MS 03: CVP Analysis

CVP Analysis
It analyzes the effect of changes in product cost, selling price, and volume or number of outputs, and its effect to the overall
operating profit of the firm. CVP analysis enable the firm to determine how many units of a new product must be sold to
break-even or how many units of a product must be sold to achieve a target or planned profit. It is useful in profit planning by
way of a systematic analysis of the profit’s relationship with various costs and volume of sales.

Contribution Margin Approach

In this approach we segregate costs according to their behavior (variable or fixed) instead of whether they are product costs
or period costs (cost of goods sold vs. selling and general and administrative expenses). This contribution margin income
statement is helpful in aiding sensitivity (“What if?”) analysis. Sensitivity analysis refers to estimating the operating profit if
one of the four factors change.
CONTRIBUTION MARGIN INCOME STATEMENT
Sales P XX
Less: Variable cost (variable product cost + variable period cost) XX
Contribution margin P XX
Less: Fixed cost (fixed product cost + fixed period cost) XX
Operating income P XX

TRADITIONAL INCOME STATEMENT

Sales P XX
Less: Cost of goods sold (variable product cost + fixed product cost) XX
Gross profit XX
Less: Operating expenses (variable period cost + fixed period cost) XX
Operating income P XX

This approach is for internal decision-making purposes only and cannot be used for preparation of financial statement because
it is not compliant with PFRS and PAS.

Contribution Margin (CM))

Is the difference between sales and variable costs. It is otherwise known as marginal income, profit contribution, contribution
to fixed cost or incremental contribution. Contribution margin per unit is the amount of increase in profit for every unit sold.
CM can be expressed in:

a) Total basis:
Total sales P XX
Less: Total variable cost (Variable cost per unit x units sold) XX
Total contribution margin P XX

b) Per unit basis:

Selling price per unit (refer to important notes!) P XX
Less: Variable cost per unit (refer to important notes!) XX
Contribution margin per unit P XX

c) Percentage (ratio) basis:

Contribution margin per unit

= Contribution margin ratio (CMR)
Selling price per unit

Contribution margin in peso

= CMR
Sales in peso

Change in Profit
= CMR
Change in Sales

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PROF. JOHN BO S. CAYETANO
Break-Even
The point of activity (sales in peso or in units) where total revenues equal total costs (i.e., there is neither profit or loss). Break-
even point can be expressed in either (1) peso; or (2) units. The procedure is, to recover the fixed cost from earnings of
contribution margin from sale.

a) Break-even point in peso.

Total fixed cost (fixed product cost + fixed period cost)

= Break-even point in peso
Contribution margin ratio (CMR)

b) Break-even point in units.

Total fixed cost

= Break-even point in units
Contribution margin per unit

Target Profit
The target operating income will be added to total fixed cost to obtain the amount that should be recovered from
contribution margin. If tax is involved, the target profit should be “gross up”.

a) Target sales in peso without tax involved.

Total fixed cost + target profit
= Target sales in peso
Contribution margin ratio (CMR)

b) Target sales in units without tax involved.

Total fixed cost + target profit
= Target sales in units
Contribution margin per unit

c) Target sales in peso with tax involved.

Total fixed cost + [target profit ÷ (100% - tax rate)]
= Target sales in peso
Contribution margin ratio (CMR)

d) Target sales in units with tax involved.

Total fixed cost + [target profit ÷ (100% - tax rate)]
= Target sales in units
Contribution margin per unit

e) Target sales expressed in percentage of sales (e.g., desired profit is 15% of sales)

(1) In Peso
Total fixed cost
= Target sales in peso
CMR – Desired Percentage of Profit (%)

(2) In Units
Target sales in peso
= Target sales in units
Selling price per unit

f) Target sales expressed in peso per unit sold (e.g., desired profit is P2 per unit sold)

(1) In Peso
Total fixed cost
= Target sales in units
CM per unit – Desired Profit per unit

(2) In Units
Target sales in units P XX
Times: Selling price per unit XX
Target sales in peso P XX

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PROF. JOHN BO S. CAYETANO
Margin of Safety
Indicates the amount by which actual or planned sales may be reduced without incurring a loss. It is the difference between
actual or planned sales volume and break-even sales. Stated otherwise, it is the difference between actual sales and break-
even sales. It indicates the maximum amount by which sales could decline without incurring a loss. It can be expressed in
either (1) peso; or (2) ratio.

a) Margin of safety in peso.

Sales in peso (actual or planned) P XX
Less: Break even in peso ( XX)
Margin of safety in peso P XX

b) Margin of safety ratio

Alternative 1:
Margin of safety in peso
= Margin of safety ratio
Sales in peso
Alternative 2:
Profit ratio
= Margin of safety ratio
Contribution margin ratio

Operating profit
= Profit ratio
Sales

Point of Indifference
This is the level of sales (peso or units) at which two alternatives being analyzed would yield the same amount of profits. It is
at this point where the decision maker would be indifferent as to what alternative to take. If the company has no alternative,
no indifference point will be computed.

(1) In Units
Difference in fixed cost
= Indifference point in units
Difference in contribution margin per unit

(2) In Peso
Difference in fixed cost
= Indifference point in peso
Difference in contribution margin ratio (CMR)

Degree of Operating Leverage (DOL)

It is a measure of the sensitivity of profit changes to changes in sales volume. DOL measures the percentage in profit that
results from a percentage of change in sales. The higher the degree of operating leverage, the greater the change in profit
when sales change.

