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Module 2 - CVP Analysis SMA
Module 2 - CVP Analysis SMA
Module 2 - CVP Analysis SMA
Answer:
a. 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.
b. It is useful in profit planning by way of a systematic analysis of the profit’s relationship with various costs and volume
of sales.
2) What are the factors affecting profit and what will be the effect?
Answer: There are four important factors that will affect the operating profit of the company, namely:
a. Selling Price – the selling price will have a direct (same) effect on the profit.
(i.e., increase in selling price = increase in profit, decrease in selling price = decrease in profit)
b. Variable Cost Per Unit – the variable cost per unit will have an inverse (opposite) effect on the profit.
(i.e., increase in variable cost/unit = decrease in profit, decrease in variable cost/unit = increase in profit)
c. Total Fixed Cost – the total fixed cost will have an inverse (opposite) effect on the profit.
(i.e., increase in total fixed cost = decrease in profit, decrease in total fixed cost = increase in profit)
d. Volume (a.k.a. units sold) – the volume will have a direct (same) effect on the profit.
(i.e., increase in volume = increase in profit, decrease in volume = decrease in profit)
3) What is the approach that will be used by the company in CVP analysis?
Answer: The approach or the statement that the company will be using is the contribution margin income statement
approach. 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.
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.
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4) What is contribution margin and how it can be computed?
Answer: 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 (product and period variable cost) XX
Total contribution margin P XX
Change in Profit
= Contribution margin ratio (a.k.a. CMR)
Change in Sales
Important notes!
Total sales
= Selling price per unit
Number of units sold
2. If variable cost per unit is not available, it can be determined by following these steps:
First – determine the variable PRODUCT cost per unit. Be careful on the given information, the basis of the per
unit variable cost is either units produced or units sold depending on the information given:
(2) “total variable cost included in the cost of goods sold (income statement)”
Second – determine the variable PERIOD cost per unit. Unlike variable product cost, the basis for variable
period cost per unit is always the number of units sold.
Third – compute the variable cost per unit (product and period combined)
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Variable cost per unit P XX
5) What will be the new operating income when there are changes in the four factors that affects the operating
income?
Answer: The four factors affecting the operating income are: (1) selling price; (2) unit variable cost; (3) fixed cost; and
(4) volume. The expected question is “after one or both factors change what will be the new operating profit?”
Answer: 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.
Alternative 1.
Alternative 2.
Alternative 1.
Alternative 2.
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7) How to determine the amount of sales needed (peso and units) to obtain a target operating income (a.k.a. target
sales)?
Answer: 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”.
Alternative 1.
Alternative 2.
Alternative 1.
Alternative 2.
Alternative 1.
Alternative 2.
Alternative 1.
Alternative 2.
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e) Target sales expressed in percentage of sales (e.g., desired profit is 15% of sales)
(1) In Peso
(2) In Units
f) Target sales expressed in peso per unit sold (e.g., desired profit is P2 per unit sold)
(1) In Peso
(2) In Units
Answer: 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.
Alternative 1:
Alternative 2:
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9) What is indifference point and how can it be computed?
Answer: 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.
Second – Compute the difference contribution margin per unit for each alternative:
Second – Compute the difference contribution margin ratio for each alternative:
10) What is degree of operating leverage (DOL) and how it is being computed?
Answer: 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:
Alternative 2:
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11) How to compute the break-even point of the company with multiple products (a.k.a. sales mix)?
Answer: Sales mix is the relative combination of quantities of sales of various products that make up the total sales of
a company.
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 is 2:8).
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).
Answer:
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.
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2.1 CONTRIBUTION INCOME STATEMENT.
1) 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
B. 25
C. 47
D. 55
Use the following information for the next six (6) questions:
Given the following projected contribution income statement for the coming year:
5) How much is the operating income if only 80 units will be sold instead of 100 units?
A. 1,000
B. 2,400
C. 3,000
D. 1,600
6) How much is the increase in operating income if 150 units will be sold instead of 100 units?
A. 6,500
B. 3,500
C. 4,500
D. 1,500
7) How much is the operating income if the variable cost per unit is P32 and sold 100 units?
A. 2,800
B. 2,450
C. 3,200
D. 5,000
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8) Tierra Company prepared the following preliminary forecast concerning Product X for 2021 assuming no expenditure
for advertising:
Use the following information for the next two (3) questions:
Basic Company incurred the following costs in the production of P10,000 units of its main product, product X:
12) 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%
B. 40%
C. 70%
D. 90%
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2.2 BREAK-EVEN POINT.
