1

San Sebastian College – Recoletos

Canlubang Campus

Accounting Review/Seminar P-1

COST-VOLUME-PROFIT ANALYSIS

COST-VOLUME-PROFIT ANALYSIS (CVP analysis) examines the behavior of total revenues, total costs,
and operating income as charges occur in the output level, selling price, variable cost per unit, or fixed costs of
a product.

BREAK-EVEN SALES that point of activity level (sales volume) where total revenues equal total costs, i.e.,
there is neither profit nor loss.
***Methods of Computing Break-even point
1. Equation Method or algebraic approach
2. Contribution margin method or formula approach

m
er as
3. Graphic approach

co
MULTIPLE-PRODUCT ANALYSIS - When CVP analysis is used for a multiple-product firm, the product is

eH w
defined as a package of products. For example, if the sales mix is 3:1 for Products A and B, the package would
consist of 3 units of Product A and 1 unit of Product B.

o.
rs e
Break-even in packages for a multiple-product firm is then calculated as:
ou urc
Break-even packages = Fixed costs/ Weighted average contribution margin
o

SALES MIX – the composition of total sales in terms of various products, i.e., the percentage of each product
included in total sales
aC s
vi y re

CVP ANALYSIS AND RISK AND UNCERTAINTY:

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.
ed d

OPERATING LEVERAGE – a measure of the extent to which fixed costs are being used in an organization.
ar stu

The greater the fixed costs in relation to variable cost, the greater is the operating leverage available and the
greater is the sensitivity of income to changes in sales.

DEGREE OF OPERATING LEVERAGE (DOL) – a measure of the sensitivity of profit changes to changes in
is

sales volume. DOL measures the percentage of change in profit that results from a percentage of change in
sales.
Th

Degree of Operating Leverage (DOL) or Operating Leverage Factor (OLF) - a measure, at a given level of
sales, of how a percentage change in sales volume will affect profits.
sh

DEGREE OF OPERATING LEVERAGE (DOL)

or = Contribution Margin / Operating Income
Operating Leverage Factor (OLF)

 The higher the degree of operating leverage, the greater the change in profit when sales change.

PERCENTAGE CHANGE IN PROFIT = DOL x Percentage change in sales

This study source was downloaded by 100000797521638 from CourseHero.com on 06-25-2021 04:15:40 GMT -05:00

https://www.coursehero.com/file/15414311/Accrev-CVP/
 2

Problems:

1. Apple Zarucki Company produces a single product. The projected income statement for the coming year
follow:

Sales (50,000 units @ P45) P2,250,000

Less variable cost 1,305,000
Contribution margin 945,000
Less fixed costs 812,700
Operating income 132,300

REQUIRED:
a. Compute unit contribution margin and the unit that must be sold to break even.
b. Suppose that 30,000 units are sold above breakeven. What is the operating income?
c. Compute the contribution margin ratio and the breakeven point in pesos. Suppose that revenues are
P200,000 more than expected, what would the total operating income be?

m
Refer to the original data in answering each of the following questions:

er as
d. Determine the number of units that must be sold to earn before tax profit of P158,760.

co
e. Compute the amount of peso sales that must be generated to earn after tax profit of P138,915. (The tax

eH w
income rate is 30%.)
f. Compute the amount of peso sales that the company must generate to earn before tax profit of 22% of

o.
sales.
rs e
g. How many units must be sold to earn before tax profit per unit of P3.90?
ou urc
h. Compute the margin of safety in units and in pesos. What is the margin of safety ratio?
i. Compute the degree of operating leverage (rounded to three decimal places). Compute the new profit
level if sales are 20% higher than expected.
o
aC s

2. Balboa, Inc. had the following economic information for the year 2006:
vi y re

Sales (50,000 units @ P20) P1,000,000

Variable manufacturing costs 400,000
Fixed costs 250,000
ed d

Income tax rate 40 percent

Balboa, Inc. budgets its 2007 sales at 60,000 units or P1,200,000. The company anticipates an increased
ar stu

competition; hence, an additional P75,000 advertising costs is budgeted in order to maintain its sales
target for 2007.