Alternative 1:
Contribution margin in peso
= DOL
Operating income

Alternative 2:
Percentage Change in Operating Income
= DOL
Percentage Change in Sales in Peso

Alternative 3:
100%
= DOL
CMR

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PROF. JOHN BO S. CAYETANO
Sales Mix
Sales mix is the relative combination of quantities of sales of various products that make up the total sales of a company. The
computation of break-even point in units and in peso is as follows:

First – determine the weighted average contribution margin per unit.

Illustration: A company is selling two products: Product Y and Product Z. The total sales composed of 20% of Product Y and
80% of Product Z (or a ratio of 2:8).
Product Y Product Z Weighted
CM/unit
Selling price per unit X X
Less: Variable cost per unit X X
Contribution margin per unit X X
Times: Percentage composing the sales 20% 80%
Weighted average contribution margin per unit X + X X

Second – compute the break-even point in units.

Total fixed cost
= Break-even point in units
Weighted average contribution margin per unit

Break-even point in peso.

First – determine the weighted average contribution margin per unit.

For better illustration: A company is selling two products: Product Y and Product Z. The total sales composed of 20% of
Product Y and 80% of Product Z (or ratio is 2:8).
Product Y Product Z Weighted CM/unit
Selling price per unit X X
Less: Variable cost per unit X X
Contribution margin per unit X X
Divide: Selling price per unit X X
Contribution margin ratio (CMR) X X
Times: Percentage composing the sales 20% 80%
Weighted average contribution margin ratio (CMR) X + X X

Second – compute the break-even point in units.

Total fixed cost
= Break-even point in peso.
Weighted average contribution margin ratio (CMR)

Assumptions in CVP:
a. Changes in the level of revenues and costs arise only because of changes in the number of product (or service) units
produced and sold.
b. Total costs can be separated into fixed component that does not vary with the output level and a component that is
variable with respect to the output level.
c. When represented graphically, the behavior of total revenues and total costs are linear (represented as a straight line) in
relation to output level within a relevant range and time period.
d. The selling price, variable cost per unit, and fixed costs are known and constant.
e. The analysis either covers a single product or assumes that the sales mix, when multiple products are sold, will remain
constant as the level of total units sold changes.
f. All revenues and costs can be added and compared without taking into account the time value of money.

--End--

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PROF. JOHN BO S. CAYETANO
 CVP ANALYSIS
Introduction
1. When used in cost-volume-profit analysis, sensitivity analysis
A. determines the most profitable mix of products to be sold.
B. allows the decision maker to introduce probabilities in the evaluation of decision alternatives.
C. is done through various possible scenarios and computes the impact on profit of various predictions of future events.
D. is limited because in cost-volume-profit analysis, costs are not separated into fixed and variable components.

Contribution Margin
2. The difference between total sales in peso and total variable expenses is called:
A. Net operating income. C. The gross margin.
B. Net profit. D. The contribution margin.

3. At a volume of 15,000 units, Boston reported sales revenues of P600,000, variable costs of P225,000, and fixed costs of
P120,000. The company's contribution margin per unit is:
A. 17 C. 47
B. 25 D. 55

4. A tile manufacturer has supplied the following data:

Boxes of tiles produced and sold 240,000 units

Sales revenue P 1,128,000

Variable manufacturing expense 456,000
Fixed manufacturing expense 320,000
Variable selling and administrative expense 156,000
Fixed selling and administrative expense 96,000
Net operating income P 100,000
What is the company's unit contribution margin?
A. 4.70 C. 2.15
B. 0.42 D. 2.55

5. DSP Company earned P100,000 on sales of P1,000,000. It earned P130,000 on sales of P1,100,000. Contribution margin
as a percentage of sales is:
A. 30% C. 70%
B. 40% D. 90%

Income Statement – Contribution Margin Format

6. The contribution income statement
A. Reports gross margin.
B. Is allowed for external reporting to shareholders.
C. Categorizes costs as either direct or indirect.
D. Can be used to predict future profits at different levels of activity.

7. Contribution margin income statements are not found in published financial statements because such a format
A. Would not be of use to most external users of financial statements.
B. Would be difficult for most users of financial statements to understand.
C. Is not considered GAAP.
D. Both (A) and (C) are correct.

8. CVP analysis requires costs to be categorized as

A. either fixed or variable. C. product or period.
B. fixed, mixed, or variable. D. standard or actual.

Use the following for numbers 9-11:

Given the following projected contribution income statement for the coming year:
Sales (100 units) P 10,000
Variable costs 3,000
Contribution margin P 7,000
Fixed cost 4,000
Operating income P 3,000

9. How much is the operating income if only 80 units will be sold instead of 100 units?
A. 1,000 C. 3,000
B. 2,400 D. 1,600
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PROF. JOHN BO S. CAYETANO
10. How much is the increase in operating income if 150 units will be sold instead of 100 units?
A. 6,500 C. 4,500
B. 3,500 D. 1,500

11. How much is the operating income if the variable cost per unit is P32 and sold 100 units?
A. 2,800 C. 3,200
B. 2,450 D. 5,000

Use the following for numbers 12-14:

