SAMPLE SOLVED PROBLEMS: BREAK-EVEN POINT & CVP ANALYSIS

Problem 1 (CVP Analysis – Comprehensive, with Sensitivity/Incremental Analysis) (RPCPA)

After reviewing its cost structure (variable costs of P7.50 per unit and monthly fixed costs of P60,000) and potential
market, Forehand Company established what it considered to be a reasonable selling price. The company expected to
sell 50,000 units per month and planned its monthly results as follows:

Sales P500,000
Variable costs 375,000
Contribution margin P125,000
Fixed costs 60,000
Income before P65,000
taxes
Income taxes (40%) 26,000
Net income P39,000

1. What selling price did the company establish?

2. What is the contribution margin per unit?
3. What is the breakeven point in units? in pesos?
4. What is the margin of safety (MOS) in pesos? in units? in percentage?

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5. Prove (using calculations) that the MOS contributes to the earning of profits.

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6. What is the degree of operating leverage (DOL)?

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7. If the company determined that a particular advertising campaign had a high probability of increasing sales by

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3,000 units, how much could it pay for such a campaign without reducing its planned profits?
8. If the company wants a P60,000 before-tax profit, how many units must it sell?

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9. If the company wants a 10% before-tax return on sales, what level of sales in pesos does it need?
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10. If the company wants a P45,000 after-tax profit, how many units must it sell?
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11. If the company wants an after-tax return on sales of 9%, how many units must it sell?
12. If the company wants an after-tax profit of P45,000 on its expected sales volume of 50,000 units, what price
must it charge?
13. If the company wants a before-tax return on sales of 16% on its expected sales volume of 50,000 units, what
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price must it charge?

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14. The company is considering offering its salespeople a 5% commission on sales. What would the total sales, in
pesos, have to be in order to implement the commission plan and still earn the planned pre-tax income of
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P65,000?

SOLUTIONS:
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(1) CMR = 25%

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SP per unit = P500,000 ÷ 50,000 units sold = P10 per unit

(2) CM per unit = P125,000 ÷ 50,000 units sold = P2.50 per unit
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(3) BEP units = P60,000 ÷ P2.50 = 24,000 units

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BEP pesos = P60,000 ÷ .25 = P240,000

(4) MOS pesos = Actual Sales – BEP Sales

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= P500,000 – P240,000

= P260,000

MOS units = Actual units sold – BEP units

= 50,000 units – 24,000 units

= 26,000 units

MOS % = MOS pesos ÷ Actual sales

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 = P260,000 ÷ P500,000

= 52%
(5) Proof #1 – using MOS pesos: PBT = MOS pesos x CMR

= P260,000 x .25

= P65,000

Proof #2 – using MOS units:PBT = MOS units x CMU

= 26,000 units x P2.50

= P65,000

Proof #3 – using MOS %: PBT % = MOS% x CMR = .52 x .25 = 13%

PBT = Actual Sales x PBT %

= P500,000 x .13

= P65,000

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(6) DOL = CM ÷ PBT = P125,000 ÷ P65,000 = 1.92x

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= 1 ÷ MOS % = 1 ÷ .52 = 1.92x
(7)

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New CM (53,000 units sold x P2.50)
Income before taxes
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P132,500
(65,000)
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Maximum Fixed Cost P67,500
Previous Fixed Cost (60,000)
Additional Fixed Cost P7,500
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(8)
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P60,000 FC + P60,000
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Sales volume = PBT = 48,000 units

P2.50 CMU

(9) Let X = Sales Volume in Pesos

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P60,000 FC + .10X
X = = P400,000
.25 CMR
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PROOF:
Sales P400,000
Multiply by: CMR x . 25
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Contribution Margin P100,000

Fixed Cost (60,000)
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PBT P40,000

PBT % = PBT ÷ Sales = P40,000 ÷ P400,000 = 10%

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(10) REMEMBER: Always convert PAT to PBT

P60,000 FC + (P45,000 PAT

Sales volume = ÷ .60) = 54,000 units
P2.50 CMU

(11) REMEMBER: Always convert PAT to PBT

Let X – Sales Volume in Units

P60,000 FC + [(.09
Sales volume = ÷ .60)(X)(P10)] = 60,000 units
P2.50 CMU
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 PROOF:

Sales volume 60,000

Multiply by: CMU x P2.50
Contribution Margin P150,000
Fixed Cost (60,000)
PBT P90,000
Income Tax (40%) (36,000)
PAT P54,000

Sales = 60,000 units x P10 = P600,000

PAT % = PAT ÷ Sales = P54,000 ÷ P600,000 = 9%

(12) REMEMBER: Always convert PAT to PBT

This is a RECONSTRUCTION PROBLEM

Sales worked back P510,000

amount
Variable Costs given in the problem (375,000)

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Contribution Margin P135,000

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Fixed Costs given in the problem (60,000)
Profit Before Tax (P45,000 ÷ .60) P75,000

