Accounting 202 – CVP Analysis

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COST-VOLUME-PROFIT ANALYSIS

THEORIES:
1. To which function of management is CVP analysis most applicable?
A. Planning C. Directing
B. Organizing D. Controlling
 Accounting 202 – CVP Analysis
2. The systematic examination of the relationships among selling prices, volume of sales and
production, costs, and profits is termed: 9. At the break-even point:
A. contribution margin analysis C. budgetary analysis A. net income will increase by the unit contribution margin for each additional item sold
B. cost-volume-profit analysis D. gross profit analysis above break-even.
B. the total contribution margin changes from negative to positive
3. The term contribution margin is best defined as the: C. fixed costs are greater than contribution margin
A. difference between fixed costs and variable costs. D. the contribution margin ratio begins to increase
B. difference between revenue and fixed costs.
C. amount available to cover fixed costs and profit. 10. In cost-volume-profit analysis, the greatest profit will be earned at
D. amount available to cover variable costs. A. One hundred percent at normal productive capacity.
B. The production point with the lowest marginal cost.
4. Cost-volume-profit analysis allows management to determine the relative profitability of a C. The production point at which average total revenue exceeds average marginal cost.
product by D. The point at which marginal cost and marginal revenue are equal.
A. Highlighting potential bottlenecks in the production process.
B. Determining the contribution margin per unit and projected profits at various levels of 11. Which of the following is not an assumption underlying C-V-P analysis?
production. A. The behavior of total revenue is linear.
C. Assigning costs to a product in a manner that maximizes the contribution margin. B. Unit variable expenses remain unchanged as activity varies.
D. Keeping fixed costs to an absolute minimum. C. Inventory levels at the beginning and end of the period are the same.
D. The number of units produced exceeds the number of units sold.
5. Cost-volume-profit analysis cannot be used if which of the following occurs?
A. Costs cannot be properly classified into fixed and variable costs. 12. Which of the following assumptions is inherent to C-V-P analysis?
B. The per unit variable costs change. A. In manufacturing firms, the beginning and ending inventory levels are the same.
C. The total fixed costs change. B. In a multi-product organization, the sales mix varies over time.
D. Per unit sales prices change. C. The behavior of total revenue is curvilinear.
D. he relevant range is not a consideration.
6. The most useful information derived from a breakeven chart is the
A. Amount of sales revenue needed to cover enterprise variable costs. 13. Which of the following assumptions is closely relevant to cost-volume-profit analysis?
B. Amount of sales revenue needed to cover enterprise fixed costs. A. for multiple product analysis, the sales mix is not important
C. Relationship among revenues, variable costs, and fixed costs at various levels of activity. B. inventory levels remain unchanged
D. Volume or output level at which the enterprise breaks even. C. total fixed costs and unit variable costs can be identified and remain constant over the
relevant range
D. B and C
7. Which of the factors is (are) involved in studying cost-volume-profit relationships?
A. Levels of production C. Fixed costs 14. Advocates of cost-volume-profit analysis argue that:
B. Variable costs D. All of these A. Fixed costs are irrelevant for decision making.
B. Fixed costs are mandatory for CVP decision making.
8. At the breakeven point, fixed cost is always C. Differentiation between the patterns of variable costs and fixed costs is critical.
A. Less than the contribution margin C. More than the contribution margin D. Fixed costs are necessary to calculate inventory valuations.
B. Equal to the contribution margin. D. More than the variable cost
 Accounting 202 – CVP Analysis
15. With respect to fixed costs, C-V-P analysis assumes total fixed costs VC = variable cost per unit
A. per unit remains constant as volume changes A. SP / (FC/VC) C. VC/(SP – FC)
B. remain constant from one period to the next B. FC/(VC/SP) D. FC/(SP – VC)
C. vary directly with volume
D. remain constant across changes in volume 22. A company increased the selling price for its product from P1.00 to P1.10 a unit when total
fixed costs increased from P400,000 to P480,000 and variable cost per unit remained
16. The CVP model assumes that over the relevant range of activity: unchanged. How would these changes affect the breakeven point?
A. only revenues are linear. C. unit variable cost is not constant. A. The breakeven point in units would be increased.
B. total fixed cost changes. D. revenues and total costs are linear. B. The breakeven point in units would be decreased.
C. The breakeven point in units would remain unchanged.
17. Which of the following is not a limiting factor of Cost-Volume-Profit analysis? D. The effect cannot be determined from the information given.
A. The process assumes a linear relationship among the variables.
B. The process assumes variable costs per unit are available. 23. On January 1, 2007, Incremental Company increased its direct labor wage rates. All other
C. Efficiency is assumed to be constant. budgeted costs and revenues were unchanged. How did this increase affect Incremental
D. Inventory levels are assumed to not change. Company’s budgeted break-even point and budgeted margin of safety?
A. B. C. D.
18. Cost-volume-profit analysis is a technique available to management to understand better the Budgeted Break-even Point Increase Increase Decrease Decrease
interrelationships of several factors that affect a firm's profit. As with many such techniques, Expected Margin of Safety Increase Decrease Decrease Increase
the accountant oversimplifies the real world by making assumptions. Which of the following is
not a major assumption underlying CVP analysis? 24. As the variable cost increases but the selling price remains constant, the
A. All costs incurred by a firm can be separated into their fixed and variable components. A. Degree of operating leverage declines C. Breakeven point goes down
B. The product’s selling price per unit is constant at all volume levels within a relevant range. B. Margin of safety stays constant D. Contribution margin ratio goes up
C. Operating efficiency and employee productivity is constant at all volume levels.
D. For multi-product situations, the sales mix can vary at different volume levels. 25. A very high degree of operating leverage (DOL) indicates that a firm:
A. has high fixed costs. C. has high variable costs.
19. Pines Company has a higher degree of operating leverage than Tagaytay Company. Which of B. has a high net income. D. is operating close to its breakeven point.
the following is true?
A. Pines has higher variable expense. 26. With the aid of computer software, managers can vary assumptions regarding selling prices,
B. Pines is more profitable than Tagaytay Company’s. costs, and volume and can immediately see the effects of each change on the break-even
C. Pines is more risky than Tagaytay is. point and profit. Such an analysis is called
D. Pines' profits are less sensitive to percentage changes in sales. A. “What if” or sensitivity analysis. C. Computer aided analysis.
B. Vary the data analysis. D. Data gathering.
20. As projected net income increases the
A. degree of operating leverage declines. C. break-even point goes down. 27. If a company raises its target peso profit, its
B. margin of safety stays constant. D. contribution margin ratio goes up. A. break-even point rises.
B. fixed costs increase.
21. Given the following notations, what is the breakeven sales level in units? C. required total contribution margin increases.
SP = selling price per unit D. selling price rises.
FC = total fixed cost