Basic Company incurred the following costs in the production of P10,000 units of its main product, product X:
Selling price per unit P 100
Direct material 15
Direct labor 12
Variable overhead 10
Variable selling and administrative expense 18
Total fixed overhead 220,000
Total fixed selling and administrative expense 88,000
12. Assuming all the 10,000 units produced was subsequently sold, the contribution margin of Basic Company is:
A. 692,000 C. 410,000
B. 242,000 D. 450,000

13. What is the operating income of Basic Company?

A. 142,000 C. 450,000
B. 322,000 D. 230,000

14. What is the contribution margin ratio of Basic Company?

A. 41% C. 55%
B. 45% D. 59%

Break-even Point in Units

15. The breakeven point is
A. The volume of activity where all fixed costs are recovered.
B. Where fixed costs equal total variable costs.
C. Where total revenues equal total costs.
D. Where total costs equal total contribution margin.
E. Both b and C.

16. At the breakeven point, the contribution margin equals total

A. Variable costs. C. Selling and administrative costs.
B. Sales revenues. D. Fixed costs.

17. Miguel Corporation budgets fixed expenses of P250,000; variable expenses of P180,000 and sales of 15,000 units for P28
each. The breakeven point in units is
A. 14,000 units C. 16,400 units
B. 15,625 units D. 16,625 units

18. Budget data for the Bidwell Company are as follows:

Fixed Variable Total
Sales (100,000 units) P1,000,000
Expenses:
Raw materials P300,000
Direct labor 200,000
Overhead P100,000 150,000
Selling and administrative 110,000 50,000
Total expenses P210,000 P700,000 (910,000)
Net operating income P 90,000
Bidwell's break-even sales in units is:
A. 30,000 units C. 60,000 units
B. 91,000 units D. 70,000 units

Break-even Point in Peso

19. The following is Allison Corporation's contribution format income statement for last month:
Sales P800,000
Less variable expenses 300,000
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PROF. JOHN BO S. CAYETANO
 Contribution margin 500,000
Less fixed expenses 400,000
Net income P100,000
The company has no beginning or ending inventories. The company produced and sold 10,000 units last month. What is
the company's break-even sales in peso?
A. P0 C. P700,000
B. P640,000 D. P400,000

20. Barnes Corporation manufactures skateboards and is in the process of preparing next year’s budget.
Sales P1,500,000
Cost of sales:
Direct materials P 250,000
Direct labor 150,000
Variable overhead 75,000
Fixed overhead 100,000 575,000
Gross profit P 925,000
Selling and G&A
Variable P 200,000
Fixed 250,000 450,000
Operating income P 475,000
The breakeven point (rounded to the nearest peso) for Barnes Corporation for the current year is
A. 146,341 C. 729,730
B. 636,364 D. 181,818

21. The break-even in units sold will decrease if there is an increase in:
A. Unit sales volume. C. Unit variable expenses.
B. Total fixed expenses. D. Selling price.

Reconstruction of Income Statement (Work-back)

22. Hat Co. manufactures a western-style hat that sells for P10 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 P100,000, what is the projected contribution
margin ratio?
A. 80 percent C. 40 percent
B. 20 percent D. 60 percent

23. Apple Company has fixed costs of P200,000 and breakeven sales of P1,600,000. What is the projected profit at P2,400,000
sales?
A. 600,000 C. 800,000
B. 300,000 D. 100,000

Margin Profit in Units

24. In using cost-volume-profit analysis to calculate expected unit sales, which of the following should be added to fixed costs
in the numerator?
A. Predicted operating loss. C. Unit contribution margin.
B. Predicted operating profit. D. Variable costs.

25. Selling price is P50, unit variable cost is P34, and fixed costs are P200,000. Unit sales required to earn a P60,000 profit are
A. 5,200 units C. 13,700 units
B. 7,647 units D. 16,250 units

26. A recent income statement of East Corporation reported the following data:
Sales revenue (5,000 units) P5,000,000
Variable costs 3,000,000
Fixed costs 800,000
If the company desired to earn a target net profit of P820,000, it would have to sell:
A. 2,000 units C. 4,050 units
B. 2,050 units D. 6,750 units

Margin Profit in Peso

27. Dynamic Company had sales of P1,500,000, fixed costs of P400,000 and variable costs of P900,000. How much should the
sales be in order to produce a net income of P30,000?
A. 2,500,000 C. 2,000,000
B. 2,250,000 D. 1,075,000

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PROF. JOHN BO S. CAYETANO
28. Assume the following cost behavior data for Brooks Company:
Sales price P8.00 per unit
Variable costs P6.00 per unit
Fixed costs P10,000
Tax rate 40%
What volume of sales peso is required to earn an after-tax income of P18,000?
A. 8,600 units
B. 27,500 units
C. 14,000 units
D. 20,000 units

Margin Profit with Tax

29. Barney, Inc., is subject to a 40% income tax rate. The following data pertain to the period just ended when the company
produced and sold 45,000 units:
Sales revenue P1,350,000
Variable costs 810,000
Fixed costs 432,000
How many units must Barney sell to earn an after-tax profit of P180,000?
A. 42,000 C. 45,000
B. 51,000 D. 61,000

30. Jose 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 Jose can expend for variable costs per unit and still meet its profit objective if the sales
price per unit is estimated at P6.
A. 3.37 C. 3.00
B. 3.59 D. 3.70

