. What is the
maximum amount of advertising cost that the company can spend and still the profit objective
is achieved?
A. P35,000
C. P15,000
B. P22,500
D. P 7,500
Bobadilla
(P15,000 ÷ 3,000) + (P7,500 ÷ 3,000)
P 70.00
30.00
7.50
P
Additional units to cover additional fixed costs:
(P32,000 x 0.3)  P6
P 20.00
P10,000
Alternative solution:
New breakeven units (P32,000 x 1.3) ÷ P6
Less current breakeven units
121
5,333
6.00
P80,000
1,600
6,933
5,333
Cost-Volume-Profit Analysis
Increase in breakeven units
1,600
The contribution margin per unit is linear or constant per unit.
Therefore: TCM  Units = UCM
7 . Answer: A
The amount of contribution margin per unit is constant within a relevant range. The amount of
profit is increased by the amount of unit contribution margin.
11 . Answer: B
TCM  Sales = CMR
Change in TCM: (600,000*0.2) – (360,000*0.1)
CMR: Increase in TCM ÷ Increase in Sales
84,000 ÷ 240,000
Contribution margin per unit:
fixed cost ÷ breakeven unit sales 50,000 ÷ 5,000 P10.00
At breakeven point, the profit is zero. Therefore, the profit at a level of 5,001 units will be P10
which is the amount of contribution provided by the unit (one unit) in excess of breakeven
point.
8 Answer: A
CMR = Fixed cost/Sales
= 100,000/800,000 = 12.50%
Profit
= (1,200,000 – 800,000)0.125
P50,000
Alternative solution:
Total contribution margin 1,200,000 x 0.125
Fixed costs
Profit
9 . Answer: A
Current unit contribution margin (P32 – P24)
Current break-even units (P400,000 ÷ P8)
New unit contribution margin (P40 - P24)
New break-even units (400,000 ÷ 16)
Net decrease in breakeven units
(50,000 – 25,000)
10 . Answer: A
CM per unit: 220,000 / (100,000 – 80,000)
Fixed costs: 80,000 x 11
35%
Breakeven sales 90,300 ÷ 0.35
258,000
12 . Answer: C
Before-tax profit 24,000 ÷ 0.6
Add fixed cost
Total contribution margin
40,000
200,000
240,000
Selling price = UVC + UCM
Selling Price = 6 + (240,000 ÷ 40,000)
The amount of sales that provides profit should be the sales revenues above the break even
sales.
84,000
12.00
13 . Answer: C
The company's degree of operating leverage is determined as follows:
Degree of operating leverage = Contribution margin ÷ Net income
Degree of operating leverage = P600,000 ÷ P240,000 = 2.50
P150,000
100,000
P 50,000
14 . Answer: A
Increase in sales
Less variable costs and expenses
0.90 x 125,000
Additional profit before tax
Less additional tax 0.40 x 12,500
Additional profit
P8
50,000
P16
25,000
25,000
15 . Answer: B
Additional profit ÷ UCM = additional unit sales
= (40,000 + 8,000) ÷ (80-60)
= 2,400 units
11.00
P880,000
16 . Answer: A
122
125,000
112,500
12,500
5,000
7,500
Cost-Volume-Profit Analysis
Total peso sales required 120,000 ÷ (0.25 – 0.1)
Less prior sales
Required increase in sales
800,000*
400,000
400,000
S = P210,000 + 0.10S
0.40
0.40S = P210,000 + 0.10S
0.40S - 0.10S = P210,000
S = P210,000/(0.40 – 0.10)
S = P700,000
*Peso sales required to earn profit stated as percentage of sales (ROS):
S = [FC + (ROSS)]  CMR
(CMR S) = [FC + (ROSS)]
(CMR S) - (ROSS) = FC
(CMR – ROS) S = FC
20 . Answer: C
Current number of units required to earn the target net profit:
[(P200,000 + P70,000) ÷ P9]
S = FC  (CMR – ROS)
17 . Answer: A
Contribution margin 50,000 x (5-3.50)
Less: additional profit (250,000 x 0.10)
Additional fixed costs
75,000
25,000
50,000
Selling price = P3.50 ÷ 0.70
P5.00
After the automated machine is placed into service,
the number of units required to earn the target
net profit will be:
((P250,000 + P70,000) ÷ P12)
21 . Answer: C
CMR= 100% - (3.9 ÷ 6.0) = 35%
BES = 1,400,000 ÷ .35
22 . Answer: C
New break-even point: P874,000 ÷ P23
Current break-even point in units: P770,500 ÷ P23
Increase in units: 38,000 - 33,500
Alternative solution: (P103,500 ÷ P23)
An alternative solution to find sales is to compute the profit margin.