28. Broadway Company sells three products: A, B and C. Product A's unit contribution margin is
higher than Product B's which is higher than Products C's. Which one of the following events is
most likely to increase the company's overall break-even point?
A. The installation of new automated equipment and subsequent lay-off of factory workers.
B. A decrease in Product C's selling price.
C. An increase in the overall market demand for Product B.
D. A change in the relative market demand for the products, with the increase favoring
Product A relative to Product B and Product C.
29. Which of the following is not a benefit of using sensitivity analysis?
A. More people can see the impact of their ideas on the project.
B. The use of a spreadsheet program increases the accuracy of the projections.
C. What will happen is not known in advance so a variety of options can be explored prior to
making a decision.
D. A well-written spreadsheet will allow for a variety of questions to be answered in a minimal
amount of time.
30. A Cost-Volume-Profit graph contains an "Area of Loss" and an "Area of Profitability". Which of
the following best explains the difference between the two points on the graph?
A. The area of loss represents the difference between Sales and Variable Cost.
B. The area of loss begins with the concept that fixed costs have to be recovered prior to
sales contributing to profit.
C. The area of profit represents the difference between Sales and Variable Cost.
D. The area of profit begins with the concept that no company would have any level of sales
below the break-even point.
31. Which of the following best describes the impact of selling more units?
A. The increase in sales volume increases total variable cost.
B. The increase in sales volume means an increase in total fixed cost.
C. The increase in sales increases contribution margin, causing net income to decrease.
D. The increase in sales increases contribution margin per unit causing the break-even point
to decrease.
32. On a cost-volume-profit chart (break-even graph), where are the total fixed costs shown?
A. As the point where the sales line intersects the vertical axis (pesos)
B. As the point where the sales line crosses the total cost line
C. As the point where the sales line crosses the horizontal axis (volume)
D. As the point where the total cost line intersects the vertical axis (pesos)
Accounting 202 – CVP Analysis
33. When using conventional cost-volume-profit analysis, some assumptions about costs and
sales prices are made. Which of the following is one of those assumptions?
A. The contribution margin will change as volume increases
B. The variable cost per unit will decrease as volume increases
C. The sales price per unit will remain constant as volume increases
D. Fixed cost per unit will remain the same as volume increases
34. Classifying a cost as fixed or variable depends on how it behaves
A. per unit, as the volume of activity changes.
B. in total, as the volume of activity changes.
C. both A and B are correct.
D. none of the above.
35. A fixed cost is the same percentage of sales in three different months. Which of the following
is true?
A. The company had the same sales in each of those months.
B. The cost is both fixed and variable.
C. The company is operating at its break-even point.
D. The company is achieving its target level of profit.
36. Per-unit variable cost
A. remains constant within the relevant range.
B. increases as volume increases within the relevant range.
C. decreases as volume increases within the relevant range.
D. decreases if volume increases beyond the relevant range.
37. In planning product mix for maximum profit, CVP analysis would stimulate sales of the product
by increasing the:
A. sales price C. contribution margin
B. variable cost per unit D. emphasis on customer priority
38. A relatively low margin of safety ratio for a product is usually an indication that the product:
A. is losing money
B. has a high contribution margin
C. is riskier than higher margin of safety products
D. is less risky than higher margin of safety products
39. Within the relevant range, total revenues and total costs
 Accounting 202 – CVP Analysis
A. increase, but at a decreasing rate. C. remain constant. B. Decrease both the fixed costs and the contribution margin.
B. decrease. D. can be graphed as straight lines. C. Decrease the fixed costs and increase the contribution margin.
D. Increase the fixed costs and decrease the contribution margin.
40. An assumption in a CVP analysis is that a change in costs is caused by a change in
A. unit direct material cost C. sales commission per unit 48. The break-even point in total sales decreases when:
B. the number of units D. efficiency due to learning curve effect A. variable cost increases and sales remain unchanged
B. variable cost increases and sales increase
41. In CVP analysis, when the number of units changes, which one of the following will remain the C. fixed cost increases
same? D. fixed cost decreases
A. Total sales revenues C. Total fixed costs
B. Total variable costs D. Total contribution margin 49. Which of the following best describes the impact of an increase in fixed cost?
A. The increase in fixed cost will result in an increase in selling more units.
42. As fixed costs for a firm rise, all other things held constant, the breakeven point will B. The increase in fixed cost will cause an increase in variable cost.
A. be unchanged C. increase C. The increase in fixed cost causes net income to decrease and the break-even point to
B. not be affected by fixed costs D. decrease decrease.
D. The increase in fixed cost causes net income to decrease and the break-even point to
43. Which of the following would not affect the breakeven point? increase.
A. Number of units sold. C. Total fixed costs.
B. Variable cost per unit. D. Sales price per unit. 50. A company’s breakeven point in peso sales may be affected by equal percentage increases in
both selling price and variable cost per unit (assume all other factors are equal within the
44. The margin of safety is a key concept of CVP analysis. The margin of safety is relevant range). The equal percentage changes in selling price and variable cost per unit will
A. The contribution margin rate. cause the breakeven point in peso sales to
B. The difference between budgeted contribution margin and actual contribution margin. A. Decrease by less than the percentage increase in selling price.
C. The difference between budgeted contribution margin and breakeven contribution margin B. Decrease by more than the percentage increase in the selling price.
D. The difference between budgeted sales and breakeven sales. C. Increase by less than the percentage increase in selling price.
D. Remain unchanged.
45. A technique for determining what would happen in a decision analysis if a key prediction or
assumption proves to be wrong is called:
A. CVP analysis. C. Post-audit analysis.
B. Sensitivity analysis. D. Contribution-margin variation analysis.