Margin Profit in Percentage

31. August Company sells Product Lamig for P5 per unit. The fixed cost is P210,000 and the variable cost is 60% of the selling
price. What amount of sales is needed to realize a profit of 10% of sales?
A. 700,000 C. 472,500
B. 525,000 D. 420,000

Point of Indifference
32. The indifference point is the level of volume at which a company earns
A. The same profit under different operating schemes.
B. No profit.
C. Its target profit.
D. Any of the above. L&H

33. Machine A has fixed costs of P225,000 and a variable cost of P20 per unit. Machine B has fixed costs of P300,000 and a
variable cost of P14 per unit. What is the indifference point, in units?
A. 11,250 units C. 21,429 units
B. 12,500 units D. 21,249 units

34. Edifer Tools, Inc. uses a semi-automated process in its production. It is faced with a proposal to completely automate its
production. Below are data for these alternative methods:
Complete Automation Semi-Automated
Materials cost per unit P12.00 P10.50
Labor cost per unit 3.00 15.00
Other variable cost per unit 4.50 3.00
Lease cost per year 75,000 30,000
Maintenance cost per year 15,000 6,000
The cost indifference point is at
A. 3,300 units C. 6,000 units
B. 3,000 units D. 6,300 units

35. Eat N Eat Shop operates sandwiches on the go in shopping malls. The average selling price of a sandwich is P100. And the
average cost of each sandwich is P80. A new mall is opening where Eat N Eat wants to locate a shop but the location
manager is not sure about the rent method to accept. The mall operators offer two options for shop rentals as follows:
§ Paying a base rent of P40,000 plus 8% of revenue received, or
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PROF. JOHN BO S. CAYETANO
 § Paying a base rent of P20,000 plus 14% of revenue received up to a maximum of P80,000
Eat N Eat will be indifferent between options 1 and 2 when its level of sales is
A. 1,000 C. 900
B. 750 D. 3,333

Margin of Safety
36. When an organization is operating above the breakeven point, the degree or amount that sales
may decline before losses are incurred is called the
A. Residual income rate. C. Margin of safety.
B. Marginal rate of return. D. Target (hurdle) rate of return.

37. The margin of safety is the excess of budgeted

A. Or actual sales over budgeted or actual variable expenses.
B. Or actual sales over budgeted or actual fixed expenses.
C. Or actual sales over the break-even volume of sales.
D. Net operating income over actual net operating income.

38. The following is Addison Corporation's contribution format income statement for last month:
Sales P 1,000,000
Variable expenses 700,000
Contribution margin P 300,000
Fixed expenses 180,000
Net operating income P 120,000
The company has no beginning or ending inventories. A total of 20,000 units were produced and sold last month. What is
the company's margin of safety in peso?
A. 400,000 C. 120,000
B. 600,000 D. 880,000

39. Narchie sells a single product for P50. Variable costs are 60% of the selling price, and the company has fixed costs that
amount to P400,000. Current sales total 16,000 units. If Narchie sells 24,000 units, its safety margin will be in peso:
A. 200,000 C. 1,000,000
B. 400,000 D. 1,200,000

Use the following for numbers 40-42:

Laguna Corporation’s sales for the month of May resulted in a margin of safety ratio of 25%, and after-tax return on sales of
10%. Monthly fixed cost is estimated to be at P100,000.

40. What is the contribution margin ratio?

A. 24% C. 25%
B. 40% D. 36%

41. What is the current sales in peso for the month of May?
A. 333,333 C. 666,667
B. 714,286 D. 384,615

42. For its most recent fiscal year, Corn Company reported that its contribution margin was equal to 40 percent of sales and
that its net income amounted to 10 percent of sales. If its fixed cost for the year were P60,000, how much was the margin
of safety?
A. 150,000 C. 600,000
B. 200,000 D. 50,000

Degree of Operating Leverage

43. The percentage change in earnings before interest and taxes associated with the percentage change in sales volume is the
degree of
A. Operating leverage. C. Breakeven leverage.
B. Financial leverage. D. Combined leverage.

44. A higher degree of operating leverage compared with the industry average implies that the firm
A. Has higher variable costs.
B. Has profits that are more sensitive to changes in sales volume.
C. Is more profitable.
D. Is less risky.

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PROF. JOHN BO S. CAYETANO
45. The following information relates to Paterno Company:
Sales revenue P10,000,000
Contribution margin 4,000,000
Net income 1,000,000
If a manager at Paterno desired to determine the percentage impact on net income of a given percentage change in sales,
the manager would multiply the percentage increase/decrease in sales revenue by:
A. 0.25 C. 2.50
B. 0.40 D. 4.00

46. Green Company's variable expenses are 75% of sales. At a sales level of P400,000, the company's degree of operating
leverage is 8. At this sales level, fixed expenses equal:
A. 87,500 C. 50,000
B. 100,000 D. 75,000

47. The following information relates to Hera Corporation for last year:
Sales P500,000
Net operating income P25,000
Degree of operating leverage 5
Sales at Hera are expected to be P600,000 next year. Assuming no change in cost structure, this means that net operating
income for next year should be:
A. 30,000 C. 50,000
B. 45,000 D. 125,000

48. Fox Company's contribution margin ratio is 20%. If the degree of operating leverage is 15 at the P225,000 sales level, net
operating income at the P225,000 sales level must equal:
A. 2,250 C. 3,000
B. 6,750 D. 5,063

49. Sales in North Company increased from P60,000 per year to P63,000 per year while net operating income increased from
P10,000 to P12,000. Given this data, the company's degree of operating leverage must have been:
A. 4.0 C. 5.0
B. 1.5 D. 21.0

50. The profit increases by 30% when sales go up by 20%. If current profit is ₱6,000, then how much is the contribution
margin?
A. ₱ 4,000 C. ₱ 9,000
B. ₱ 8,000 D. ₱10,000

Sales Mix
51. Sales mix refers to the
A. different volume of sales achieved during the year.
B. contribution margins achieved on the different products during the year.
C. relative proportions of different products that constitute total sales.
D. mix of variable and fixed costs.
E. mix of materials purchased for proportion.

