UNIVERSITY OF SAN JOSE-RECOLETOS

CPA REVIEW CENTER

INTEGRATED MANAGEMENT SERVICES MR. EDMAN P. FLORES, MBA, CPA

Module 3: Cost-Volume-Profit Analysis

1. Basic Concepts
The study of the interrelationships between costs, volume, and profit at various levels of activity is known as cost-
volume-profit (CVP)/break-even analysis.
CVP analysis associates revenues and costs in an economic model that allows managers to forecast profits at various
levels of sales and production volume.
The break-even point is defined as the point at which revenues equal total costs.
Assumptions:
1. Depending on how the cost behaves, all costs can be classified as either variable or fixed.
2. The only relevant factor influencing cost is volume.
3. All costs behave in a linear fashion in relation to production volume.
4. Cost behaviors are expected to remain constant over the relevant range of production volume because it is assumed
that production efficiency does not change.
5. Costs show greater variability over time. The percentage of variable costs increases as the time period lengthens.
The percentage of fixed costs increases as the time period shortens.
6. Although CVP analysis can be performed for multiple products, the model in its most basic form assumes that the
product mix remains constant. This produces the economic dynamic of a single product.
7. Break-even analysis is performed using the contribution approach to the income statement. The determination of
whether a cost element is fixed or variable defines its relationship to volume and the calculation of break-even point.
8. The volume of transactions results in a uniform contribution margin per unit and a predictable projected contribution
margin based on volume.

Break-even charts are visual representations of the results of a break-even analysis. We will use a basic example to
demonstrate how to draw a breakeven chart. The data is:
Selling price P50 per unit
Variable cost P30 per unit
Fixed costs P20,000 per month
Forecast sales 1,700 units per month
The completed graph is shown below:
P000

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Test your understanding 1

1. One of the major assumptions limiting the reliability of break-even analysis is that:
A. Efficiency and productivity will continue to rise.
B. Total fixed costs will remain constant over the relevant range.
C. Total variable costs will remain constant over the relevant range.
D. The cost of production factors varies with technological advances.

2. Which of the following best describes what happens to the variable cost per unit when it falls within the relevant
range?
A. It decreases as output increases.
B. It rises in tandem with production.
C. It varies depending on the activity level.
D. It remains constant across all activity levels.

3. A break-even chart shows positive operating income when the

A. Total expense line exceeds the total sales revenue line.
B. Total sales revenue line exceeds the total expense line.
C. Total sales revenue line exceeds the total fixed expense line.
D. Total variable expense line exceeds the total fixed expense line.

2. Single product CVP analysis

At the break-even point, sales revenue equals total costs, and there is no profit. At the break-even point, total
contribution margin = fixed costs.

The breakeven analysis can be extended to calculate the required sales pesos or unit sales to generate the desired profit.

Break-even point formula

Break-even Point in units = Total Fixed Costs / Contribution Margin Per Unit

Break-even revenue = Break-even Point in Units x Unit Selling Price

OR
Break-even revenue = Total Fixed Costs / Contribution Margin Ratio

Target sales formula

Target Sales in units = (Fixed Cost + Target Profit) / Contribution Margin per Unit

Target Sales Revenue = Fixed Costs + Variable Costs + Profit.

OR
Target Sales Revenue = (Fixed Cost + Target Profit) / Contribution Margin Ratio

Margin of safety

The margin of safety is the excess of the budgeted or actual sales of a company over its break-even sales; it can be
calculated in units or pesos or as a percentage; it is equal to (1 ÷ degree of operating leverage).

The margin of safety is the amount that sales can drop before reaching the break-even point and, thus, provides a
certain amount of “cushion” from losses.

The following formulas are applicable:

Margin of safety in units = Actual units – Break-even units

Margin of safety in P = Actual sales P – Break-even sales in P
Margin of safety % = Margin of safety in units ÷ Actual unit sales
OR
Margin of safety % = Margin of safety in P ÷ Actual sales P

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The margin of safety calculation allows management to determine how close to a danger level the company is operating,
and thus provides an indication of risk.