46. An increase in the unit variable cost will generally cause an increase in all of the following
except PROBLEMS:
A. the break-even point. C. total variable costs. 1
. Green Corporation expects to sell 3,000 plants a month. Its operations manager estimated the
B. contribution margin. D. unit selling price. following monthly costs:
Variable costs P 7,500
47. The most likely strategy to reduce the breakeven point would be to Fixed costs 15,000
A. Increase both the fixed costs and the contribution margin.
 Accounting 202 – CVP Analysis
What sales price per plant does she need to achieve to begin making a profit if she sells the B. P36. D. P54.
estimated number of plants per month?
A. P7.51 C. P5.00 .
6
Seal Yard Ornaments sells lawn ornaments for P15 each. Seal's contribution margin ratio is
B. P7.50 D. P2.50 40%. Fixed costs are P32,000. Should fixed costs increase 30%, how many additional units
will Seal have to produce and sell in order to generate the same net profit as under the current
.
2
An organization's break-even point is 4,000 units at a sales price of P50 per unit, variable cost conditions?
of P30 per unit, and total fixed costs of P80,000. If the company sells 500 additional units, by A. 1,600. C. 6,933.
how much will its profit increase? B. 5,333. D. 1,067.
A. P25,000 C. P10,000
B. P15,000 D. P12,000 .
7
At a break-even point of 5,000 units sold, variable expenses were P10,000 and fixed expenses
were P50,000. The profit from the 5,001st unit would be?
.
3
The Red Lions Brotherhood is planning its annual Riverboat Extravaganza. The Extravaganza A. P10 C. P15
committee has assembled the following expected costs for the event: B. P50 D. P12
Dinner per person P 70
Programs and souvenir per person 30 .
8
Galactica Company has fixed costs of P100,000 and breakeven sales of P800,000. Based on
Orchestra 15,000 this relationship, what is its projected profit at P1,200,000 sales?
Tickets and advertising 7,000 A. P 50,000 C. P150,000
Riverboat rental 48,000 B. P200,000 D. P400,000
Floor show and strolling entertainment 10,000
The committee members would like to charge P300 per person for the evening’s activities. .
9
The sales price per unit will increase from P32 to P40. The variable cost per unit will remain at
Assume that only 250 persons are expected to attend the extravaganza, what ticket price must P24, and the fixed costs will remain unchanged at P400,000. How many fewer units must be
be charged to breakeven? sold to break-even at the new sales price of P40 per unit?
A. P420 C. P320 A. 25,000 C. 10,000
B. P350 D. P390 B. 2,500 D. 12,500

.
4
Consider the following: 10
. The Hard Company sells widgets. The company breaks even at an annual sales volume of
Fixed expenses P78,000 80,000 units. At an annual sales volume of 100,000 units the company reports a profit of
Unit contribution margin 12 P220,000. The annual fixed costs for the Hard Company are:
Target net profit 42,000 A. P 880,000 C. P 800,000
How many unit sales are required to earn the target net profit? B. P1,100,000 D. P1,000,000
A. 15,000 units C. 12,800 units
B. 10,000 units D. 20,000 units
11
. Albatross Company has fixed costs of P90,300. At a sales volume of P360,000, return on
.
5
Carribean Company produces a product that sells for P60. The variable manufacturing costs sales is 10%; at a P600,000 volume, return on sales is 20%. What is the break-even volume?
are P30 per unit. The fixed manufacturing cost is P10 per unit based on the current level of A. P225,000 C. P301,000
activity, and fixed selling and administrative costs are P8 per unit. A selling commission of B. P258,000 D. P240,000
10% of the selling price is paid on each unit sold.
The contribution margin per unit is: 12
. An entity has fixed costs of P200,000 and variable costs per unit of P6. It plans on selling
A. P24. C. P30. 40,000 units in the coming year. If the entity pays income taxes on its income at a rate of
 Accounting 202 – CVP Analysis
40%, what sales price must the firm use to obtain an after-tax profit of P24,000 on the 40,000 Contribution margin/sales 30%
units? Breakeven sales (present volume) P1,000,000
A. P11.60 C. P12.00 Diva wants to sell an additional 50,000 units at the same selling price and contribution margin
B. P11.36 D. P12.50 per unit. By how much can fixed costs increase to generate a gross margin equal to 10% of
the sales value of the additional 50,000 units to be sold?
. The following is the Lux Corporation's contribution format income statement for last month:
13
A. P 50,000 C. P 67,500
Sales P2,000,000 B. P 57,500 D. P125,000
Less variable expenses 1,400,000
Contribution margin 600,000 . Marsman Company had a margin of safety ratio of 20%, variable costs of 60% of sales, fixed
18