Sales (60,000 ÷ 0.08)
19 . Answer: A
Peso sales = FC/(CMR - ROS)
= P210,000/(0.40 - 0.10)
CMR = 40%
26,667
Change in units: 30,000 - 26,667 = 3,333 decrease in unit sales
18 . Answer: C
A shorter calculation of finding the amount of sales is to divide breakeven sales by (1 – MSR)
Sales = P600,000  (1 – 0.2)
P750,000
Profit margin = Contribution margin ratio x margin of safety ratio.
Profit margin = 20% x 40%
Sales = Profit ÷ Profit margin
30,000
8%
23 . Answer: A
The estimated cost of goods sold
= P565,000 + 0.35S*
*Sum of all percentages for variable production costs
P750,000
P700,000
= P565,000 + (P2,000,000 x 0.35)
= P1,265,000
A long computation of required sales uses the following equation:
24 . Answer: B
123
4,000,000
38,000
33,500
4,500
4,500
Cost-Volume-Profit Analysis
Peso sales required to earn 10% of sales;
FC/(CMR – ROS)
= P36,000/(0.30-0.10)
= 180,000
25 . Answer: A
Revised contribution margin 20,000 x 1.15 x (7-1)
Fixed cost (105,000 + 19,200)
Revised profit
Prior profit
Decrease in profit
26 . Answer: A
Margin of Safety = Budgeted sales – Breakeven sales
Margin of Safety: P400,000 – P40,000
Increased units 4,000 x 1.25
Revised contribution margin 5,000 x (9 – 6)
Less fixed cost
Revised profit
30 . Answer: B
Projected cost of sales:
P800,000 + (P3,000,000 x 0.65)
138,000
124,200
13,800
35,000
21,200
90,000
50,000
40,000
30,000
10,000
DOL = TCM/OP
= 40,000/10,000
4 times
Fixed costs = Breakeven units x UCM
75,000 x 8 = 600,000
32 . Answer: B
Unit cost:
Materials (P36,000 ÷ 24,000)
Labor (P54,000 ÷ 24,000)
Variable selling expense
Variable unit cost
Required profit (2,250 ÷ 1,500)
Required minimum selling price
% increase in sales x DOL = % increase in profit
4 x 20% = 80%
28 . Answer: B
2006 DOL = 275,000/75,000
Percentage Increase in profit, 2007 = 3.67 x 30%
2007 Profit = 75,000 +(75,000 x 1.10)
29 . Answer: A
Peso sales 12,000/(0.40 – 0.1)
Unit sales P40,000/10
P2,750,000
31 . Answer: B
Unit CM = Change in Profit ÷ Change in Sales
= 200,000 ÷ (100,000 – 75,000)
=8
P360,000
27 . Answer: B
DOL at P90,000 sales:
Sales
Variable costs
Total Contribution margin
Fixed costs
Profit
5,000
P15,000
12,000
P 3,000
3.67
110%
P157,500
P40,000
4,000
124
P1.50
2.25
0.35
P4.10
1.50
P5.60
33 . Answer: D
Composite ratio:
X: 640,000 ÷ (720,000 + 640,000)
Y: 720,000 ÷ (720,000 + 640,000)
47.059%
52.941%
Weighted-Average Contribution Margin:
(.52941 × .60) + (.47059 × .40)
0.505882
Breakeven sales in pesos:
(505,881 ÷ 0.505882)
P1,000,000
Y’s peso sales at breakeven P1M x 0.47059
P 470,590
Cost-Volume-Profit Analysis
34 . Answer: A
Sales (500,000 x 1.10)
Variable cost
Contribution margin
Fixed costs before an increase of 78,750:
750,000 x 0.35
550,000
300,000
250,000
The increase in fixed costs of P78,750 equals the increase in contribution margin in order to
continue at breakeven sales.