Operating Leverage
Operating leverage is the proportionate relationship between a company’s variable and fixed costs. A company’s cost
structure, or the relative composition of its fixed and variable costs, strongly influences the degree to which its profits
respond to changes in volume.
The degree of operating leverage is a factor that indicates how a percentage change in sales, from the existing or
current level, will affect company profits; it is calculated as contribution margin divided by net operating income
or it is equal to 1 ÷ margin of safety percentage. The calculation assumes that fixed costs do not increase when
sales increase.
The degree of operating leverage decreases the farther a company moves from its break-even point; when the margin of
safety is small, the degree of operating leverage is large.
Low operating leverage and a relatively low break-even point are found in companies that are highly labor-intensive,
have high variable costs, and low fixed costs. Companies with low operating leverage can experience wide swings in
volume levels and still show a profit.
High operating leverage and a relatively high break-even point are found in companies that have low variable costs and
high fixed costs. Companies will face this type of cost structure and become more dependent on volume to add profits as
they become more automated. Companies with high operating leverage also have high contribution margin ratios.

Test your understanding 2

4. A company manufactures a product that sells for P300 per unit. Fixed costs are expected to be P1,800,000 in the
coming year, with variable costs estimated at P260 per unit. How many units does the company need to sell in order
to break even?
A. 6,000
B. 6,924
C. 45,000
D. 720,000

5. What is the breakeven level of revenues for a company with P4 million in sales, variable costs of P2.8 million and
fixed costs of P1 million?
A. P1,428,571
B. P3,333,333
C. P9,333,333
D. P13,333,333

6. A company manufactures and sells a single product with a variable cost per unit of P360. It has a contribution margin
ratio of 25%. The company has weekly fixed costs of P180,000.

Which one of the following is the weekly breakeven point in units?

A. 1,500
B. 1,600
C. 1,800
D. 2,000

7. How many units must be sold to achieve a target operating profit of P600,000, given fixed costs of P100,000, variable
costs per unit of P1,950, and a unit selling price of P3,700?
A. 189 units.
B. 343 units.
C. 358 units.
D. 400 units.

8. Gloria's Coffee Express has a contribution margin ratio of 55%. The company is investing in new coffee roasters,
which will raise their fixed costs from P15,000 to P20,000 per month. Last month's operating income was P30,000.

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 What would monthly sales be required for the company to make the same operating income with the new roasters?
Round up to the nearest whole peso.
A. P36,364
B. P81,818
C. P90,909
D. P118,180

9. Pink Magic, Inc. has decided to concentrate solely on producing and selling one type of teddy bear. The company
expects to make a 25% profit on sales in the coming year. The fixed costs are set at P510,000, while the variable
costs are set at P95 per unit. How many teddy bears must be sold to meet the profit goal if they are sold for P150
each?
A. 5,514
B. 9,273
C. 13,600
D. 29,143

Questions 10 and 11 are based on the following information.

Brandon Company manufactures a single product. Each unit sells for P150. The firm's projected costs are listed below:
Variable costs per unit:
Production P50
SG&A P10
Fixed costs:
Production P400,000
SG&A P600,000
Estimated volume 20,000 units

10. What is Brandon's projected margin of safety for the current year?
A. P800,000 B. P1,000,000 C. P1,333,333 D. P1,500,000

11. What is Brandon's projected degree of operating leverage for the current year?
A. 1.67 B. 2.25 C. 1.80 D. 3.75

12. The following information relates to Ace Corporation for the current year:
Sales P5,000,000
Net operating income P250,000
Degree of operating leverage 5

Sales at Ace are expected to be P6,000,000 next year. Assuming no change in cost structure, this means that net
operating income for next year should be:

A. P300,000 B. P450,000 C. P500,000 D. P1,250,000

13. If Company X has a higher degree of operating leverage than Company Y, then:
A. company X is more risky.
B. company X is more profitable.
C. company X has higher variable expenses
D. company X’s profits are less sensitive to percentage changes in sales.