Less fixed expenses 360,000 costs of P240,000, a break-even point of P600,000, and an operating income of P60,000 for
Net income P 240,000 the current year. What are the current year's sales?
The company has no beginning or ending inventories. A total of 40,000 units were produced A. P 500,000 C. P 750,000
and sold last month. What is the company's degree of operating leverage? B. P 600,000 D. P 900,000
A. 0.12 C. 2.50
B. 0.40 D. 3.30 . Regal, Inc. sells Product M for P5 per unit. The fixed costs are P210,000 and the variable
19

costs are 60% of the selling price. What would be the amount of sales if Regal is to realize a
. Delmar Company has the opportunity to increase its annual sales by P125,000 by selling to a
14
profit of 10% of sales?
new, riskier group of customers. The uncollectible expense is expected to be 10%, and A. P700,000 C. P525,000
collection costs will be 10%. The company’s manufacturing and selling expenses are 70% of B. P472,500 D. P420,000
sales, and its effective tax rate is 40%. If Delmar were to accept this opportunity, the
company’s after tax profits would increase by . The following economic data were provided by the corporate planning staff of Heaven, Inc.:
20

A. P 7,500 C. P12,500 Sales volume 30,000 units

B. P 6,000 D. P15,000 Sales price per unit P30
Unit variable costs:
. In 2006 Lucia Company had a net loss of P8,000. The company sells one product with a
15
Variable manufacturing P13
selling price of P80 and a variable cost per unit of P60. In 2007, the company would like to Other variable costs 8
earn a before-tax profit of P40,000. How many additional units must the company sell in 2007 Unit variable costs P21
than it sold in 2006? Assume that the tax rate is 40 percent. Unit contribution margin P 8
A. 1,600 C. 2,000
B. 2,400 D. 5,400 Fixed costs:
Manufacturing P150,000
. Bulusan Company has sales of P400,000 with variable costs of P300,000, fixed costs of
16
Other fixed costs P 50,000
P120,000, and an operating loss of P20,000. How much increase in sales would Bulusan Total fixed costs P200,000
need to make in order to achieve a target operating income of 10% of sales? The management is considering installing a new, automated manufacturing process that will
A. P400,000 C. P500,000 increase fixed costs by P50,000 and reduce variable manufacturing cost by P3 per unit. The
B. P462,000 D. P800,000 management set a target a profit of P70,000 before and after the acquisition of the automated
machine. After installation of the automated machine, what will be the change in the units
. The following data apply to Diva Corporation for the year 2006:
17
required to achieve the target profit?
Total variable cost per unit P3.50 A. 6,667 unit increase C. 3,333 unit decrease
 Accounting 202 – CVP Analysis
B. 5,667 unit decrease D. 4,333 unit decrease A. P270,000 C. P360,000
B. P180,000 D. P540,000
. In planning its operations for next year based on a sales forecast of P6,000,000, Herran, Inc.
21

prepared the following estimated costs and expenses: . The Alpine Company’s year-end income statement is as follows:
25

Variable Fixed Sales (20,000 units) P360,000

Direct materials P1,600,000 Variable costs 220,000
Direct labor 1,400,000 Contribution margin P140,000
Factory overhead 600,000 P 900,000 Fixed costs 105,000
Selling expenses 240,000 360,000 Net income P 35,000
Administrative expenses 60,000 140,000 Alpine’s management is unhappy with the results and plans to make some changes for next
P3,900,000 P1,400,000 year. If management implements a new marketing program, fixed costs are expected to
What would be the amount of peso sales at the breakeven point? increase by P19,200 and variable costs to increase by P1 per unit. Unit sales are expected to
A. P2,250,000. C. P4,000,000. increase by 15 percent.
B. P3,500,000. D. P5,300,000.
What is the effect on income if the foregoing changes are implemented?
. The Expressive Company currently has fixed cost of P770,500. This cost is expected to
22 A. decrease of P21,200 C. increase of P 1,800
increase by P103,500 if the company expands its production facilities. Currently, it sells its B. increase of P13,800 D. increase of P14,800
product for P47. The product has a variable cost per unit of P24. How many more units must
the company sell to break even, at the current sales price per unit, than it did to break even . Mercado, Inc. had the following economic data for 2007:
26

prior to the increase in fixed cost? Net sales P400,000

A. 3,500 C. 4,500 Contribution margin 160,000
B. 4,000 D. 6,000 Margin of safety 40,000
What is Mercado’s breakeven point in 2007?
. The Tanker Company estimated the following data for the coming year:
23 A. P360,000 C. P320,000
Fixed manufacturing costs P565,000 B. P288,000 D. P 80,000
Variable production costs per peso of sales
Materials P 0.125 . Marquez Co. manufactures a single product. For 2006, the company had sales of P90,000,
27

Direct labor 0.150 variable costs of P50,000, and fixed costs of P30,000. Marquez expects its cost structure and
Variable overhead 0.075 sales price per unit to remain the same in 2007; however total sales are expected to jump by
Variable selling costs per peso of sales 0.150 20%. If the 2007 projections are realized, net income in 2007 should exceed net income in
Tanker estimates its sales for the coming year to be P2,000,000. 2006 by
A. 100% C. 20%
The expected cost of goods sold for the coming year is B. 80% D. 50%
A. P1,265,000 C. P1,565,000
B. P1,115,000 D. P 700,000 . Below is the income statement for Harpo Co. for 2006:
28