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SP per unit = P510,000 ÷ 50,000 units = P10.20

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(13) Let X = Sales Volume in Pesos
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X (sales) – 375,000 (VC) – 60,000 (FC) = .16X (PBT)

.84X = P435,000
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X = P435,000 ÷ .84
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X = P517, 857

SP per unit = P517,857 ÷ 50,000 units sold = P10.36

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(14)
NOTE:
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- the additional 5% commission is an additional VC

- therefore, VC will be increased by 5% commission on sales
- increase in VC = decrease in CM
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- there will be a new CM% because the total VC and VC% will change
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New CMR = 25% original CMR – 5% commission

= 20%

Let X = Sales Volume in Pesos

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P60,000 FC + P65,000 PBT

X = (original) = P625,000
.20 CMR (new)

Problem 2 (CVP Analysis – with Sensitivity/Incremental Analysis) (RPCPA)

Armada Company manufactures a component used in farm machinery. The firm’s fixed costs are P2,000,000 per year.
The variable cost of each component is P1,000 and the components are sold for P1,500 each. The company sold
7,000 components during the prior year. Ignore income taxes in answering the following questions:

1. Compute the breakeven point in units.

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 2. What will the new breakeven point be if fixed costs increase by 5 percent?
3. What was the company’s net income for the prior year?
4. The sales manager believes that a reduction in the sales price to P1,400 will result in orders for more than
1,000 components each year. What will the breakeven point be if the price is changed?
5. Should the prince change be implemented?

SOLUTIONS:

(1) BEP units = P2,000,000 FC ÷ P500 CMU = 4,000 units

(2) BEP units (new) = (P2,000,000 x 1.05) ÷ P500 CMU = 4,200 units

(3)
Contribution Margin (7,000 units sold x P500 P3,500,000
CMU)
Fixed Cost (2,000,000)
Net Income P1,500,000

ALTERNATIVE COMPUTATION:

Since BEP is 4,000 units, and the company sold 7,000 units, each unit sold after BEP will earn profit up to the extent of
CMU

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Profit = (7,000 actual units – 4,000 BEP units) x P500 CMU

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= P1,500,000

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(4) rs e
NOTE: Reduction in SP per unit = reduction in CM per unit
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New CMU = P500 – P100 = P400

New BEP (units) = P2,000,000 FC ÷ P400 new CMU = 5,000 units

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(5)
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Profit (before) = 3,000 units (above BEP) x P500 (original CMU) = P1,500,000

Profit (after) = (7,000 units sold – 5,000 units new BEP) x P400 new CMU = P800,000
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DECISION: DO NOT IMPLEMENT THE PRICE CHANGE SINCE PROFIT WILL DECREASE
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Problem 3 (Sales Mix; CBEP; Determination of units for each sales mix using CBEP)

Dos Co. manufactures and sells 2 products: A and B. The projected information on these two products is given:
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Product A Product B
Sales in units 4,000 1,000
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Sales price per unit P12 P8

Variable costs per unit 8 4

Total fixed costs for the company are projected at P10,000.

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1.Compute Dos Co.'s projected break-even point in total units.

2.How many units would the company need to sell to produce an income before income taxes equal to 15 percent of sales?

SOLUTIONS:

(1)
Sales Mix – 4:1

CMU Sales Mix WACMU

(Allocation Factor)
Product A P4 4/5 P3.20
Product B P4 1/5 P .80
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 P4.00

OR: WACMU = (P4 x 4/5) + (P4 x 1/5) = P4.00

Better to use fractions than % for more accurate rounding

CBEP FC P10,000 2,500 A: (2,500 x 4/5) = 2,000 units

= = =
(units) WACMU P4 units B: (2,500 x 1/5) = 500 units

PROOF OF BEP:

Contribution Margin 2,500 units CBEP x P4 WACMU P10,000

(CBEP)
Fixed Costs given in the problem (10,000)
Profit P0

Contribution Margin – Product A 2,000 units from CBEP x P4 individual CMU P8,000
Contribution Margin – Product B 500 units from CBEP x P4 individual CMU P2,000
Total Contribution Margin P10,000
Fixed Costs given in the problem (10,000)
Profit P0
(2)

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Let X = Composite Sales Volume

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Unit SP Sales Mix WAUSP

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(Allocation Factor)
Product A P12 4/5 P9.60

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Product B P 8 1/5 P1.60
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FC + P10,000 + = P10,000 + 1.68X
X = PBT = [(P11.20)(X)(.15)]
WACMU P4 P4
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4X = P10,000 + 1.68X
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2.32X = P10,000
A: (4,310 x 4/5) = 3,448 units
= 4,310 units
X B: (4,310 x 1/5) = 862 units
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PROOF:
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Contribution Margin (composite 4,310 units CBEP x P4 WACMU P17,240

units)
Fixed Costs given in the problem (10,000)
Profit P7,240
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Profit Requirement = 15% of Sales