CMR = 250 ÷ 550 = 45.45%
Original fixed costs:
500,000 – 300,000 – 150,000 = 50,000
New fixed cost = 50,000 x 0.80 = 40,000
Breakeven sales = 40,000/0.4545 = P88,000
35 . Answer: B
Before-tax profit (24,000 ÷ 0.6)
Add fixed costs
Total contribution margin
Contribution margin per unit (P240,000 ÷ 40,000)
Variable cost per unit
Selling price
262,500
39 . Answer: D
UCM = (70,000 x 1.20)+(40,000 x 3)
70,000 – 40,000
= P6.80
FC = Units(UCM – profit per unit)
= 70,000(6.80 – 1.20)
= P392,000
P 40,000
200,000
P240,000
BEU = 392,000/6.80
= 57,647
P 6.00
6.00
P12.00
36 . Answer: A
DOL = CM/OP
= 275,000/75,000
= 3.67 times
37 . Answer: C
Peso sales : FC ÷ (CMR - Profit Margin)
= P210,000 ÷ (0.55 - 0.15)
= P525,000
40 . Answer: A
Margin of safety in peso sales = Budgeted sales – Breakeven sales
Margin of safety = P1M – P.7M
P300,000
41 . Answer: A
2006 Sales
Advertising Cost (75000 ÷ .6)
Required 2007 peso sales
1,000,000
125,000
1,125,000
42 . Answer: A
Revised WACM (0.5 x 1.50) + (0.5 x 2)
Original WACM (0.4 x 1.50) + (0.6 x 2)
Revised Breakeven units 12,600/1.75
Original Breakeven units 12,600/1.80
Increase in breakeven units
CMR = 100% - 45% = 55%
38 . Answer: B
CMR: Change in Fixed Costs ÷ Change in Breakeven Sales
78,750 ÷ (975,000 – 750,000)
0.35
43 . Answer: C
WACM = (30 x 0.6) + (60 x 0.4)
Breakeven units: 630,000/42
125
1.75
1.80
7,200
7,000
200
P42
15,000
Cost-Volume-Profit Analysis
Breakdown:
Product Standard 15,000 x 0.6
Product Deluxe 15,000 x 0.4
49 . Answer: B
CMR = Before Tax Profit Margin
M/S Ratio
= (0.06 ÷ 0.6) ÷ .25
= 40%
9,000
6,000
44 . Answer: B
WACM = (4/7 x 0.40)+(3/7 x 0.93 = P0.62857
BE units = 7,600/0.62857 = 12,091
Baubles = 12,091 x 4/7 = 6,909
Trinkets = 12,091 x 3/7 = 5,182
45 . Answer: C
Total sales revenue per composite sales:
(12 x P5.25) + (10 x P7.50) + (6 x P12.25)
Total variable cost per composite sales:
(12 x P4.85) + (10 x P6.95) + (6 x P10.35)
Total contribution margin per composite sales
(P211.50 - P189.80)
Composite breakeven point
P75,950 ÷ P21.70
FC = (120,000 x .40) – (120,000 x .10) = P36,000
Annual FC = 36,000 x 12
P211.50
P189.80
P 21.70
3,500
30%
P 292,500
P1,135,000
48 . Answer: B
BEV = 600,000
16 – 12
P72,000
51 . Answer: A
Revised UCM = 25 – 19.80 – (5 x 0.08)
BEU = 468,000/4.80
P4.80
97,500
53 . Answer: B
Cash-flow breakeven: 270,000 ÷ (100-60)
47 . Answer: C
UCM = (60,000 x 0.75)+(45,000 x 1.25)
60,000 – 45,000
= 6.75
Fixed cost = (60,000 x 6.75)-(60,000 x 0.75)
50 . Answer: A
Profit Margin = 20% x 10% = 2%
Profit = 400,000 x 2% = 8,000
Fixed Costs = CM - Profit
Fixed Costs = (400,000 x 20%) – 8,000
52 . Answer: A
The Company projected zero profit based on zero advertising expenditure.
Additional CM (30,000 units @ 10)
P300,000
Less: Required profit
200,000
Maximum advertising cost
P100,000
Note: Total breakeven units: 3,500 x 28 = 98,000
46 . Answer: C
WACMR = (.6 x .4) + (.4 x .15)
Fixed Costs = 225000 x 1.3
Sales (292500 + 48000) ÷ .3
P432,000
54 . Answer: A
CMR = Before-tax return on sales/MSR
= (0.06  0.60)  0.25
BES = 320,000  0.40
Sales = 800,000  0.75
P360,000
6,750
0.40 or 40%
P 800,000
P1,066,667
55 . Answer: B
The easier calculation of sales value of 60,000 units is to divide the total annual costs by total
cost ratio of 85% (100% - 15%).