Sales P400,000
. At a sales volume level of 2,250 units, Baluarte Company’s contribution margin is one and
24 Variable costs ( 125,000)
one-half of the fixed costs of P36,000. Contribution margin is 30% How much peso sales Contribution margin P275,000
should the Baluarte Company sell to earn 10 percent of sales? Fixed costs ( 200,000)
 Accounting 202 – CVP Analysis
Profit before tax P 75,000 What unit price would the company have to charge to make P2,250 on a sale of 1,500
Assuming that the fixed costs are expected to remain at P200,000 for 2007, and the sales additional units that would be shipped out of the normal market area?
price per unit and variable cost per unit are also expected to remain constant, how much profit A. P5.10 C. P4.10
before tax will be produced if the company anticipates 2007 sales rising to 130% of the 2006 B. P5.60 D. P5.00
level?
A. P 97,500 C. P195,000 . The Mandarin Company's product mix includes P720,000 in sale of X and P640,000 in sale of
33

B. P157,500 D. P180,000 Y. X's contribution margin is 60% and Y's is 40% of sales. Fixed costs amount to P505,881.
Y's sale at breakeven point should amount to
. Almos Corporation produces a product that sells for P10 per unit. The variable cost per unit is
29
A. P640,000 C. P529,490
P6 and total fixed costs are P12,000. At this selling price, the company earns a profit equal to B. P720,000 D. P470,590
10% of total peso sales. By reducing its selling price to P9 per unit, the manufacturer can
increase its unit sales volume by 25%. Assume that there are no taxes and that total fixed . Levi’s Company has revenues of P500,000, variable costs of P300,000, and pretax profit of
34

costs and variable cost per unit remain unchanged. If the selling price were reduced to P9 per P150,000. Had the company increased the sales price per unit by 10%, reduced fixed costs
unit, the company’s profit would have been by 20%, and left variable cost per unit unchanged, what would the new breakeven point in
A. P3,000. C. P5,000. pesos have been?
B. P4,000. D. P6,000. A. P 88,000 C. P100,000
B. P 80,000 D. P125,000
. Information concerning the 2007 financial projections of the Silver Company is as follows:
30

Net sales of P3,000,000. . A firm has fixed costs of P200,000 and variable cost per unit of P6. It plans to sell 40,000
35

Fixed costs of P800,000. units in the coming year. If the firm pays income taxes on its income at a rate of 40%, what
P0.65 increase in cost of sales for each peso increase in net sales. sales price must the firm use to obtain an after-tax profit of P24,000?
What is the projected cost of sales for 2007? A. P11.60 C. P11.36
A. P 950,000 C. P1,050,000 B. P12.00 D. P12.50
B. P2,750,000 D. P1,850,000

. The Childless Company sells widgets. The company breaks even at an annual sales volume
31
. Below is the income statement for Blender Co. for 2007:
36

of 75,000 units. Sales P400,000

Variable costs (125,000)
Actual annual sales volume was 100,000 units, and the company reported a profit of Contribution margin P275,000
P200,000. The annual fixed costs for the Childless Company are Fixed costs ( 200,000)
A. P800,000 C. P200,000 Profit before tax P 75,000
B. P600,000 D. P150,000 What is the degree of operating leverage for Blender Company for 2007?
A. 3.67 C. 5.33
. The costs to produce 24,000 units at 70% capacity are:
32
B. 1.45 D. 1.67
Direct materials P36,000
Direct labor 54,000 . Food Factory, Inc. sells loose biscuits for P5 per unit. The fixed costs are P210,000 and the
37

Factory overhead, all fixed 29,000 variable costs are 45% of the selling price. What would be the amount of sales if Food
Selling expense (35% variable, 65% fixed) 24,000 Factory, Inc. were to realize a profit of 15% of sales?
A. P700,000 C. P525,000
 Accounting 202 – CVP Analysis
B. P472,500 D. P420,000 A. P1,125,000 C. P1,325,000
B. P1,187,500 D. P1,387,500
. The Opposition Sales Corporation is expecting an increase of fixed costs by P78,750 upon
38

moving their place of business to the downtown area. The company anticipates that the . Mauresmo Company developed the following information for the year ended December 31,
42

selling price per unit and the variable expenses will not change. At present, the sales volume 2007:
necessary to breakeven is P750,000 but with the expected increase in fixed costs, the sales Product A Product B Total
volume necessary to breakeven would go up to P975,000. Units Sold 4,000 6,000 10,000

Based on these projections, what were the total fixed costs before the increase of P78,750? Sales P12,000 P27,000 P39,000
A. P341,250 C. P183,750 Variable costs 6,000 15,000 21,000
B. P262,500 D. P300,000 Contribution margin P 6,000 P12,000 18,000
Fixed costs 12,600
. At 40,000 units of sales, Benevolent Corporation had an operating loss of P3.00 per unit.
39
Net income P 5,400
When sales were 70,000 units, the company had a profit of P1.20 per unit. The number of If the sales mix changes to 5,000 units of Product A and 5,000 units of Product B, the effect on
units to breakeven is the company’s break-even point would be
A. 35,000 C. 45,000 A. to increase it by 200 units. C. to increase it by 1,200 units.
B. 52,500 D. 57,647 B. to decrease it by 200 units. D. no change.
. The following information pertains to Hennin Corporation for the year ending December 31,
40
. Menor Company sells two products with the following per unit data:
43
2006:
Standard Deluxe
Budgeted sales P1,000,000
Selling price/unit P75 P120
Breakeven sales 700,000
Variable costs/unit 45 60
Budgeted contribution margin 600,000
Contribution margin/unit P30 P 60
Cashflow breakeven 200,000
The margin of safety for the Hennin Corporation is: Sales mix 3 2
A. P300,000 C. P500,000 If fixed costs are P630,000, the number of standard and deluxe units that Menor must sell to
B. P400,000 D. P800,000 break even is
A. 1,800 standard and 1,200 deluxe. C. 9,000 standard and 6,000 deluxe.
. Balboa, Inc. had the following economic information for the year 2006:
41 B. 3,600 standard and 2,400 deluxe. D. 21,000 standard and 14,000 deluxe.
Sales (50,000 units @ P20) P1,000,000
Variable manufacturing costs 400,000
Fixed costs 250,000
Income tax rate 40 percent
Balboa, Inc. budgets its 2007 sales at 60,000 units or P1,200,000. The company anticipates . The following are projections about the two products of Dorine Company, baubles and trinkets,
44

an increased competition; hence, an additional P75,000 advertising costs is budgeted in order for the coming year:
to maintain its sales target for 2007. Baubles Trinkets
Units Amount Units Amount Total
What is the amount of peso sales needed for 2007 in order to equal the after-tax income in Sales 10,000 P10,000 7,500 P10,000 P20,000
2006? Costs
 Accounting 202 – CVP Analysis
Fixed P 2,000 P 5,600 P 7,600
Variable 6,000 3,000 9,000 . Bytes Company is a retailer of video disks. The projected after-tax income for the current year
48