14. An analyst calculates the peso sales break-even point for a product as P5,000,000. The product sells for P250 per
unit. Fixed costs are P1,500,000. What is the contribution margin per unit?
A. P50.00
B. P62.50
C. P75.00
D. P80.00

15. A company uses cost-volume-profit analysis to evaluate a new product. The total fixed cost of production is
P6,000,000. If the product would break even with 10,000 units sold per year, and the unit variable cost is P250, the
unit selling price is
A. P350
B. P600
C. P850
D. P15,000

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3. Multi-product CVP analysis

The basic breakeven model can be used satisfactorily for a business operation with only one product. However, most
companies sell a range of different products, and the model has to be adapted when one is considering a business
operation with several products.

CVP analysis assumes that, if a range of products is sold, sales will be in accordance with a pre-determined sales mix.

When a pre-determined sales mix is used, it can be depicted in the CVP analysis by assuming average revenues and
average variable costs for the given sales mix.

However, the assumption has to be made that the sales mix remains constant. This is defined as the relative proportion
of each product’s sale to total sales. It could be expressed as a ratio such as 2:3:5, or as a percentage as 20%, 30%,
50%.

The calculation of breakeven point in a multi-product firm follows the same pattern as in a single product firm. While the
numerator will be the same fixed costs, the denominator now will be the weighted average contribution margin ratio
(Weighted average CM ratio).

In multi-product situations, a weighted average CM ratio is calculated by using the formula:

Weighted average CM ratio = Total contribution / Total revenue

The weighted average CM ratio is useful in its own right, as it tells us what percentage each Peso of sales revenue
contributes towards fixed costs; it is also invaluable in helping us to quickly calculate the breakeven point in sales
revenue:

Breakeven revenue = Fixed cost / Weighted average CM ratio

Example 1

Company A produces Product X and Product Y. Fixed overhead costs amount to P2,000,000 every year. The following
budgeted information is available for both products for next year.

Product X Product Y
Sales price P500 P600
Variable cost P300 P450
Contribution per unit P200 P150
Budgeted sales (in units) 20,000 10,000

In order to calculate the breakeven revenue for the next year, using the budgeted sales mix, we need the weighted
average CM ratio as follows:

Weighted average CM ratio = Total contribution / Total revenue

= (20,000 × P200) + (10,000 × P150) / (20,000 × P500) + (10,000 × P600)
= 34.375%

The breakeven revenue can now be calculated this way for company A:

Breakeven revenue = Fixed costs / Weighted average CM ratio

= P2,000,000 / 0.34375
= P5,818,182

Calculations in the illustration above provide only estimated information because they assume that products X and Y are
sold in a constant mix of 2X to 1Y. In reality, this constant mix is unlikely to exist and, at times, more Y may be sold than
X. Such changes in the mix throughout a period, even if the overall mix for the period is 2:1, will lead to the actual
breakeven point being different than anticipated.

Establishing a target profit for multiple products

The approach is the same as in single product situations, but the weighted average contribution margin ratio is now used
so that:

Sales revenue required to earn a target profit = (Fixed costs + Required profit) / Weighted average CM ratio

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Example 2

To achieve a target profit of P3,000,000 in Company A:

Sales revenue required for profit of P3,000,000 = (P2,000,000 + P3,000,000) / 0.34375

= P14,545,455

Margin of safety calculations

The basic breakeven model for calculating the margin of safety can be adapted to multi-product environments.
Calculating the margin of safety for multiple products is exactly the same as for single products, but we use the standard
mix.

Example 3

XYZ Company produces and sells two types of sports equipment items for children, balls (in batches) and miniature
racquets.

A batch of balls sells for P80 and has a variable cost of P50. Racquets sell for P40 per unit and have a unit variable cost
of P26.

For every 2 batches of balls sold, one racquet is sold. Murray budgeted fixed costs are P4,070,000 per period. Budgeted
sales revenue for next period is P12,500,000 in the standard mix.