Sales required = P1,912,500/0.85
P2,250,000
P150,000
126
Cost-Volume-Profit Analysis
Unit selling price = 2,250,000/60,000
56 . Answer: D
Indifference Point = Change in Fixed Cost ÷ Change in Variable Cost
Increase in fixed cost: 2 @ 15,000
Decrease in variable cost (15% - 7.5%) 80
Indifference point: 30,000 ÷ 6
P37.50
62 . Answer: B
The indifference point refers to the level of sales that would give equal profit or total costs for
the two alternatives
11.30x + 60,000 = 8.90x + 82,500
2.40x = 22,500
x = 9,375
P30,000
P6
5,000 units
63 . Answer: C
Variable cost ratio = 2.25/7.50 = 30%
Variable cost next year = 2.25 x 1.3333 = 3
Selling price required = 3/0.30 = P10
57 . Answer: A
WACM = (0.25 x 5)+(0.75 x 7)
= 6.50
BEU = 975,000/6.50
= 150,000
64 . Answer: B
Total Fixed Cost
Operating Profit
Total Contribution Margin
58 . Answer: B
The additional fixed costs of P1,200,000 should be fully covered by the same amount as
additional sales (also additional contribution margin) through an increase in selling price.
Increased price
Selling price
Contribution margin per unit
(180,000 ÷ 12,000)
Unit variable cost
P120 +(1.20M/80,000) P 135
59 . Answer: A
Breakeven point:
Old policy: P80,000/7
New policy: P100,000/8
Increase in Breakeven point
65 . Answer: C
Fixed costs
Operating profit
Contribution margin
11,429
12,500
1,071
60 . Answer: B
WACMR = (.4 x .2) + (.5 x.3) + (.4 x.5) = 0.43
BES = 1,290,000 ÷ .43 = P3,000,000
61 . Answer: A
Contribution margin 12,000 x (1,500 – 900)
Fixed costs
Operating profit
Unit contribution margin 720,000 ÷ 400,000
Selling price (1.80 ÷ 0.40)
P154,000
26,000
P180,000
P 20
15
P 5
600,000
120,000
720,000
1.80
P4.50
66 . Answer: B
Contribution margin per machine hour: Contribution margin per unit x No. of units produced
per machine hours
Product A
P20 x 6
P120
Product B
P16 x 8
P128
P7,200,000
3,600,000
P3,600,000
DOL: 7.2/3.6 = 2 times
127
Cost-Volume-Profit Analysis
67 . Answer: A
440,000 + (110,400/0.61) =
4 – 2.70
Increase in BEU = 6,240 – 5,600 = 640
480,000
Revised variable cost: P2.40 + (P2.00 x 0.15)
72 . Answer: C
Composite CM = 40 + (2 x 20)
= 80
P2.70
68 . Answer: D
VC Ratio 375,00/625,000 = 60%
VC / unit 375,000/25,000 = P15
New VC = 15 + (4.50 – 2.50)= P17
SP = 17/0.6 = P28.33
Composite BE = 910,000/80
= 11,375
73 . Answer: C
Required new sales = 2005 sales + (P112,500/CMR)
= P5M +(P112,500/0.45)
P5.25M
69 . Answer: B
The level of sales that would give equal costs:
0.06S = (40 x 24,000)+ 0.02S
0.04S = 960,000
S = 24M
CMR = (250 – 137.50)/250
45%
74 . Answer: A
Breakeven units = 807,840 ÷ 5.30
152,423
New CM/unit = 20 – 14.70 = 5.30
New variable cost: (14 + (14 x.5 x 0.10) = 14.70
New FC = 792,000 + (792,000 x.20x.10) = 807,840
70 . Answer: C
Additional fixed cost/week:
31,200/52 = 600
Additional weekly sales to cover additional fixed cost:
600/0.25 = 2,400
Total Sunday’s sales (where 2,400 represents 25%):
2,400/0.25 = 9,600
75 . Answer: A
Indifference point = Decrease in Fixed Cost
Increase in Variable Cost
= 80,000/0.05
= P1.60M
Alternative solution:
600 = 0.25 x 0.25S
600 = 0.0625S
S = 9,600
76 . Answer: D
Processing hours per unit:
XY – 7: 0.75/1 = 0.75 or 45 minutes
BD – 4: 0.20/1 = 0.20 or 12 minutes
71 . Answer: A
New BES = 873,600/140 = 6,240
New FC = 840,000 x 1.04 = 873,600
New CM = 250 – 100 –(100 x 0.10) = 140
Old BES = 840,000/150 = 5,600
Additional contribution margin using 100,000 hours:
XY – 7: 100,000/0.75 x P1 = P133,333
BD – 4: 100,000/0.20 x P0.50 = P250,000
77 . Answer: B
128
Cost-Volume-Profit Analysis
Units sold to earn P1M:
(1,000,000 + 1,000,000) / 5.25 = 380,952
= 91,611
82 . Answer: C
CM /unit 405,000 ÷ 1,800
BEV = 247,500 ÷ 225
The use of P1M fixed costs will require 380,952 units which are within the first range.