52. Critical to CVP analysis in a multi-product company is that

A. the products be complementary.
B. the products be sold to the same kinds of customers.
C. all products have about the same contribution margin percentages.
D. the sales mix is relatively constant.

Use the following for numbers 53-54:

Lamar & Co., makes and sells two types of shoes, Plain and Fancy. Data concerning these products are as follows:
Plain Fancy
Unit selling price P20.00 P35.00
Variable cost per unit 12.00 24.50
Sixty percent of the unit sales are Plain, and annual fixed expenses are P45,000.
53. The weighted-average unit contribution margin is:
A. 4.80 C. 9.25
B. 9.00 D. 17.00

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PROF. JOHN BO S. CAYETANO
 54. Assuming that the sales mix remains constant, the total number of units that the company must sell to break even is:
A. 2,432 C. 4,737
B. 2,647 D. 5,000

55. Assuming a constant mix of 3 units of Small for every 1 unit of Large.
Small Large Total
Sales P20 P30
Variable cost per unit 14 18
Total fixed costs P48,000
The breakeven point in units would be
A. B. C. D.
Small 4,800 1,200 1,600 400
Large 1,600 400 4,800 1,200

56. The following information is for Barnett Corporation:

Product X Product Y
Revenue P10.00 P15.00
Variable Cost 2.50 5.00
Total Fixed Costs P50,000
What is the breakeven point, assuming the sales mix consists of two units of Product X and one unit of Product Y?
A. B. C. D.
Product X 2,000 units 2,025 units 4,025 units 4,000 units
Product Y 1,000 units 1,012.5 units 2,012.5 units 2,000 units

57. Von Stutgart International’s breakeven point is 8,000 racing bicycles and 12,000 5-speed bicycles. If the selling price and
variable costs are P570 and P200 for a racer and P180 and P90 for a 5-speed, respectively, what is the weighted-average
unit contribution margin?
A. 100 C. 179
B. 145 D. 202

CVP Assumptions
58. Break-even analysis assumes over the relevant range that
A. Total variable costs are linear. C. Total variable costs are nonlinear.
B. Fixed costs per unit are constant. D. Total revenue is nonlinear. Barfield

59. Breakeven analysis assumes that over the relevant range

A. Variable costs are nonlinear. C. Selling prices are unchanged.
B. Fixed costs are nonlinear. D. Total costs are unchanged.

60. Which one of the following is correct regarding a relevant range?

A. Total variable costs will not change.
B. Total fixed costs will not change.
C. Actual fixed costs usually fall outside the relevant range.
D. The relevant range cannot be changed after being established.

SELF-TEST:

1. How does cost-volume-profit analysis allows management to determine the relative profitability of a product?
A. By highlighting potential bottlenecks in the production process.
B. By keeping fixed costs to an absolute minimum.
C. By determining the contribution margin and projected profits at various levels of production.
D. By assigning costs to a product in a manner that maximizes the contribution margin.

2. Breakeven quantity is defined as the volume of output at which revenues are equal to:
A. Total costs. C. Variable cost
B. Marginal costs. D. Fixed cost

3. Alpine Company wants to earn a 6% return on sales after taxes. The company's effective income tax rate is 40%, and its
contribution margin is 30%. If Alpine has fixed costs of P240,000, the amount of sales required to earn the desired rate of
return is:
A. P400,000 C. P1,000,000
B. P1,200,000 D. P375,000

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PROF. JOHN BO S. CAYETANO
4. Consider the equation X = Sales – [(CM/Sales) × (Sales)]. What is X?
A. Net income C. Contribution margin
B. Fixed costs D. Variable costs

5. What does sensitivity analysis refers to?

A. Control. C. Variable costs only
B. What-if situations. D. Fixed costs only

6. Madden Company has projected its income before taxes for next year as shown below. Madden is subject to a 40%
income tax rate.
Sales (160,000 units) P P 8,000,000
Less: Cost of sales
Variable costs 2,000,000
Fixed costs 3,000,000 5,000,000
Income before taxes P 3,000,000
Madden’s net assets are P36,000,000. The peso sales that must be achieved for Madden to earn a 10% after tax return on
assets would be
A. P 8,800,000 C. P16,000,000
B. P12,000,000 D. P6,880,000

7. The sales mix for Emory's Hardware is as follows:

Selling Variable Sales
price cost per xix
unit
Product A P 5.25 P 4.85 12 units
Product B 7.50 6.95 10 units
Product C 12.25 10.35 6 units
Emory's fixed costs are P75,950. What are the break-even units?
A. 98,000 C. 3,500
B. 2,000 D. 4,000

8. Pinklawan Electronics Co. is developing a new product, surge protectors for high-voltage electrical flows. The following unit
cost information relates to the product.
Direct materials P 3.25
Direct labor 4.00
Distribution 0.75
The company will also be absorbing P120,000 of additional fixed costs associated with this new product. A corporate fixed
charge of P20,000 currently absorbed by other products will not be allocated to this new product. How many surge
protectors (rounded to the nearest hundred) must Pinklawan sell at a selling price of P14 per unit to gain P30,000 additional
income before taxes?
A. 25,000 units. C. 28,300 units.
B. 10,700 units. D. 12,100 units.