P 8,000 P 8,600 P16,600 is P120,000 based on a sales volume of 200,000 video disks. Bytes has been selling the
Income before taxes P 2,000 P 1,400 P 3,400 disks at P16 each. The variable costs consist of the P10 per unit purchase price of the disks
Assuming that the customers purchase composite units of four baubles and three trinkets, the and a handling cost of P2 per disk. Bytes’ annual fixed costs are P600,000, and Bytes is
breakeven output for the two products would be subject to a 40% income tax rate. Management is planning for the coming year when it
A. B. C. D. expects that the unit purchase price of the video disks will increase 30%.
Baubles 6,909 6,909 5,000 5,000
Trinkets 6,909 5,182 8,000 6,000 Bytes Company’s breakeven point for the current year in number of video disks is
A. 100,000 units C. 50,000 units
B. 150,000 units D. 60,000 units
. The sales mix for Dial Enterprise is as follows:
45

Product A: 12 units @ P5.25 sales price; P4.85 variable cost per unit.
. Alonzo Corporation had sales of P120,000 for the month of May. It has a margin of safety
49
Product B: 10 units @ P7.50 sales price; P6.95 variable cost per unit.
ratio of 25 percent, and an after-tax return on sales of 6 percent. The company assumes its
Product C: 6 units @ P12.25 sales price; P10.35 variable cost per unit.
sales being constant every month. If the tax rate is 40 percent, how much is the annual fixed
cost?
Dial Enterprise's fixed costs are P75,950.
A. P 36,000 C. P 90,000
B. P432,000 D. P360,000
What are the composite break-even point?
A. 98,000 C. 3,500
. Cultured Company is a manufacturer of its only one product line. It had sales of P400,000 for
50
B. 2,000 D. 4,000
2007 with a contribution margin ratio of 20 percent. Its margin of safety ratio was 10 percent.
. Alexandra Co. provides two products, Velvet and Cotton. Velvet accounts for 60 percent of
46
What are the company’s fixed costs?
total sales. The variable costs as a percentage of selling prices are 60% for Velvet and 85%
A. P 72,000 C. P 80,000
for Cotton. Total fixed costs are P225,000.
B. P288,000 D. P320,000
If fixed costs will increase by 30 percent, what amount of peso sales would be necessary to
generate an operating profit of P48,000?
A. P1,350,000 C. P1,135,000
B. P 486,425 D. P 910,000

. Last month, Zamora Company had an income of P0.75 per unit with sales of 60,000 units.
47

During the current month when the unit sales are expected to be only 45,000, there is a loss of Answer to Theory Questions
P1.25 per unit. Both the variable cost per unit and total fixed costs remain constant. 1. A
2. B
The fixed costs amounted to 3. C
A. P 80,000 C. P360,000 4. B
B. P247,500 D. P210,000 5. A
 Accounting 202 – CVP Analysis
6. C 45. B
7. D 46. B
8. B 47. C
9. A 48. D
10. D 49. D
11. D 50. D
12. A
13. D
14. C
15. D
16. D
17. B
18. D
19. C
20. A
21. D
22. D
23. B
24. A
25. D
26. A
27. C
28. C
29. B
30. B
31. A
32. D
33. C
34. C
35. A
36. A
37. C
38. C
39. D Solutions to Problem Questions
40. B
41. C
42. C
43. A
44. D
1
.Answer: B
Contribution Margin = Fixed costs
= P15,000

(Contribution Margin/Unit Sales) + Variable cost per unit

= Desired Minimum Sales Price

(P15,000 ÷ 3,000) + (P7,500 ÷ 3,000) 7.50

2
.Answer: C
Unit contribution margin (P50 - P30) P 20.00
Additional profit (500 x P20) P10,000

After the break-even level, the amount of profit equals the unit contribution margin multiplied by the number of units sold
in excess of break-even units.

The candidates should remember that the profit increases by the amount of contribution margin brought by additional
units sold.
3
.Answer: A
Cost of dinner P 70.00
Favors and program 30.00
Fixed costs
(15,000 + 7,000 + 48,000 + 10,000)/250 320.00
Cost to be charged P420.00
4
.Answer: B
The number of units required to earn the target profit is equal to the sum of fixed expenses and the target profit divided
by the unit contribution margin. The number of units required to earn the target net profit is:
(P78,000 + P42,000) ÷ P12 10,000
5
.Answer: A
Selling Price P 60
Less: Variable Manufacturing Cost ( 30)
10% Commission ( 6)

Unit Contribution Margin P 24

6
.Answer: A
Current break-even:
Pesos: (P32,000 ÷ 0.40) P80,000
Units: [P32,000 ÷ P6) 5,333
Contribution margin per unit: P15 x 0.40P 6.00

Additional units to cover additional fixed costs:

(P32,000 x 0.3)  P6 1,600

Alternative solution:
New breakeven units (P32,000 x 1.3) ÷ P6 6,933
Less current breakeven units 5,333
Increase in breakeven units 1,600
7
.Answer: A
 The amount of contribution margin per unit is constant within a relevant range. The amount of profit is increased by the
amount of unit contribution margin.