78 . Answer: A
Fixed costs
= 792,000 +(792,000 x 0.20 x 0.10)
= 807,840
83 . Answer: A
Operating Profit: (2,100 x 225) – 247,500 = P225,000
After–tax profit: 225,000 x 60% = 135,000
UCM = 20 – 14 –(14 x 0.50 x 0.10)= 5.30
Computation = 807,840/5.30
79 . Answer: A
Cost of one 4–foot piece of metal 4 x 13.60
Less proceeds from sale of scrap 6.4 / 16 x 8
Net cost of one 4- foot piece of metal
54.40
3.20
51.20
Net cost per ounce P 51.20 ÷ 25.6 oz
P2.00
Output per one 4-foot piece of metal
Large 4 x 4oz
Small 4 x 2.4oz
Scrap
Total oz
16.00
9.60
6.40
32.00
80 . Answer: B
Material cost per unit
Large: 4 x P2 x 1.8
Small 2.4 x P2 x 1.75
225
1,100 units
84 . Answer: C
Contribution margin
Regular sales 1,500 x 225
Special sale 1500 x 175
Total Contribution
Fixed costs
Taxable income
Income tax
Net income
337,500
262,500
600,000
247,500
352,500
141,000
211,500
85 . Answer: A
Additional FC/ New Unit CM
61,500 ÷ 200 = 307.5 tons
86 . Answer: D
New SP = 500 x .90
New VC 275 + 40
New CM
P14.40
P 8.40
450
315
135
Sales required:]
(Fixed costs + Before Tax profit) ÷ CMR
247,500 + (94,500 ÷ 60)
P1,350,000
81 . Answer: A
Unit CM
Large: 29.00 – (8.5 x 1.8) = 13.70
Small: 14.00 – ( 5.1 x 1.75) = 5.075
87 . Answer: A
Unit sales required:
(316,800 + 40,000) ÷ 27.20
= 13,118 pairs
Unit Contribution Margin, Touring:
80.00 – 52.80
P27.20
WACM = (13.70 + 5.075) ÷ 2 = 9.3875
Breakeven point = 860,000/9.3875
129
100%
70%
30%
Cost-Volume-Profit Analysis
Breakeven next year with no change in commission:
4,800,000 ÷ 0.4 = P12,000,000
88 . Answer: A
Indifference point in peso sales:
0.4S – P369,600 = 0.34S – P316,800
0.06S = 52,800
S = P880,000
89 . Answer: D
Breakeven sales, Mountaineering:
369,600 ÷ 35.20 =
Required contribution margin – Touring
316,800 ÷ 10,500 =
Present contribution margin – Touring
Required decrease in variable cost per unit
90 . Answer: A
New breakeven point: 348,480 ÷ 32.48
New UCM, Touring: 27.20 + (52.80 x 0.1)
New Fixed costs: 316,800 x 1.1
93 . Answer: C
If the commission rate is increased by 5%, the contribution margin is decreased by 5% or a
new contribution margin ratio of 35%
Breakeven sales next year.
4,800,000 / 0.35 = P13,714,286
10,500
94 . Answer: A
Fixed cost under 15% commission plan
Increase in Fixed cost
Decrease in audit fee
Increased fixed costs
30.17
27.20
2.97
10,730
The commission rate of 7.5%, instead of 15% will raise the contribution margin ratio to 47.5%
(40% + 7.5%).
