MAS-02: CVP Analysis

Exercise I: CVP formulas

Complete the table below with the following information.
The company's break even sales are P528,000. Selling price is P500.
The variable cost ratio to sales is 60%, while the profit ratio is 8%.

Ratio @
Volume x Price = Amount Ratio at BEP BEP
Sales
Variable costs
Contribution margin
Fixed costs
Net profit/ EBIT

Units x Price = Amount Ratio

Sales
Break-even sales
Margin of safety

Determine the formula of the following:

1. Fixed costs 7. Break-even sales (BES) 13. NP ratio (NPR)/ Return on sale (ROS)
2. Actual sales 8. BES Ratio (BESR) 14. Variable costs (VC)
3. Profit 9. BES in units (BESU) 17. VC per unit (VC/u)
4. Margin of safety (MS) 10. Contribution margin (CM) 18. VC ratio (VCR)
5. MS ratio (MSR) 11. CM ratio (CMR) 19. Actual sales in units
6. MS in units (MSU) 12. CM per unit (CM/u) 20. Fixed cost ratio (FCR)

Exercise II: Units sales with target profit after tax

The company sells a product to retailers for P200. The unit variable cost is P40 plus a selling commission of 10%.
Fixed manufacturing costs totals P1,000,000 per month, while fixed selling and administrative cost equals
P420,000. The income tax rate is 30%. The target sales assuming after tax income of P 123,200 would be:

Exercise III: Peso sales with target return on sale

The company sells Product V for P 5 per unit. Fixed cost is P210,000 and the variable cost is 60% of the selling
price.

Q1. What would be the amount of sales if the company is to realize a profit of 10% of sales?
Q2. How many units must be sold to realized 10% ROS?

Exercise IV: Sales Mix

A. The following data pertain to the two products manufactured by the company
Per Unit
Products Selling Price Variable Cost
A P 240 P 140
B P 1,000 P 400

Fixed cost totals P 600,000 annually. The expected sales mix in units is 60% for product A and 40% for product B. Q1.
How many units of the two products together must the company sell to break-even?
Q2. How many units of A must be sold to break-even?
Q3. How many units of B must be sold to break-even?

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B. The company had the following sales results for current year:
TV sets CD player Radios
Peso sales
0.30 0.30 0.40
component ratio
Contribution
0.40 0.40 0.60
margin ratio
The company had fixed costs of P2,400,000. The break even sales in peso for the company are:

1. TV sets
2. CD player
3. Radios

Exercise V: Degree of operating leverage

The corporation sells set of encyclopedias. It sold 4,000 sets last year at P250 a set. If the variable cost per set was
P175, and the fixed costs for the company were P100,000, What is the company’s degree of operating leverage
(DOL)?

Exercise VI: Indifference point

Machine A has fixed costs of P225,000 and a contribution margin per unit of P120. Machine B has fixed costs of
P300,000 and a contribution margin per unit of P140. What is the indifference point, in units?

Multiple Choices:

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

a. Variable costs c. Selling and administrative costs
b. Sales revenues d. Fixed costs

2. The company plans to market a new product. Based on its market studies, the company estimates that it can
sell 5,500 units in a year. The selling price will be P 2 per units. Variable cost is estimated to be 40% of the
selling price. Fixed cost is estimated to be P 6,000. What is the break – even point?
a. 3,750 units c. 5,500 units
b. 5,000 units d. 7,500 units

3. Once the breakeven point has been reached operating income will increase by the?
a. Gross margin per units for each additional unit sold
b. Contribution margin per units for each additional unit sold
c. Fixed costs per units for each additional unit sold
d. Variable costs per unit for each additional unit sold

4. The following data refer to cost-volume-profit relationship of Albert Co.

Breakeven point in units 1,000
Variable cost per unit P 250
Total fixed cost P 75,000

How much will be contributed to operating income by the 1,001 unit sold?
a. P250 c. P75
b. P 325 d. Zero

5. In planning its operations for the year based on sales forecast of P 6,000,000, the company prepared the
following estimated data:
Cost and expenses
Variable Fixed
Direct materials P 1,600,000
Direct labor 1,400,000
Factory overhead 600,000 900,000
Selling expenses 240,000 360,000
Administrative expenses 60,000 140,000
P 3,900,000 P 1,400,000

What would be the amount of sales in pesos at the break- even point?
a. P2,250,000 c. P4,000,000
b. P3,500,000 d. P5,300,000

6. For the period just ended, Lorna Company generated the following operating results in percentages:

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 Revenues 100%
Cost of sales
Variable 50%
Fixed 10%
Total 60%
Gross profit 40%
Operating expenses
Variable 20%
Fixed 15%
Total 35%
Operating income 5%

Total sales amounted to P 3 million. How much was the break – even sales
a. P 1,875,000 c. P 2,850,000
b. P 2,500,000 d. P 3,750,000

7. The present break-even sale of the company is P550,000 per year. It is computed that if fixed expenses will go
up by P60,000, the sales required to break-even will also increase to P 70,000, without any change in the
selling price per unit an on the variable expenses.
Before the increase of P 60,000 the total fixed expense of the company is :
a. P 200,000 c. P 280,000
b. P 220,000 d. P 330,000

8. 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 22
Sales commission ( on sales ) per unit 5%
Fixed costs and expenses
Manufacturing overhead P5, 598,720
General and administrative P 3,732,480
Effective income tax rate 40%
The number of units of 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