Use the following for numbers 9-10:

The following information relates to financial projections of Big Co. for 2023:
Projected sales 60,000 units
Projected variable costs P2.00 per unit
Projected fixed costs P50,000 per year
Projected unit sales price P7.00
9. How many units would Big Co. need to sell in 2023 to earn a profit before taxes of P10,000?
A. 25,714 C. 8,571
B. 10,000 D. 12,000

10. If Big Co. achieves its projections in 2023, what will be its degree of operating leverage?
A. 6.00 C. 1.68
B. 1.20 D. 2.40

11. A company has a break-even point of 200,000 units and earns a ₱100,000 profit at sales of 250,000 units. Which of the
following is true?
A. Fixed costs are ₱400,000.
B. Total contribution margin at 200,000 units is ₱100,000.
C. Profit at sales of 300,000 units is ₱120,000.
D. Selling price per unit is ₱2.
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PROF. JOHN BO S. CAYETANO
12. Excellent Corp. produces motherboard at a special economic zone in Central Luzon. It is now considering to shift to new
automated equipment instead of its present facility. Management was given the mandate to shift if its break even point
will materially be improved with a minimum of 10% reduction in volume. Below are the pertinent information:
Existing With
Automation
Sales in units 800,000 900,000
Selling price P 30 P 30
Variable costs per unit 15 13
Fixed costs 775,000 892,500
The company should
A. Not shift since the break-even volume will not change.
B. Not shift since the break-even volume will even increase by 1.61% with the automation.
C. Shift to automation since the 10% reduction in break-even volume could be achieved.
D. Shift to automation since the reduction in break-even volume will be more than 10%

Use the following for numbers 13-14:

John Cena is considering investing in a vending machine operating involving 50 vending machines located in various malls
around the city. The machine manufacturer reports that similar vending machines routes have produces a sales volume
ranging from 500 to 1,000 units per machine per month. The following information is made available to Mr. John Cena in
evaluating the possible profitability of the operation:
a. An investment of P25,000 will be required, P7,000 for merchandise and P18,000 for the 50 machines.
b. That machines have a service life of five years and no salvage value at the end of the period. Depreciation will be
computed on the straight line basis.
c. The merchandise (candies) retails for an average of P0.15 per unit and will cost John an average of P0.06 per unit.
d. Owners of the building in which the machines are located are paid a commission of P0.03 per unit of candy sold.
e. One man will be hired to service the machines. He will be paid P700 per month.
f. Other expenses are estimated at P200 per month. These expense do not vary with the number of units sold.
13. The estimated break even point in units per month is
A. 75,000 C. 20,000
B. 10,000 D. 240,000

14. What sales volume per month will be necessary to produce a return of 12% before taxes on John’s investment during his
first year of operations?
A. 70,000 C. 24,167
B. 9,667 D. 125,000

15. Gol Co. manufactures and sells two products with selling prices and variable costs as follows:
A B
Selling price P 18.00 P 22.00
Variable costs 12.00 14.00
Gol's total annual fixed costs are P38,400. Gol sells four units of A for every unit of B. If operating income last year was
P28,800, what was the number of units Gol sold?
A. 5,486 C. 9,600
B. 6,000 D. 10,500

16. A ceramics manufacturer sold cups last year for P7.50 each. Variable costs of manufacturing were P2.25 per unit. The
company needed to sell 20,000 cups to break even. Net income was P5,040. This year, the company expects the price per
cup to be P9.00; variable manufacturing costs to increase 33.3%; and fixed costs to increase 10%. How many cups (rounded)
does the company need to sell this year to breakeven?
A. 17,111 C. 19,250
B. 17,500 D. 25,667

17. Bonita Corporation produces a product that is sold for P80 per unit. This year the variable cost to produce and sell each unit
is P60. Next year, materials and labor costs are expected to increase, so the variable cost per unit will increase by P5. The
fixed costs this year are P285,000 and are expected to be the same next year. The president of the company is concerned
about the amount of additional sales volume required next year to earn the same pretax profit, which average P12 per unit
this year. Considering the expected increase in variable cost per unit, and assuming that the company desires to earn the
same profit of P12 per unit next year, the company’s sales, break even sales, and margin of safety will:
Sales Break even sales Margin of safety
A. Not change Not change Not change
B. Not change Increase Decrease
C. Increase Not change Increase
D. Increase Increase Increase

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PROF. JOHN BO S. CAYETANO
18. Wheels Corp. employs 45 sales personnel to market its sedan cars. The average car sells for P690,000 and a 6% commission
is paid to the sales person. It is considering changing the scheme to a commission arrangement that would pay each person
a package of P30,000 plus a commission of 2% of the sales made by the person.
The amount of total monthly car sales at which Wheels Corp. would be indifferent (answer may be rounded off) as to which
plan to select is
A. 45,000,000 C. 33,750,000
B. 36,500,000 D. 22,250,000