= 32.48
= 348,480
Revised breakeven sales 7,125,000 / .475 = P 15M
91 . Answer: C
The indifference point in number of pairs is 6,600. Inasmuch that the expected level is 12,000
units, it is better to sell Mountaineering because it has high leverage than the touring model.
Once the indifference point is exceeded, the one with the higher contribution margin (leverage)
has the advantage over the one with the lower contribution margin.
92 . Answer: B
Fixed Costs:
Overhead
Marketing
Administrative
Interest
Total
4,800,000
2,400,000
( 75,000)
7,125,000
95 . Answer: A
Required sales, with 20% commission and profit target of P1,120,000:
(P4,800,000 + 1,600,000) ÷ .35 = 18,285,714
96 . Answer: D
The question asked for is the indifference point. The peso sales required to produce equal
income can be easily calculated by dividing the net increase in fixed costs by the increase in
contribution margin ratio:
2,340,000
120,000
1,800,000
540,000
4,800,000
Difference in CMR = 35% - 47.5 = 12.5%
Increase in fixed costs = 2,400,000 – 75,000
Indifference Point: 2,325,000 ÷ 0.125
Contribution margin ratio:
1 - [(7,200,000 + 2,400,000)/16M] = 40%
Alternative Solution:
.355 – 4,800,000 = .475S – 7,125,000
.125S = 2,325,000
130
P2,325,000
P18.6M
Cost-Volume-Profit Analysis
S = P18,6M
The calculated breakeven point of 14,780 is invalid because the number falls under the
second range wherein the amount of fixed costs that had been used are not relevant to that
range.
97 . Answer: C
Billing charge per patient day
Variable cost per patient day
Contribution margin
P650
150
P500
Number of patient days for the year:
P10,676,250/650
Second Range (Final calculation):
Total fixed cost, lowest range
Additional fixed cost:
1 aide
1 nurse
Total
Breakeven in patient days:
7,570,000 ÷ 500
16,425
Variable cost per patient day:
P2,463,650÷16,425
P150
98 . Answer: B
Fixed costs for bed capacity
Salary, supervisory nurse
Total
100 .Answer: A
Additional revenues if 20 beds are rented:
90 days @ 17 patient days x 650
P4,190,000
720,000
P4,910,000
17 beds x 90 days x P150
99 . Answer: B
In solving for the breakeven level where there are step fixed costs, the logical approach is to
test the validity of the ranges of activities.
Breakeven calculation: 7,390,000 ÷ 500
4,190,000
1,050,000
1,430,000
720,000
50,000
130,000
7,570,000
15,140
994,500
101 .Answer: B
Increase in variable cost should be calculated based on additional patient days for 90 days at
P150 per patient day.
Number of patient days required to cover fixed costs for bed capacity and salaries of
supervisory nurse
4,910,000 ÷ 500
9,820
First Range:
Fixed costs based on capacity
Salaries:
Aides 21 x 50,000
Nurses 11 x 130,000
Supervisor 4 x 180,000
Total
7,390,000
102 .Answer: A
The increase in fixed cost based on bed capacity:
P4,190,250 ÷ 60 x 20
P1,396,750
103 .Answer: A
Tax shield in non cash expenses
40% x 800,000
= P320,000
104 .Answer: A
Breakeven in number of pizzas (traditional)
4,537,500/(250 – 75)
3,200,000
7,390,000
14,780
Units sold: P9,500,000/250
Unit variable cost (cost of food)
131
P229,500
= 25,929
= 38,000
Cost-Volume-Profit Analysis
2,850,000 ÷ 38,000
Fixed cost = 7,387,500 – 2,850,000
105 .Answer: A
Cash Flow Breakeven:
3,417,500 ÷ 175
Total fixed cost:
Less: Noncash fixed cost
Tax shield on noncash
Fixed costs
Fixed cash flow
= P75.00
2S = 250,000
S = P1,250,000
P4,537,500
110 .Answer: C
The problem illustrates a calculation of breakeven point for a company with a step variable and
step fixed cost.