To calculate the margin of safety, the following steps must be followed:

Step 1 – Calculate CM per unit:

Balls Racquets
Selling price per unit P80 P40
Variable cost per unit P50 P26
CM per unit P30 P14

Step 2 – Calculate CM per mix:

(P30 × 2 balls) + (P14 × 1 racquet) = P74

Step 3 – Calculate the breakeven point in terms of the number of mixes:

Breakeven point = Fixed costs/CM per mix

= P4,070,000/P74
= 55,000 mixes

Step 4 – Calculate the breakeven point in terms of the units of the products:

55,000 mixes × 2 = 110,000 balls

55,000 mixes × 1 = 55,000 racquets

Step 5 – Calculate the breakeven point in terms of revenue

(P80 × 110,000 balls) + (P40 × 55,000 racquets) = P11,000,000

Step 6 – Calculate the margin of safety:

Budgeted sales – breakeven sales = P12,500,000 – P11,000,000 = P1,500,000

Or, as a percentage, (P12,500,000 – P11,000,000)/P12,500,000 = 12%

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Test your understanding 3

16. ABC Company produces and sells the following three products:

Product X Y Z
Selling price per unit P160 P200 P100
Variable cost per unit P50 P150 P70
CM per unit P110 P50 P30
Budgeted sales volume 50,000 units 10,000 units 100,000 units

The company expects the fixed costs to be P4,500,000 for the coming year. Assume that sales arise throughout the year
in a constant mix.

Required:
(a) Calculate the weighted average CM ratio for the products.
(b) Calculate the break-even sales revenue required.
(c) Calculate the margin of safety required.
(d) Calculate the revenue required to achieve a target profit of P9,000,000.

Questions 17 and 18 are based on the following information.

A company sells two products, X and Y. The sales mix consists of a composite unit of two units of X for every five units of
Y (2:5). Fixed costs are P495,000. The unit contribution margins for X and Y are P25 and P12, respectively.

17. Considering the company as a whole, the number of composite units to break even is
A. 1,650 B. 4,500 C. 8,250 D. 22,500

18. If the company had a profit of P220,000, the unit sales must have been
A. B. C. D.
Product X 5,000 13,000 23,800 32,500
Product Y 12,500 32,500 59,500 13,000

19. A company makes and sells product X and product Y. Twice as many units of product Y are made and sold as that
of product X. Each unit of product X makes a contribution of P100 and each unit of product Y makes a contribution
of P40. Fixed costs are P900,000.

What is the total number of units which must be made and sold to make a profit of P450,000?
A. 7,500
B. 22,500
C. 15,000
D. 16,875

4. Sensitivity analysis (including indifference point in unit sales and peso sales)

Sensitivity analysis is a technique used to assess how changes in one or more variables affect an outcome.

For example, a manager might use sensitivity analysis to determine how much they could increase prices before it would
start to hurt sales.

The indifference point is the point at which two alternatives are equally profitable. For example, the indifference point for
unit sales sensitivity analysis is the point at which the profit for two different pricing strategies is equal.

Test your understanding 4

20. ABC Company’s single product has a selling price of P150 per unit. Last year, the company reported total variable
expenses of P1,800,000, fixed expenses of P900,000, and a net income of P300,000. A study by the sales manager
discloses that a 15% increase in the selling price would reduce unit sales by 10%. If her proposal is adopted, net
income would:
A. Increase by P75,000
B. Increase by P285,000
C. Increase by P375,000
D. Increase by P450,000

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21. A company sells two products: Sparta and Volta. Volta is manufactured by a third party supplier, which charges the
company a contractual price for each unit of Volta manufactured. A summary of revenue and costs assumptions for
each product is as follows.
Sparta Volta
Planned sales units prior to promotion 100,000 20,000
Unit selling price P100 P200
Unit variable cost P30 P100
Fixed costs P5,000,000 P0

The company has the opportunity to spend an additional P100,000 in promotional expenditures on either Sparta or
Volta, anticipating a 10% increase in unit sales volume as a result. Both product lines have idle capacity and can
support the increase in unit volume. The company should spend the additional promotional expenditure on
a. Volta, because it would generate an additional P100,000 in operating profit.
b. Volta, because it would generate an additional P200,000 in operating profit.
c. Sparta, because it would generate an additional P100,000 in operating profit.
d. Sparta, because it would generate an additional P600,000 in operating profit.