9. The most likely strategy to reduce the breakeven point, would be to

a. increase both the fixed cost and the contribution c. decrease the fixed cost and increase the
margin contribution margin
b. decrease both the fixed cost and the contribution d. increase the fixed costs and decrease the
margin contribution margin

10. One of the major assumptions limiting the reliability of breakeven analysis is that
a. Efficiency and productivity will continually increase c. Total fixed costs will remain unchanged over the
relevant range
b. Total variable costs will remain unchanged over the d. The costs of production factors varies with
relevant range changes in technology

11. Which of the following would cause the break-even point to change?
a. Sales increased c. Total variable costs increased as a function of
higher production
b. Total production decreased d. Fixed costs increased owing to additional
equipment in physical plant

12. The company is planning to sell 100,000 units of product A for P 12 a unit. The fixed cost amounted to
P280,000. In order to realize a profit of P200,000, what would the variable cost be?
a. P 480,000 c. P 300,000
b. P 720,000 d. P 220,000

13. The company is planning to sell 200,000 units of product F. the fixed cost is P400,000 and the variable cost is
60% of the selling price. In order to realize a profit of P100,000, the selling price per unit would have to be
a. P 3.75 c. P 6.00
b. P 4.17 d. P 6.25

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14. The company prepared the following preliminary forecast concerning Product D for the current year assuming
no expenditure for advertising:
Selling price per unit P 10
Unit sales P 100,000
Variable costs P 600,000
Fixed costs P 300,000

Based on a market study in December of the prior year, the company estimated that it could increase the unit
selling price by 15% and increase the unit sales volume by 10% if P100,000 was spent in advertising. Assuming
that the company incorporates these changes in its current year forecast, what should be the operating
income for Product D.
a. P 175,000 c. P 205,000
b. P 190,000 d. P 365,000

15. The company aims to earn a 25% return on its P500,000 investment in equipment used in the manufacture of
product Y. Based on estimated sales of 10,000 units of Product Y next year, the cost per unit were estimated
as follows:
Variable manufacturing cost P25
Fixed selling and administrative cost 10
Fixed manufacturing cost 5
Product Y should be priced at

a. P 45.00 c. P 52.50
b. P 50.00 d. P 55.00

16. The company has fixed costs of P100,000 and breakeven sales of P800,000. What is its projected profit at
P1,200,000 sales? ( Hint : compute the constant contribution margin ratio)
a. P50,000 c. P200,000
b. P150,000 d. P400,000

17. The company is planning to produce two products, A and B. The company is planning to sell 100,000 units of A
at P4 a unit and 200,000 units of B at P3 per unit. Variable cost is 70% of sales for A and 80% of sales for B. In
order to realize a total profit of P160,000, what must the total fixed cost be?
A. 80,000 C. 240,000
B .90,000 D. D. 600,000

18. If the sales mix shifts towards higher contribution margin products , the break-even point.
A. Decreases C. Remains constant
B. Increases D. Is zero

19. For a profitable company, the amount by which sales can decline before losses occur is known as the
A. Sales volume variance C. Variable sales ratio
B. Hurdle rate D. Margin of safety

20. 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 breakeven contribution margin
C. The difference between budgeted sales and breakeven sales
D. The difference between the breakeven point in sales and cash flow breakeven

21. The company has sales of P100,000 fixed costs of P 50,000, and a profit of P10,000. What is the company’s
margin of safety?
A. P10,000 C. P33,333
B. P16,667 D. P83,333

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

23. The company’s variable costs are 75% of sales. At a sales level of P400,000, the company’s degree of operating
leverage is 8. At this level, fixed costs equal
A. P 87,500 C. P 50,000
B. P 100,000 D. P 75,000

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24. The indifference point is the level of volume at which a company
A. Earns the same profit under different operating schemes
B. Earns no profit
C. Earns its target profit
D. Earns large amount of profit

25. Machine X has fixed costs of P225,000 and a variable cost of P20. Machine Y has fixed costs of P300,000 and a
variable costs of P14. What is the indifference point, in units?
A. P 11,250
B. P 12,500
C. P 21,429
D. An amount that cannot be determined without more information

26. A point of indifference is reached when

A. The savings in fixed costs is equal to the decrease in variable cost
B. The savings in variable costs is equal to the increase in fixed costs
C. The savings in fixed costs is more than the increase in variable costs
D. The savings in variable costs is less than the increase in fixed costs

27. The corporation submitted to you the following condensed income statement

Sales (80% capacity) P 300,000

Variable costs P 180,000
Fixed costs 82,500 262,500
---------------- ----------------
Net income P 37,500
What is the break-even point as a percentage of capacity?
A. 45% C. 67.85%
B. 55% D. 68.75%

28. The following is the company’s cost behavior

5,000 units or less More than 5,000 units
Fixed costs P 35,000 P 45,000
Contribution margin ratio 20% 12.5%
Selling price, P 40

How many units must be sold to realize a net income of P 25,000?

A. 7,500 C. 11,000
B. 14,000 D. 12,500

29. Contribution margin ratio multiplied by the margin of safety ratio equals
A. Variable cost ratio C. Break even sales ratio
B. Fixed cost ratio D. Net profit ratio

30. The management of the company performed cost studies and projected the following annual costs based on
40,000 units of productions and sales:

Total annual costs % of variable costs to total costs

Direct materials P 400,000 100%
Direct labor 360,000 75%
Factory overhead 300,000 40%
Selling and administrative expense 200,000 25%

What unit-selling price will yield a 10% profit from sales of 40,000 units?

A. P 33.50 C. P 40.00
B. P 35.00 D. P 50.00

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