19. Evergreen Corp. has provided the following data:

Sales per period 1,000 units
Selling price P40 per unit
Variable manufacturing cost P12 per unit
Selling expenses P5,100 plus 5% of selling price
Administrative expenses P3,000 plus 20% of selling price
The margin of safety percentage would be:
A. 45% C. 55%
B. 71.4% D. 25%

20. Buddy Company sells its single product for P40 per unit uses cost volume profit analysis in its planning. The company’s after-
tax net income for the past year was P1,188,000 after applying an effective tax rate of 40%. The projected costs for
manufacturing and selling its single product in the coming year are in the next column:
Variable Costs Per Unit Fixed Costs
Direct material P 5.00
Direct labor 4.00
Manufacturing overhead 6.00 P6,200,000
Selling and administrative costs 3.00 3,700,000
Total P18.00 P9,900,000
The peso sales volume required in the coming year to earn the same after-tax net income as the past year is
A. 21,600,000 C. 23,400,000
B. 23,400,000 D. 20,160,000

21. Carpenter Company have the following income statements for 2021:
Sales P100,000
Variable costs 20,000
Contribution margin P 80,000
Fixed costs 50,000
Net income P 30,000
What is the degree of operating leverage for Carpenter Company for 2021?
A. 2.667 C. 1.667
B. 0.375 D. 1.250

22. Which of the following best describes the impact of increasing the sales price?
A. The increase in sales price increases contribution margin per unit, causing net income to decrease.
B. The increase in sales price increases contribution margin per unit causing the break-even point to decrease.
C. The increase in sales price means more units are sold.
D. The increase in sales price means an increase in variable cost.

23. Which of the following formulas is used to calculate the contribution margin ratio?
A. (Sales - Fixed expenses)/Sales C. (Sales - Variable expenses)/Sales
B. (Sales - Cost of goods sold)/Sales D. (Sales - Total expenses)/Sales

24. Which of the following equations is true?

a. Sales = variable costs + fixed costs + net income
b. Variable costs = sales – fixed costs – net income
c. Fixed costs = sales – variable costs – net income
d. All of the above equations are true
e. None of the above equations are true

25. When used in cost-volume-profit analysis, sensitivity analysis

a. Determines the most profitable mix of product to be sold
b. Allows the decision maker to introduce probabilities in the evaluation of decision alternatives
c. Computes profit per unit of production and determines the optimum production of the company
d. It is done through various possible scenarios and computes the impact on profit of various predictions of future
events
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PROF. JOHN BO S. CAYETANO
26. On January 1, Lake Corporation increased its management salaries. All other costs and revenues were unchanged. How did
this increase affect Lake's break-even point and margin of safety?
A. B. C. D.
Break-even Point Increase Increase Decrease Decrease
Margin of Safety Increase Decrease Decrease Increase

27. Assuming all other things are the same, variable cost per unit must have ________ if there was an increase in the breakeven
point.
a. Remained the same C. Increased
b. Increased first, then decreased D. Decreased

28. For a profitable company, the amount by which sale can decline before losses occur is known as the
a. Degree of operating leverage C. Marginal income rate
b. Sales mix D. Margin of safety

29. In a company with low operating leverage

a. Fixed costs are high and variable costs are low
b. Large changes in sales volume result in small changes in net income
c. There is a higher possibility of net loss than a higher-leveraged firm
d. Less risk is assumed than in a highly leveraged firm

30. Statement 1 The breakeven point is defined as the sum of variable expenses and fixed expenses
Statement 2 As sales exceed the break-even point, a low contribution margin percentage would
in lower profits than would a high contribution margin percentage.
Statement 3 All fixed costs are treated as period costs when variable costing is used.
A. B. C. D.
Statement 1 True False False False
Statement 2 True True False False
Statement 3 True True True False

31. The most likely strategy to reduce the break-even point would be to
A. Increase both the fixed cost 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

Use the following for numbers 32-33:

Metro Rugs is holding a two-week carpet sale at Ukayan, a local warehouse store. Metro Rugs plans to sell carpets for P500
each. The company will purchase the carpets from a local distributor for P350 each, with the privilege of returning any unsold
units for a full refund. Ukayan has offered Metro Rugs two payment alternatives for the use of space.
• Option 1 – A fixed payment of P5,000 for the sale period.
• Option 2 – A 10% total revenues earned during the sale period.
32. Assume Metro Rugs will incur no other costs. What level of revenues will Metro Rugs be indifferent between the two
payment options?
A. 50,000 C. 10,000
B. 17,000 D. 0

33. At a sales level of 100 units, the degree of operating leverage under Option 2 is
A. 1.50 C. 1.00
B. 5.00 D. 5.50

34. The following information is available on Furniture Co’s two product lines:
Chairs Tables
Sales P 180,000 P 48,000
Variable cost (96,000) (30,000)
Contribution margin P 84,000 P 18,000
Fixed cost:
Avoidable (36,000) (12,000)
Unavoidable (18,000) (10,800)
Operating income P 30,000 P 4,800

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PROF. JOHN BO S. CAYETANO
 Assuming the tables line is discontinued, and the factory space previously used to make tables rented for P24,000 per year,
operating income will increase by what amount?
A. 13,200 C. 24,000
B. 18,000 D. 28,800

35. Below is an income statement for June Co. for 2020:

Sales P 400,000
variable costs (125,000)
Contribution margin P 275,000
Fixed costs (200,000)
Profit before taxes P 75,000
Which of the following statements is correct?
A. June’s degree of operating leverage is 5.33.
B. Based on the cost and revenue structure on the income statement, June’s break-even point for 2020 in pesos is P200,000.
C. June’s margin of safety for 2020 is 109,091 units.
D. None of the above.