22. Simon's Wholesale Flowers produces two types of flower bouquets that it distributes to retail shops: simple bouquets
and upgraded bouquets. Total fixed costs for the firm are P1,840,000. Variable costs and sales data for these
bouquets are presented here.
Simple Bouquets Upgraded Bouquets
Selling price per unit P240 P400
Variable cost per unit P200 P320
Budgeted sales (units) 20,000 30,000

If the product sales mix were to change to three upgraded bouquets sold for each simple bouquet sold, the
breakeven volume for each of these products would be:
a. 6,572 simple bouquets and 19,715 upgraded bouquets.
b. 27,600 simple bouquets and 9,200 upgraded bouquets.
c. 11,500 simple bouquets and 17,250 upgraded bouquets.
d. 15,333 simple bouquets and 15,333 upgraded bouquets

23. Siberian Ski Company recently expanded its manufacturing capacity, which will allow it to produce up to 15,000
pairs of cross- country skis of the mountaineering model or the touring model. The Sales Department assures
management that it can sell between 9,000 pairs and 13,000 pairs of either product this year. Because the models
are very similar, Siberian Ski will produce only one of the two models. The following information was compiled by
the Accounting Department:
Per-Unit (Pair) Data
Mountaineering Touring
Selling price P880 P800
Variable costs P528 P528

Fixed costs will total P3,696,000 if the mountaineering model is produced but will be only P3,168,000 if the touring
model is produced. Siberian Ski is subject to a 40% income tax rate.

The total sales revenue at which Siberian Ski Company would make the same profit or loss regardless of the ski
model it decided to produce is
a. P4,224,000 c. P8,800,000
b. P6,864,000 d. P9,240,000

PRACTICE TEST

1. CVP analysis relies on the assumptions that costs are either strictly fixed or strictly variable. Consistent with these
assumptions, as volume decreases total
a. fixed costs decrease.
b. variable costs remain constant.
c. costs decrease.
d. costs remain constant.
2. After the level of volume exceeds the break-even point
a. the contribution margin ratio increases.
b. the total contribution margin exceeds the total fixed costs.

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 c. total fixed costs per unit will remain constant.
d. the total contribution margin will turn from negative to positive.

3. Which of the following will decrease the break-even point?

Decrease in Increase in direct Increase in
fixed cost labor cost selling price
a. yes yes yes
b. yes no yes
c. yes no no
d. no yes no

4. The contribution margin ratio always increases when the

a. variable costs as a percentage of net sales increase.
b. variable costs as a percentage of net sales decrease.
c. break-even point increases.
d. break-even point decreases.

5. Management is considering replacing an existing sales commission compensation plan with a fixed salary plan. If the
change is adopted, the company's
a. break-even point must increase.
b. margin of safety must decrease.
c. operating leverage must increase.
d. profit must increase.

6. Mossfeet Shoe Company is a single product firm. Mossfeet is predicting that a price increase next year will not cause
unit sales to decrease. What effect would this price increase have on the following items for next year?
Contribution Break-even
Margin Ratio Point
a. Increase Decrease
b. Decrease Decrease
c. Increase No effect
d. Decrease No effect

7. A P2.00 increase in a product's variable expense per unit accompanied by a P2.00 increase in its selling price per unit
will:
a. decrease the degree of operating leverage.
b. decrease the contribution margin.
c. have no effect on the break-even volume.
d. have no effect on the contribution margin ratio.

8. The margin of safety would be negative if a company('s)

a. was presently operating at a volume that is below the break-even point.
b. present fixed costs were less than its contribution margin.
c. variable costs exceeded its fixed costs.
d. degree of operating leverage is greater than 100.

9. As projected net income increases the

a. degree of operating leverage declines.
b. margin of safety stays constant.
c. break-even point goes down.
d. contribution margin ratio goes up.

10. A managerial preference for a very low degree of operating leverage might indicate that
a. an increase in sales volume is expected.
b. a decrease in sales volume is expected.
c. the firm is very unprofitable.
d. the firm has very high fixed costs.