19,529
P4,537,500
( 800,000)
Contribution Margin per Unit:
60,000 or less (P30 – P12.50)
Units above 60,000 (P30 – P14.00)
( 320,000)
P3,417,500
Total contribution margin from the first
60,000 (60,000 x P17.50)
106 .Answer: A
Breakeven sales based on 20% commission:
P100,000 ÷ 0.20 P500,000
The new contribution margin ratio is (20% + 15%)
0 = 280,000 + 16X -360,000
X = 80,000 ÷ 16
X = 5,000 units
Breakeven units: 16,000 + 5,000
21,000
Alternative Solution:
P1,000,000
Total fixed costs
Less Contribution margin from 60,000 units
Remaining fixed costs to be covered by
additional units, each with CM of P16
35%
Fixed costs are expected to be P350,000
(100,000 + 90,000 + 160,000)
Breakeven units: 16,000 + (80,000 ÷ 16)
108 .Answer: D
The required peso sales to earn net income of P1,330,000 if the commission is raised to 25%:
(P100,000 + P1,900,000) ÷ 0.15
P280,000
Let X = Number of units above 16,000
Contribution margin ratio:
(10M – 8M) ÷ 10M 20%
107 .Answer: D
Breakeven sales if the company employs its own salesmen:
(P350,000 ÷ 0.35)
P17.50
P16.00
P360,000
280,000
P 80,000
21,000
111 .Answer: B
The units that will generate the desired profit of P150,000 for the company, contributes P16
each. These units are the excess of 21,000 units to breakeven.
P13,333,333
109 .Answer: B
The indifference point, the level of sales where the alternatives will have equal profits:
.15S- 100,000 = .35S – 350,000
Unit sales required:
21,000 + (150,000 ÷ P16)
132
30,375
Cost-Volume-Profit Analysis
112 .Answer: B
The bonus plan of P1.00 per unit on sales made in excess of breakeven point (21,000 units)
will necessarily decrease the contribution margin to P15.
(Please see solution for No. 94)
117 .Answer: A
Breakeven units if there is a change in marketing method:
P48,000 ÷ 6
The desired profit based on fixed cost:
25% x P360,000
P90,000
Units required: 21,000 + (P90,000 ÷ 15)
Contribution margin per unit:
(Fixed cost + profit) ÷ Units sold
27,000
113 .Answer: B
In determining the minimum selling price for the 8,000 units should consider the increased
variable cost per unit and the additional fixed cost. Any cost and losses on the first 16,000
units are irrelevant:
Variable cost per unit
P14.00
Additional fixed cost per unit (10,000 ÷ 8,000)
1.25
Minimum selling price
P15.25
114 .Answer: A
The net income for the month if the new equipment is acquired:
Contribution margin based on the present system
Add increase in contribution margin due to
decrease in variable cost (15,000 x 9)
Increased contribution margin
Less Increased fixed costs
Net income
(P48,000 + P60,000) ÷ 18,000 units
P6.00
118 .Answer: B
The percentage increase in profit can be calculated by multiplying the degree of operating
leverage (DOL) by the percentage increase in sales during the second month.
The sales increased by 30% (P4,500 ÷ P15,000) and therefore the profit percentage
increased by 180% (6 x 30%).
The expected profit during the next month would be:
P135,000
P45,000 + (P45,000 x 1.8)
135,000
270,000
225,000
P 45,000
115 .Answer: B
The increase in breakeven point would be:
(12,500 – 10,000)
Breakeven, present (P90,000 ÷ P9)
Breakeven, proposed (P225,000 ÷ P18)
116 .Answer: C
The degree of operating leverage (DOL)
during the month that the new
equipment would be used: (270,000 ÷ 45,000)
8,000 units
2,500 units
10,000 units
12,500 units
P126,000
119 .Answer: C
Breakeven Units:
Fixed Costs ÷ Unit Contribution Margin
P6,000,000 ÷ 300
20,000 pairs
120 .Answer: B
Contribution margin (P18,000 x 300)
Less Fixed costs
Net loss
P5,400,000
6,000,000
P( 600,000)
121 .Answer: A
The breakeven level for the sales outlet is expected to rise because of additional commission,
a variable cost item, and such a commission is being paid for all pairs of shoes sold.
6X
Breakeven in pairs of shoes:
6,000,000 ÷ (300 – 75)
133
26,667 pairs
Cost-Volume-Profit Analysis
127 .Answer: B
Sales 39,000 x P270
Variable cost 39,000 x P210
Contribution margin
Fixed cost
Net loss
122 .Answer: D
Though an additional commission is paid on pairs of shoes sold, the breakeven point is not
affected and shall remain at 20,000 because the additional commission applies only to number
of pairs of shoes sold in excess of breakeven level.