Contribution margin per unit:

fixed cost ÷ breakeven unit sales 50,000 ÷ 5,000 P10.00
At breakeven point, the profit is zero. Therefore, the profit at a level of 5,001 units will be P10 which is the amount of
contribution provided by the unit (one unit) in excess of breakeven point.
8
Answer: A
CMR= Fixed cost/Sales
= 100,000/800,000 = 12.50%

Profit = (1,200,000 – 800,000)0.125 P50,000

The amount of sales that provides profit should be the sales revenues above the break even sales.

Alternative solution:
Total contribution margin 1,200,000 x 0.125 P150,000
Fixed costs 100,000
Profit P 50,000
9
.Answer: A
Current unit contribution margin (P32 – P24) P8
Current break-even units (P400,000 ÷ P8) 50,000
New unit contribution margin (P40 - P24) P16
New break-even units (400,000 ÷ 16) 25,000
Net decrease in breakeven units
(50,000 – 25,000) 25,000
10
.Answer: A
CM per unit: 220,000 / (100,000 – 80,000) 11.00
Fixed costs: 80,000 x 11 P880,000

The contribution margin per unit is linear or constant per unit.

Therefore: TCM  Units = UCM
11
.Answer: B
TCM  Sales = CMR
Change in TCM: (600,000*0.2) – (360,000*0.1) 84,000
CMR: Increase in TCM ÷ Increase in Sales
84,000 ÷ 240,000 35%

Breakeven sales 90,300 ÷ 0.35 258,000

12
.Answer: C
Before-tax profit 24,000 ÷ 0.6 40,000
Add fixed cost 200,000
Total contribution margin 240,000

Selling price = UVC + UCM

Selling Price = 6 + (240,000 ÷ 40,000) 12.00
13
.Answer: C
The company's degree of operating leverage is determined as follows:
Degree of operating leverage = Contribution margin ÷ Net income
Degree of operating leverage = P600,000 ÷ P240,000 = 2.50
14
.Answer: A
Increase in sales 125,000
Less variable costs and expenses
0.90 x 125,000 112,500
Additional profit before tax 12,500
Less additional tax 0.40 x 12,500 5,000
Additional profit 7,500
15
.Answer: B
Additional profit ÷ UCM = additional unit sales
= (40,000 + 8,000) ÷ (80-60)
= 2,400 units
16
.Answer: A
Total peso sales required 120,000 ÷ (0.25 – 0.1) 800,000*
Less prior sales 400,000
Required increase in sales 400,000

*Peso sales required to earn profit stated as percentage of sales (ROS):

S = [FC + (ROSS)]  CMR
(CMR S) = [FC + (ROSS)]
(CMR S) - (ROSS) = FC
(CMR – ROS) S = FC

S = FC  (CMR – ROS)
17
.Answer: A
Contribution margin 50,000 x (5-3.50) 75,000
Less: additional profit (250,000 x 0.10) 25,000
Additional fixed costs 50,000

Selling price = P3.50 ÷ 0.70 P5.00

18
.Answer: C
A shorter calculation of finding the amount of sales is to divide breakeven sales by (1 – MSR)
Sales = P600,000  (1 – 0.2) P750,000

An alternative solution to find sales is to compute the profit margin.

Profit margin = Contribution margin ratio x margin of safety ratio.

Profit margin = 20% x 40% 8%
Sales = Profit ÷ Profit margin

Sales (60,000 ÷ 0.08) P750,000

19
.Answer: A
Peso sales = FC/(CMR - ROS)
= P210,000/(0.40 - 0.10) P700,000
 CMR = 40%

A long computation of required sales uses the following equation:

S = P210,000 + 0.10S
0.40

0.40S = P210,000 + 0.10S

0.40S - 0.10S = P210,000
S = P210,000/(0.40 – 0.10)
S = P700,000

20
.Answer: C
Current number of units required to earn the target net profit:
[(P200,000 + P70,000) ÷ P9] 30,000

After the automated machine is placed into service,

the number of units required to earn the target
net profit will be:
((P250,000 + P70,000) ÷ P12) 26,667

Change in units: 30,000 - 26,667 = 3,333 decrease in unit sales

21
.Answer: C
CMR= 100% - (3.9 ÷ 6.0) = 35%
BES = 1,400,000 ÷ .35 4,000,000
22
.Answer: C
New break-even point: P874,000 ÷ P23 38,000
Current break-even point in units: P770,500 ÷ P23 33,500
Increase in units: 38,000 - 33,500 4,500
Alternative solution: (P103,500 ÷ P23) 4,500
23
.Answer: A
The estimated cost of goods sold
= P565,000 + 0.35S*
*Sum of all percentages for variable production costs

= P565,000 + (P2,000,000 x 0.35)

= P1,265,000
24
.Answer: B
Peso sales required to earn 10% of sales;
FC/(CMR – ROS)
= P36,000/(0.30-0.10)
= 180,000
25
.Answer: A
Revised contribution margin 20,000 x 1.15 x (7-1) 138,000
Fixed cost (105,000 + 19,200) 124,200
Revised profit 13,800
Prior profit 35,000
Decrease in profit 21,200
26
.Answer: A
Margin of Safety = Budgeted sales – Breakeven sales
Margin of Safety: P400,000 – P40,000 P360,000
27
.Answer: B
DOL at P90,000 sales:
Sales 90,000
Variable costs 50,000
Total Contribution margin 40,000
Fixed costs 30,000
Profit 10,000