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11. A company manufactures a single product. Estimated cost data regarding this product and other information for the
product and the company are as follows:

Sales price per unit P40

Total variable production cost per unit P22
Sales commission (on sales) 5%
Fixed costs and expenses
Manufacturing overhead P5,598,720
General and administrative P3,732,480
Effective income tax rate 40%

The number of units the company must sell in the coming year in order to reach its breakeven point is
a. 388,800 units c. 583,200 units
b. 518,400 units d. 972,000 units

12. Cheesy hot dog stand expects the following operating results for next year:
Sales ............................................... P280,000
Net operating income ......................... P21,000
Contribution margin ratio ......................... 70%

What is Cheesy's break-even point next year in sales pesos?

a. P120,000 b. P181,300 c. P196,000 d. P250,000

13. Davis Manufacturing incurs annual fixed costs of P250,000 in producing and selling a single product. Estimated unit
sales are 125,000. An after-tax income of P75,000 is desired by management. The company projects its income tax
rate at 40 percent. What is the maximum amount that Davis can expend for variable costs per unit and still meet its
profit objective if the sales price per unit is estimated at P6?
a. P3.37 b. P3.59 c. P3.00 d. P3.70

14. XYZ Company manufactures a single product. In the prior year, the company had sales of P900,000, variable costs of
P500,000, and fixed costs of P300,000. Unique expects its cost structure and sales price per unit to remain the same
in the current year, however total sales are expected to increase by 20 percent. If the current year projections are
realized, net income should exceed the prior year’s net income by:
a. 100 percent. b. 80 percent. c. 20 percent. d. 50 percent.

15. Starlight Company is a medium-sized manufacturer of lamps. During the year a new line called “Magnificent” was
made available to Starlight's customers. The break-even point for sales of Magnificent is P2 million with a
contribution margin ratio of 40%. Assuming that the profit for the Magnificent line during the year amounted to P1
million, total sales during the year would have amounted to:
a. P3 million b. P4.20 million c. P4.50 million d. P4.75 million

16. Neymar Corp. sells a product for P50 per unit. The fixed expenses are P2.10 million and the unit variable expenses
are 60% of the selling price. What sales would be necessary in order for Neymar Corp. to realize a profit of 10% of
sales?
a. P7 million b. P5.25 million c. P4.725 million d. P4.20 million

Questions 17 and 18 are based on the following information.

Below is an income statement for Kidd Company:
Sales P3,000,000
Variable costs (1,500,000)
Contribution margin P1,500,000
Fixed costs (1,000,000)
Profit before taxes P 500,000

17. What was the company's margin of safety?

a. P500,000 b. P1,000,000 c. P1,500,000 d. P250,000

18. If the unit sales price for Kidd’s sole product was P100, how many units would it have needed to sell to produce a
profit of P400,000?
a. 27,500 c. 29,000
b. 28,000 d. can't be determined from the information given

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19. A firm estimates that it will sell 100,000 units of its sole product in the coming period. It projects the sales price at
P40 per unit, the CM ratio at 60 percent, and profit at P500,000. What is the firm budgeting for fixed costs in the
coming period?
a. P1,600,000 b. P2,400,000 c. P1,100,000 d. P1,900,000

20. Chandler Company manufactures a western-style hat that sells for P500 per unit. This is its sole product and it has
projected the break-even point at 50,000 units in the coming period. If fixed costs are projected at P5,000,000, what
is the projected contribution margin ratio?
a. 80 percent b. 20 percent c. 40 percent d. 60 percent

Questions 21 and 22 are based on the following information.

The following information relates to financial projections of Terry Company:
Projected sales 60,000 units
Projected variable costs P20.00 per unit
Projected fixed costs P500,000 per year
Projected unit sales price P70.00
21. How many units would Terry Company need to sell to earn a profit before taxes of P100,000?
a. 25,714 b. 10,000 c. 8,571 d. 12,000

22. If Terry Company achieves its projections, what will be its degree of operating leverage?
a. 6.00 b. 1.20 c. 1.68 d. 2.40

23. The following information pertains to Heat Company’s cost-volume-profit relationships:

Break-even point in units sold 10,000
Variable costs per unit P500
Total fixed costs P1,500,000

How much will be contributed to profit before taxes by the 10,001st unit sold?
a. P650 b. P500 c. P150 d. P0