The profit contribution by the 5,000 pairs is based on reduced contribution margin per pair.
Profit: 5,000 x (300 – 50)
Alternative Solution:
Sales (25,000 x P800)
Variable costs (24,000 x P500)
Total contribution margin
Fixed costs
Profit
128 .Answer: B
Original unit contribution margin
(1,755,000 ÷ 19,500)
Less increase in packaging cost
New Unit contribution margin
P1,250,000
P20,000,000
12,750,000
7,250,000
600,000
P 1,250,000
Unit sales required:
(P1,800,000 + P97,500) ÷ P82.50
129 .Answer: A
Breakeven units, Automated
(P1,800,000 + P720,000) ÷ (P90 + P30)
P2,520,000 ÷ 90
Breakeven units, Present
(P1,800,000 ÷ 90)
Increase in breakeven units
123 .Answer: A
Because the breakeven level is unchanged, the calculation of the number of pairs to earn
P900,000 is simple. The amount of the desired profit will be contributed by the number of
pairs of shoes in excess of breakeven, each contributing P250.
20,000 +(P900,000 ÷ 250)
23,600 pairs
124 .Answer: B
300X – P6,000,000 = 440X – P8,142,000
140X = P2,142,000
X = 15,300 pairs
125 .Answer: A
Breakeven peso sales: P1,800,000 ÷ 0.3
CMR = P1,755,000 ÷ P5,850,000
30%
126 .Answer: B
Additional contribution margin P800,000 x 0.30
Additional fixed cost
Increase in profit
P10,530,000
8,190,000
2, 340,000
2,400,000
P( 60,000)
P90.00
7.50
P82.50
23,000
21,000
20,000
1,000
130 .Answer: C
The computation of the indifference point for the two processes can be determined by dividing
the increase in fixed costs by the decrease in variable cost per unit because the selling price
was unchanged.
Indifference Point: P720,000 ÷ 30
P6,000,000
24,000
131 .Answer: B
If the level of sales is higher than the indifference point, the one with higher leverage, i.e.,
higher fixed costs and lower unit variable cost, will provide higher income. The automated
process has the higher leverage and therefore, it has higher income:
P240,000
160,000
P 80,000
Difference in income: (26,000 – 24,000)30
134
P60,000
Cost-Volume-Profit Analysis
132 .Answer: C
Breakeven units = Fixed costs  Unit contribution margin
P100,000  (P400 – P200)
500 units
133 .Answer: D
Step 1: Compute before-tax profit:
P240,000  (1.0 – 0.4)
Units sales required to earn before-tax profit:
(P100,000 + P400,0000)  P200
Revenue (350 x P400) + (2,000 x P380)
Variable costs (2,350 x P200)
Contribution margin
Fixed costs
Operating profit
Income tax
Net income
P400,000
137 .Answer: D
Before tax profit objective (240,000 ÷ 0.6)
Fixed costs
Total contribution margin required
Less contribution margin made on units sold
January – May (350 x 200)
Additional contribution margin still needed
Additional contribution margin from 2,500 units
(2,500 x P175)
Less additional contribution margin required to meet profit objective
Maximum advertising cost
2,500 units
Alternative Solution:
Profit = Sales – Variable costs – Fixed costs
P400,000 = P400X – P200X – P100,000
P500,000 = P200X
X = 2,500 units
134 .Answer: C
Revenue (350 x P400) + (2,700 x P360)
Variable costs (3,050 x P200)
Contribution margin
Fixed expenses
Operating income
Income tax
Net income
P1,112,000
610,000
502,000
100,000
P 402,000
160,800
P 241,200
135 .Answer: A
Revenue (350 x P400) + (2,200 x P370)
Variable costs (350 x P200) + (2,200 x P175)
Contribution margin
Fixed expenses
Operating income
Income tax
Net income
P 954,000
455,000
499,000
100,000
399,000
159,600
P 239,400
136 .Answer: B
135
P 900,000
470,000
P 430,000
90,000
340,000
136,000
P 204,000
P400,000
100,000
500,000
70,000
P430,000
P437,500
430,000
P 7,500