DOL = TCM/OP
= 40,000/10,000 4 times

% increase in sales x DOL = % increase in profit

4 x 20% = 80%
28
.Answer: B
2006 DOL = 275,000/75,000 3.67
Percentage Increase in profit, 2007 = 3.67 x 30% 110%
2007 Profit = 75,000 +(75,000 x 1.10) P157,500
29
.Answer: A
Peso sales 12,000/(0.40 – 0.1) P40,000
Unit sales P40,000/10 4,000
Increased units 4,000 x 1.25 5,000
Revised contribution margin 5,000 x (9 – 6) P15,000
Less fixed cost 12,000
Revised profit P 3,000
30
.Answer: B
Projected cost of sales:
P800,000 + (P3,000,000 x 0.65) P2,750,000
31
.Answer: B
Unit CM = Change in Profit ÷ Change in Sales
= 200,000 ÷ (100,000 – 75,000)
=8

Fixed costs = Breakeven units x UCM

75,000 x 8 = 600,000
32
.Answer: B
Unit cost:
Materials (P36,000 ÷ 24,000) P1.50
Labor (P54,000 ÷ 24,000) 2.25
 Variable selling expense 0.35
Variable unit cost P4.10
Required profit (2,250 ÷ 1,500) 1.50
Required minimum selling price P5.60
33
.Answer: D
Composite ratio:
X: 640,000 ÷ (720,000 + 640,000) 47.059%
Y: 720,000 ÷ (720,000 + 640,000) 52.941%

Weighted-Average Contribution Margin:

(.52941 × .60) + (.47059 × .40) 0.505882

Breakeven sales in pesos:

(505,881 ÷ 0.505882) P1,000,000

Y’s peso sales at breakeven P1M x 0.47059 P 470,590

34
.Answer: A
Sales (500,000 x 1.10) 550,000
Variable cost 300,000
Contribution margin 250,000

CMR = 250 ÷ 550 = 45.45%

Original fixed costs:
500,000 – 300,000 – 150,000 = 50,000
New fixed cost = 50,000 x 0.80 = 40,000
Breakeven sales = 40,000/0.4545 = P88,000
35
.Answer: B
Before-tax profit (24,000 ÷ 0.6) P 40,000
Add fixed costs 200,000
Total contribution margin P240,000

Contribution margin per unit (P240,000 ÷ 40,000) P 6.00

Variable cost per unit 6.00
Selling price P12.00
36
.Answer: A
DOL = CM/OP
= 275,000/75,000
= 3.67 times
37
.Answer: C
Peso sales : FC ÷ (CMR - Profit Margin)
= P210,000 ÷ (0.55 - 0.15)
= P525,000

CMR = 100% - 45% = 55%

38
.Answer: B
CMR: Change in Fixed Costs ÷ Change in Breakeven Sales
78,750 ÷ (975,000 – 750,000)
 0.35

Fixed costs before an increase of 78,750:

750,000 x 0.35 262,500

The increase in fixed costs of P78,750 equals the increase in contribution margin in order to continue at breakeven
sales.
39
.Answer: D
UCM = (70,000 x 1.20)+(40,000 x 3)
70,000 – 40,000
= P6.80

FC = Units(UCM – profit per unit)

= 70,000(6.80 – 1.20)
= P392,000

BEU = 392,000/6.80
= 57,647
40
.Answer: A
Margin of safety in peso sales = Budgeted sales – Breakeven sales
Margin of safety = P1M – P.7M P300,000
41
.Answer: A
2006 Sales 1,000,000
Advertising Cost (75000 ÷ .6) 125,000
Required 2007 peso sales 1,125,000
42
.Answer: A
Revised WACM (0.5 x 1.50) + (0.5 x 2) 1.75
Original WACM (0.4 x 1.50) + (0.6 x 2) 1.80
Revised Breakeven units 12,600/1.75 7,200
Original Breakeven units 12,600/1.80 7,000
Increase in breakeven units 200
43
.Answer: C
WACM = (30 x 0.6) + (60 x 0.4) P42
Breakeven units: 630,000/42 15,000

Breakdown:
Product Standard 15,000 x 0.6 9,000
Product Deluxe 15,000 x 0.4 6,000

44
.Answer: B
WACM = (4/7 x 0.40)+(3/7 x 0.93 = P0.62857
BE units = 7,600/0.62857 = 12,091
Baubles = 12,091 x 4/7 = 6,909
Trinkets = 12,091 x 3/7 = 5,182
45
.Answer: C
Total sales revenue per composite sales:
 (12 x P5.25) + (10 x P7.50) + (6 x P12.25) P211.50
Total variable cost per composite sales:
(12 x P4.85) + (10 x P6.95) + (6 x P10.35) P189.80
Total contribution margin per composite sales
(P211.50 - P189.80) P 21.70
Composite breakeven point
P75,950 ÷ P21.70 3,500

Note: Total breakeven units: 3,500 x 28 = 98,000

46
.Answer: C
WACMR = (.6 x .4) + (.4 x .15) 30%
Fixed Costs = 225000 x 1.3 P 292,500
Sales (292500 + 48000) ÷ .3 P1,135,000
47
.Answer: C
UCM = (60,000 x 0.75)+(45,000 x 1.25)
60,000 – 45,000
= 6.75

Fixed cost = (60,000 x 6.75)-(60,000 x 0.75) P360,000

48
.Answer: B
BEV = 600,000 P150,000
16 – 12
49
.Answer: B
CMR = Before Tax Profit Margin
M/S Ratio
= (0.06 ÷ 0.6) ÷ .25
= 40%

FC = (120,000 x .40) – (120,000 x .10) = P36,000

Annual FC = 36,000 x 12 P432,000
50
.Answer: A
Profit Margin = 20% x 10% = 2%
Profit = 400,000 x 2% = 8,000
Fixed Costs = CM - Profit
Fixed Costs = (400,000 x 20%) – 8,000 P72,000