24. Information concerning Tyson Corporation's Product A follows:

Sales P3,000,000
Variable costs 2,400,000
Fixed costs 400,000

Assuming that Tyson increased sales of Product A by 20 percent, what should the profit from Product A be?
a. P200,000 b. P240,000 c. P320,000 d. P800,000

25. Wade Company reported the following results from sales of 5,000 units of Product A for June:
Sales P2,000,000
Variable costs (1,200,000)
Fixed costs (600,000)
Operating income P 200,000
Assume that Wade increases the selling price of Product A by 10 percent in July. How many units of Product A would
have to be sold in July to generate an operating income of P200,000?
a. 4,000 b. 4,300 c. 4,545 d. 5,000

Questions 26 and 27 are based on the following information.

A company that sells its single product for P400 per unit uses cost-volume-profit analysis in its planning. The company’s
after-tax net income for the past year was P13,860,000 after applying an effective tax rate of 30%. The projected costs
for manufacturing and selling its single product in the coming year are listed.
Variable costs per unit:
Direct material P 50.00
Direct labor 40.00
Manufacturing overhead 60.00
Selling and administrative costs 30.00
Total cost per unit P180.00
Annual fixed operating costs:
Manufacturing overhead P62,000,000
Selling and administrative costs 37,000,000
Total annual fixed cost P99,000,000

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26. The peso sales volume required in the coming year to earn the same after-tax net profit as the past year is
a. P201,600,000 b. P216,000,000 c. P234,000,000 d. P264,000,000

27. The company has learned that a new direct material is available that will increase the quality of its product. The new
material will increase the direct material costs by P30 per unit. The company will increase the selling price of the
product to P500 per unit and increase its marketing costs by P15,750,000 to advertise the higher-quality product.
The number of units the company has to sell in order to earn a 10% before-tax return on sales would be
a. 337,500 units. b. 346,875 units. c. 425,000 units. d. 478,125 units.

28. New Fashion Company is contemplating of marketing a new product. Fixed costs will be P8,000,000 for production
of 75,000 units or less and P12,000,000 if production exceeds 75,000 units. The variable cost ratio is 60% for the
first 75,000. Contribution margin percentage will increase to 50% for units in excess of 75,000. If the product is
expected to sell for P250 per unit, how many units must New Fashion sell to breakeven?
a. 120,000 b. 111,000 c. 96,000 d. 80,000

29. ABC Company manufactures and sells two types of beach towels, standard and deluxe. ABC expects the following
operating results next year for each type of towel:
Standard Deluxe
Sales P4,500,000 P500,000
Variable expenses (total) P3,600,000 P200,000

ABC expects to have a total of P576,000 in fixed expenses next year. What is ABC's break-even point next year in
sales pesos?
a. P720,000 b. P1,440,000 c. P1,920,000 d. P2,400,000

30. Which of the following statements relating to cost volume profit analysis are true?
(1) Production levels and sales levels are assumed to be the same so there is no inventory movement.
(2) The contribution margin ratio (CM ratio) can be used to indicate the relative profitability of different products.
(3) CVP analysis assumes that fixed costs will change if output either falls or increases significantly.
(4) Sales prices are recognized to vary at different levels of activity especially if higher volume of sales is needed.
a. (1) and (2) only
b. (3) and (4) only
c. (1), (2) and (3)
d. (2), (3) and (4)

31. The budget data for the Bidwell Company appear below.

Sales (100,000 units) P10,000,000

Costs Fixed Variable
Direct materials P0 P3,000,000
Direct labor 0 2,000,000
Manufacturing overhead 1,000,000 1,500,000
Selling and administrative costs 1,100,000 500,000
Total costs P2,100,000 P7,000,000 9,100,000
Budgeted operating income P 900,000

If fixed costs increased by P315,000 with no other cost or revenue factors changing, the breakeven sales in units is
A. 34,500 units. C. 80,500 units.
B. 69,000 units. D. 94,150 units.

32. Mikay General Merchandise is currently open only on Monday to Saturday. It is considering opening on Sundays.
The annual incremental costs of Sunday opening is estimated at P124,800. Its gross margin is 20%. It estimates
that 60% of Sunday sales to customers would be on other days if its stores were not open on Sundays.