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= (P11.20)(X)(.15)

= P11.20 x 4,310 composite units x .15

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= P7,240

Contribution Margin – Product A 3,448 units from CBEP x P4 individual CMU P13,792
Contribution Margin – Product B 862 units from CBEP x P4 individual CMU 3,448
Total Contribution Margin P17,240
Fixed Costs given in the problem (10,000)
Profit P7,240

Problem 4 (Sales Mix; CBEP; WACMU vs. WACMR)

The following questions are based on the following data pertaining to two types of products manufactured by Korn
Corp.:
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 Per unit
Sales price Variable costs
Product Y P120 P 70
Product Z P500 P200

Fixed costs total P300,000 annually. The expected mix in units is 60 percent for Product Y and 40 percent for Product
Z.

1. How much is Korn's break-even point sales in units?

2. What are Korn's break-even point sales in pesos?

SOLUTIONS:
(1)
Sales Mix – 60% : 40%

CMU Sales Mix WACMU

(Allocation Factor)
Product Y P50 .60 P 30
Product Z P300 .40 P120
P150
OR: WACMU = (P50 x .60) + (P300 x .40) = P150

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CBEP FC P300,000 2,000 Y: (2,000 x .60) = 1,200 units

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= = =
(units) WACMU P150 units Z: (2,000 x .40) = 800 units

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PROOF OF BEP:

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Contribution Margin 2,000 units CBEP x P150
rs e P300,000
(CBEP) WACMU
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Fixed Costs given in the problem (300,000)
Profit P0

Contribution Margin – Product Y 1,200 units from CBEP x P50 individual CMU P60,000
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Contribution Margin – Product Z 800 units from CBEP x P300 individual CMU 240,000
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Total Contribution Margin P300,000

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Fixed Costs given in the problem (300,000)

Profit P0

(2)
Since requirement is now CBEP in pesos, compute WACMR to be used as denominator in formula
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Unit SP Sales Mix WAUSP

(Allocation Factor)
Product Y P120 .60 P 72
Product Z P500 .40 P200
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P272
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WACMU P150
WACMR = = = 55.15%
WAUSP P272

CBEP FC P300,000
= = = P543,971
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(pesos) WACMR .5515

PROOF OF SALES AMOUNT:

Sales – Product Y 1,200 units from CBEP x P120 unit SP P144,000

Sales – Product Z 800 units from CBEP x P500 unit SP 400,000
Total Sales to BE P544,000 (difference due to rounding)

Product 5 (CBEP given different PBT levels)

Smooth Company produces and sells two products: A and B in the ratio of 3A to 5B. Selling prices for A and B are,
respectively, P1,200 and P240; respective variable costs are P480 and P160. The company's fixed costs are
P1,800,000 per year.
Compute the volume of sales in units of each product needed to:
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 a. breakeven.
b. earn P800,000 of income before income taxes.
c. earn P800,000 of income after income taxes, assuming a 30 percent tax rate.
d. earn 12 percent on sales revenue in before-tax income.
e. earn 12 percent on sales revenue in after-tax income, assuming a 30 percent tax rate.

SOLUTIONS:
CMU Sales Mix WACMU
(Allocation Factor)
Product A P720 3/8 P270
Product B P 80 5/8 50
P320

Unit SP Sales Mix WAUSP

(Allocation Factor)
Product A P1,200 3/8 P450
Product B P 240 5/8 150
P600
a)

CBEP FC P1,800,000 5,625 A: (5,625 x 3/8) = 2,109 units

= = =
(units) WACMU P320 units B: (5,625 x 5/8) = 3,516 units

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(b)

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Let X = Composite Sales Volume

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FC + P1,800,000 + A: (8,125 x 3/8) = 3,047 units

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X = PBT = P800,000 = 8,125 units
WACMU
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(c)

Let X = Composite Sales Volume

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Remember: Always convert PAT to PBT

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FC + P1,800,000 + (P800,000 A: (9,196 x 3/8) = 3,449 units

X = PBT = ÷ .70) = 9,196 units
WACMU P320 B: (9,196 x 5/8) = 5,747 units
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(d)
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Let X = Composite Sales Volume

FC + P1,800,000 + [(P600)(X)(.12)] A: (7,258 x 3/8) = 2,722 units

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X = PBT = = 7,258 units

WACMU P320 B: (7,258 x 5/8) = 4,536 units
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320X = P1,800,000 + 72X

248X = P1,800,000
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X = 7,258 units
(e)

Let X = Composite Sales Volume

Remember: Always convert PAT to PBT

FC + P1,800,000 + [(P600)(X)(.12)] A: (8,295 x 3/8) = 3,111 units

X = PBT = .70 = 8,295 units
WACMU P320 B: (8,295 x 5/8) = 5,184 units

320X = P1,800,000 + 103X

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 217X = P1,800,000

X = 8,295 units

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vi y re
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