13) 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
B. 15,625 units
C. 16,400 units
D. 16,625 units
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
B. 636,364
C. 729,730
D. 181,818
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18) 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
B. 20 percent
C. 40 percent
D. 60 percent
19) 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
B. 300,000
C. 800,000
D. 100,000
20) In planning its operations for 2021 based on a sales forecast of P6,000,000, Throne, Inc., prepared the following
estimated cost:
Variable cost Fixed cost
Direct material P1,600,000
Direct labor 1,400,000
Factory overhead 600,000 900,000
Selling expenses 240,000 360,000
Administrative expenses 60,000 140,000
3,900,000 1,400,000
What would be the amount of sales in pesos at the break-even point?
A. 2,250,000
B. 3,500,000
C. 4,000,000
D. 5,300,000
21) 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
B. 7,647 units
C. 13,700 units
D. 16,250 units
22) A recent income statement of East Corporation reported the following data:
If the company desired to earn a target net profit of P820,000, it would have to sell:
A. 2,000 units
B. 2,050 units
C. 4,050 units
D. 6,750 units
23) The following is Addison Corporation's contribution format income statement for last month:
Sales P1,000,000
Less variable expenses 700,000
Contribution margin 300,000
Less fixed expenses 180,000
Net income P 120,000
The company has no beginning or ending inventories. A total of 20,000 units were produced and sold last month.
How many units would the company have to sell to attain target profits of P150,000?
A. 22,000 units
B. 37,500 units
C. 25,000 units
D. 26,667 units
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24) 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
B. 2,250,000
C. 2,000,000
D. 1,075,000
25) Assume the following cost behavior data for Brooks Company:
A. 8,600 units
B. 27,500 units
C. 14,000 units
D. 20,000 units
26) 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:
How many units must Barney sell to earn an after-tax profit of P180,000?
A. 42,000
B. 51,000
C. 45,000
D. 61,000
27) 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
B. 3.59
C. 3.00
D. 3.70
28) 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
B. 525,000
C. 472,500
D. 420,000
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2.4 INDIFFERENCE POINT.
29) 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
B. 12,500 units
C. 21,429 units
D. 21,249 units
30) 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:
31) 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
§ 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 B. 750 C. 900 D. 3,333
32) 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
B. 600,000
C. 120,000
D. 880,000
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34) 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
B. 400,000
C. 1,000,000
D. 1,200,000
Use the following information for the next two (3) questions:
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.
36) What is the current sales in peso for the month of May?
A. 333,333
B. 714,286
C. 666,667
D. 384,615
37) 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
B. 200,000
C. 600,000
D. 50,000
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
B. 0.40
C. 2.50
D. 4.00
39) A firm has fixed operating costs of P175,000, total sales revenue of P3,000,000 and total variable costs of
P2,250,000. The firm's degree of operating leverage is ______.
A. 0.77
B. 1.30
C. 0.81
D. 4.29
40) 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
B. 100,000
C. 50,000
D. 75,000
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41) 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
B. 6,750
C. 3,000
D. 5,063
42) 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
B. 1.5
C. 5.0
D. 21.0
Use the following information for the next two (2) questions:
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.
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
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47) 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
B. 145
C. 179
D. 202
48) Wren Co. manufactures and sells two products with selling prices and variable costs as follows:
49) Catfur Company has fixed costs of P300,000. It produces two products, X and Y. Product X has a variable cost
percentage equal to 60% of its P10 per unit selling price. Product Y has a variable cost percentage equal to 70%
of its P30 selling price. For the past several years, sales of Product X have averaged 66-2/3% of the sale of Product
Y. That ratio is not expected to change. What is Catfur’s breakeven point in dollars?
A. 300,000
B. 750,000
C. 857,142
D. 942,857
50) The data below pertain to two type of products manufactured by Kron Corporation. Fixed costs total P300,000
annually. The expected mix in units is 60% for Product Sun and 40% for Product Moon.
51) Look At You is a company with P280,000 of fixed costs has the following data:
Assume three units of Product Sword are sold for each unit of Product Shield sold. How much will sales be in peso
of Product Shield at the breakeven point?
A. 200,000
B. 240,000
C. 280,000
D. 840,000
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52) Gardner Furniture Company produces two kinds of chairs: an oak model and a chestnut wood model. The oak
model sells for P60 and the chestnut wood model sells for P100. The variable expenses are as follows:
Oak Chestnut
Variable production costs per unit P30 P35
Variable selling & admin. expenses per unit 6 5
Expected sales in units next year are: 5,000 oak chairs and 1,000 chestnut chairs. Fixed expenses are budgeted at
P135,000 per year. The company's overall contribution margin ratio for the expected sales mix is:
A. 40%
B. 45%
C. 50%
D. 60%
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