The Sunday sales that would be necessary for Mikay to attain the same weekly operating income is
a. P19,500. c. P30,000.
b. P29,250. d. P20,000.

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33. Two companies are expected to have annual sales of 1,000,000 decks of playing cards next year. Estimates for next
year are presented below:
Company 1 Company 2
Selling price per deck P30.0 P30.0
Cost of paper per deck 6.2 6.5
Printing ink per deck 1.3 1.5
Labor per deck 7.5 12.5
Variable overhead per deck 3.0 3.5
Fixed costs P9,600,000 P2,520,000

Given these data, which of the following responses is true?

A. B. C. D.
Breakeven Point in Units for Company 1 533,334 533,334 800,000 800,000
Breakeven Point in Units for Company 2 105,000 105,000 420,000 420,000
Volume in Units at which Profits of Company 1
and Company 2 are Equal 1,000,000 1,180,000 1,000,000 1,180,000

34. ABC Co. is preparing next year's budget. The pro forma income statement for the current year is presented below.

Sales P11,000,000
Cost of sales:
Direct materials P1,000,000
Direct labor 500,000
Variable overhead 1,400,000
Fixed overhead 1,000,000 (3,900,000)
Gross profit P7,100,000
Selling and G&A
Variable P1,500,000
Fixed 1,500,000 (3,000,000)
Operating income P4,100,000

What is ABC Co.'s budgeted breakeven point for the upcoming year? (Round to the nearest peso.)
A. P4,166,667
B. P4,647,899
C. P6,250,000
D. P7,333,333

35. A company has the following cost structure:

Direct labor per unit P60

Direct materials per unit P20
Fixed manufacturing overhead P150,000
Variable manufacturing overhead per unit P30
Variable selling and administrative expense per unit P20
Fixed selling and administrative expense P250,000

How many units must be sold at P250 each to yield a contribution margin of P750,000?
A. 3,000 units.
B. 4,412 units.
C. 5,357 units.
D. 6,250 units

36. Which amount of production and sales would produce a net income of P750,000 if the selling price is P125 per unit,
the contribution ratio is 0.40, and total fixed expenses are P250,000?
A. 6,000 units.
B. 8,000 units.
C. 15,000 units.
D. 20,000 units.

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37. Jane sells vacuums and shampooers. The vacuums each sell for P3,000 with variable costs of P1,000, and the
shampooers each sell for P5,000 with variable costs of P3,000. The fixed costs for the store are P40,000,000. The
shampooers make up 1,200 of the units sold, while the vacuums make up the other 2,800 of the units sold. What is
Jane’s breakeven point in units?
A. 6,000 units
B. 14,000 units
C. 20,000 units
D. 40,000 units

38. A company with P2,800,000 of fixed costs has the following data:
Product A Product B
Sales price per unit P50 P60
Variable costs per unit P30 P50

Assume three units of A are sold for each unit of B sold. How much will sales be in pesos of product B at the
breakeven point?
A. P2,000,000
B. P2,400,000
C. P2,800,000
D. P8,400,000

39. Bumble Bees sells local, organic honey. They have a contribution margin ratio of 45%. To increase production, the
company is purchasing several new hives, which will increase fixed costs from P20,000 to P50,000 per month. Last
month’s operating income totaled P20,000. What amount of monthly sales would be needed to keep operating
income at the same level with the new hives? Round to the nearest whole peso.
A. P88,889
B. P111,111
C. P155,556
D. P200,000

40. ABC and XYZ operate in the same industry. ABC’s sales, variable costs, and fixed costs are P10,000,000, P7,000,000,
and P1,000,000, respectively. XYZ’s sales, variable costs, and fixed costs are P10,000,000, P4,000,000, and
P4,000,000, respectively. If each company experiences an equal increase or decrease in sales, XYZ’s income will:
A. Go up or down half as much as ABC’s.
B. Go up or down twice as much as ABC’s.
C. Go up twice as much as ABC’s, but go down only half as much as ABC’s.
D. Go up or down by the same amount as ABC’s because both companies have equal net income.

---NOTHING FOLLOWS---

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