What is the amount of peso sales needed for 2007 in order to equal the after-tax income in 2006?
is

A. P1,125,000 C. P1,325,000
Th

B. P1,187,500 D. P1,387,500

3. Santos Company is planning its advertising campaign for next year and has prepared the following budget
data based on a zero advertising expenditure:
sh

Normal plant capacity 200,000 units

Sales 150,000 units
Selling price P25 per unit
Variable manufacturing costs P15 per unit
Fixed manufacturing costs P800,000
Fixed selling costs P700,000

This study source was downloaded by 100000797521638 from CourseHero.com on 06-25-2021 04:15:40 GMT -05:00

https://www.coursehero.com/file/15414311/Accrev-CVP/
 3

An advertising agency claims that an aggressive advertising campaign would enable Santos to increase its
unit sales by 20%. What is the maximum amount that Santos Company can pay for advertising and have
an operating profit of P200,000 next year?
A. P100,000 C. P300,000
B. P200,000 D. P550,000 Bobadilla

4. Pansipit Company had a 25 percent margin of safety. Its after-tax return on sales is 6 percent. The income
is subject to tax rate of 40 percent. If fixed costs amount to P320,000, how much peso sales did Pansipit
make for the year?
A. P1,066,667 C. P1,280,000
B. P1,000,000 D. P 800,000 Bobadilla

Questions 5 through 9 are based on the Statement of Income of Davao, Inc. which represents the operating
results for the current fiscal year ending December 31. Davao had sales of 1,800 tons of product during the
current year. The manufacturing capacity of Davao’s facilities is 3,000 tons of product. Consider each
question’s situation separately.
Sales P900,000
Variable costs

m
Manufacturing P315,000

er as
Selling costs 180,000

co
Total variable costs P495,000

eH w
Contribution margin P405,000
Fixed costs

o.
Manufacturing P 90,000
Selling rs e 112,500
ou urc
Administration 45,000
Total fixed costs P247,500
Net income before income taxes P157,500
o

Income taxes (40%) (63,000)

Net income after income taxes P 94,500
aC s
vi y re

5. The breakeven volume in tons of product for the year is

A. 420 C. 1,100
B. 495 D. 550 Bobadilla
ed d

6. If the sales volume is estimated to be 2,100 tons in the next year, and if the prices and costs stay at the same
ar stu

levels and amounts next year, the after-tax income that Davao can expect for next year is
A. P135,000 C. P110,250
B. P283,500 D. P184,500 Bobadilla
is

7. Davao has a potential foreign customer that has offered to buy 1,500 tons at P450 per ton. Assume that all
of Davao’s costs would be at the same levels and rates as last year. What net income after taxes would
Th

Davao make if it took this order and rejected some business from regular customers so as not to exceed
capacity?
A. P297,500 C. P211,500
B. P252,000 D. P256,500 Bobadilla
sh

8. Without prejudice to your answers to previous questions, and assume that Davao plans to market its product
in a new territory. Davao estimates that an advertising and promotion program costing P61,500 annually
would need to be undertaken for the next two or three years. In addition, a P25 per ton sales commission
over and above the current commission to the sales force in the new territory would be required. How
many tons would have to be sold in the new territory to maintain Davao’s current after-tax income of
P94,500?

This study source was downloaded by 100000797521638 from CourseHero.com on 06-25-2021 04:15:40 GMT -05:00

https://www.coursehero.com/file/15414311/Accrev-CVP/
 4

A. 307.5 C. 273.3
B. 1,095.0 D. 1,545.0 Bobadilla

9. Without prejudice to preceding questions, assume that Davao estimates that the per ton selling price will
decline 10% next year. Variable costs will increase P40 per ton and the fixed costs will not change. What
sales volume in pesos will be required to earn an after-tax income of P94,500 next year?
A. P1,140,000 C. P1,500,000
B. P 825,000 D. P1,350,000 Bobadilla

10. Sales mix, new and upgrade customers. Exsel is a top-selling electronic spreadsheet product. Exsel is
about to release version 8.0. It divides its customers into two groups: new customers and upgrade customers
(those who previously purchased Exsel, 7.0 or earlier versions). Although the same physical product is
provided to each customer group, sizable differences exist in selling prices and variable marketing costs:

New Customers Upgrade Customers

m
Selling price 275 100

er as
Variable costs

co
Manufacturing 35 35

eH w
Marketing 65 100 15 50
Contribution margin P175 P50

o.
The fixed costs of Exsel, 8.0 are P15,000,000. The planned sales mix in units is 60% new customers and 40%
upgrade customers. rs e
ou urc
REQUIRED:
1) What is the Exsel, 8.0 breakeven point in units, assuming that the planned 60%:40% sales mis is
attained?
o

2) If the sales mix is attained, what is the operating income when 220,000 total units are sold?
aC s

3) Show how the breakeven point in units changes with the following customer mixes:
vi y re

a. New 40% and Upgrade 60%

b. New 80% and Upgrade 20%
c. Comment on the results
ed d
ar stu

***END***
is
Th
sh

This study source was downloaded by 100000797521638 from CourseHero.com on 06-25-2021 04:15:40 GMT -05:00

https://www.coursehero.com/file/15414311/Accrev-CVP/
Powered by TCPDF (www.tcpdf.org)