36. Assuming that the fixed costs are expected to remain at P200,000 for 2021 and the sales price per unit and variable costs per uni
are also expected to remain constant, how much profit before taxes will be produced if the company anticipates 2021 sales rising
to 130 percent of the 2020 level?
A. 97,500 C. 157,500
B. 195,000 D. A prediction cannot be made from the information given.

37. Below are income statement that apply to three company:

Company A Company B Company C
Sales P 100 P 100 P 100
Variable costs (10) (20) (30)
Contribution margin P 90 P 80 P 70
Fixed costs (30) (20) (10)
Profit before taxes P 60 P 60 P 60
Which of the following is incorrect?
A. Within the relevant range, if sales go up by P1 for each firm, Company A will experience the greatest increase in profit.
B. At sales of P100, Company A has the lowest degree of operating leverage.
C. At sales of P100, Company C has the highest margin of safety.
D. Company A has the highest break-even point

38. Litton Productions, Inc. owns and operates a chain of movie theaters. The theaters in the chain vary from low volume, small
town to high volume, Big City/downtown theaters. Management is considering installing machines that will make popcorn
on the premises. This proposed feature would be properly advertised and is intended to increase patronage at the
company’s theaters.

These machine are available in two different sizes with the following details:
Economy Popper Regular Popper
Annual capacity (in boxes) 50,000 120,000
Costs
Annual machine rental P 80,000 P110,000
Popcorn cost per box 1.30 1.30
Cost of each box 0.80 0.80
Other variable costs/box 2.20 1.40
The level of output in boxes at which the Economy Popper and the Regular Popper would earn the same profit (loss) is
A. 50,000 C. 37,500
B. 65,000 D. 40,000

39. Harry 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 Harry can expend for variable costs per unit and still meet its profit objective if
the sales price per unit is estimated at P6?
A. 3.37 C. 3.00
B. 3.59 D. 3.70

40. Bernice Company has an average unit cost of ₱45 at 10,000 units and ₱25 at 30,000 units. Assuming a unit selling price of
₱40, what is the margin of safety at ₱1,000,000 sales?
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PROF. JOHN BO S. CAYETANO
 A. 6,000 units C. 13,000 units
B. 12,000 units D. 20,000 units

41. The following costs have been estimated based on sales of 30,000 units
Total annual cost Percent that is Variable
Direct materials ₱ 300,000 100%
Direct labor 250,000 100%
Manufacturing overhead 250,000 50%
Selling and administrative expense 150,000 25%
What unit selling price will yield a contribution margin of 40%
A. ₱ 59.38 C. ₱ 39.58
B. ₱ 43.75 D. ₱ 33.25

42. Brenda Company with ₱210,000 of fixed cost has the following data:
Product X Product Y
Unit selling price ₱ 10 ₱5
Unit variable cost 8 4
Assume that 3 units of X are sold for each unit of Y. How much is the contribution margin of product x at its breakeven
point?
A. ₱ 900,000 C. ₱ 120,000
B. ₱ 180,000 D. ₱ 90,000

43. Boss Amo Company has 3,200 machine hours of plant capacity and infinite labor hours available for manufacturing two
products with the following characteristics:
Product S Product T
Selling price ₱ 200 ₱ 165
Cost:
Direct materials 80 40
Direct labor 40 35
Variable overhead 15 30
Fixed overhead 10 20
Variable operating expense 40 20
Net income ₱ 15 ₱ 20
Direct labor applied on the basis of labor hours while variable overhead applied on the basis of machine hours. Assuming
that there is no market limit, what is the maximum contribution margin that could be attained under the scenario?
A. ₱ 96,000 C. ₱ 72,000
B. ₱ 80,000 D. ₱ 64,000

44. Bladder Company manufactures and sells native bracelets to assorted prints. Data for the previous year were as follows:
Selling price per piece ₱ 8.00
Variable cost per piece 2.00
Net post-tax income 5,850
The number of bracelets to breakeven is 25,000 units. For the coming year, the company estimates that the selling price
will be ₱ 9.50 per piece, variable cost to manufacture will increase by 25%, and fixed costs will increase by 20%. Income
tax rate of 35% remains constant. How many units are required to maintain the same income as last year?
A. 26,000 units C. 28,333 units
B. 27,000 units D. 29,666 units

45. The following data pertains to Brian Company:

Total Per unit
Sales (40,000 units) ₱ 1,000,000 ₱ 25
Raw materials 160,000 4
Direct labor 280,000 7
Factory overhead
Variable 80,000 2
Fixed 360,000
Selling and general and admin
Variable 120,000 3
Fixed 225,000
Assuming that Brain sells 80,000 units, what is the maximum that can be paid for advertising campaign while still breaking
even?
A. ₱ 135,000 C. ₱ 695,000
B. ₱ 535,000 D. ₱1,015,000

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PROF. JOHN BO S. CAYETANO