ReSA - THE REVIEW SCHOOL OF ACCOUNTANCY

CPA Review Batch 45  May 2023 CPA Licensure Examination

MS-03
MANAGEMENT SERVICES Aljon Lee  Elirie Arañas  Kenneth Manuel

COST-VOLUME-PROFIT (CVP) ANALYSIS

CVP ANALYSIS - is a profit planning tool that deals with the relationship of profit with costs and sales volume.
CONTRIBUTION MARGIN (CM) is a measure of company’s ability to cover variable costs with revenues. It is
also known as marginal income, profit contribution, contribution to fixed cost or incremental contribution.
 CM = Sales – Variable Costs
 Unit CM = Unit Selling Price – Unit Variable Costs
 CM Ratio = CM ÷ Sales = Unit CM ÷ Unit Selling Price = Δ CM ÷ Δ Sales
CM Ratio is also known as marginal ratio or profit-volume (P/V) ratio.
BREAK-EVEN POINT (BEP) is the sales level at which profit is zero (i.e., total revenues = total costs).
 BEP (units) = Fixed Costs ÷ Unit CM
 BEP (peso sales) = Fixed Costs ÷ CM Ratio
 BEP Ratio = BEP ÷ Sales
 Sales (units) with Target Profit = (Fixed Costs + Target Profit*) ÷ Unit CM
 Sales (peso sales) with Target Profit = (Fixed Costs + Target Profit*) ÷ CM Ratio
 Sales (peso sales) with Target Profit Ratio = Fixed Costs ÷ (CM Ratio – Profit Ratio)
* Target Profit must be expressed before tax: Pre-tax Profit = After-tax Profit ÷ (100% - tax rate)
MARGIN of SAFETY is the maximum amount by which sales could decrease without incurring a loss.
 Margin of Safety (MS) = Sales – Breakeven Sales = Profit ÷ CM Ratio
 MS Ratio = MS ÷ Sales = Profit Ratio ÷ CM Ratio
Like the break-even point, safety margin can also be expressed in units or in peso sales.
NOTE: Since MS + BEP = Sales, then MS Ratio + BEP Ratio = Sales Ratio (100%)
INDIFFERENCE POINT is the level of volume at which total costs or profits are the same between two
alternatives under consideration.
Alternative A Alternative B .
 Cost-based: Fixed Costs + (Unit VC x Q) = Fixed Costs + (Unit VC x Q)
 Profit-based: (Unit CM x Q) – Fixed Costs = (Unit CM x Q) – Fixed Costs
Legend: Q –indifference point based on the number of units
SALES MIX (a.k.a. product mix) is the proportion of different products that comprise the company’s total sales.
 Overall BEP (units) = Fixed Costs ÷ Weighted Average Unit CM
 Overall BEP (peso sales) = Fixed Costs ÷ Weighted Average CM Ratio
DEGREE of OPERATING LEVERAGE (DOL) measures how sensitive the pre-tax profit is to sales volume
increases and decreases. It is also known as operating leverage factor.
 DOL = CM ÷ Pre-tax Profit = Δ% in Pre-tax Profit ÷ Δ% in Sales
NOTE: Since DOL = CM ÷ Profit (before tax), then DOL = CM Ratio ÷ Profit Ratio = 1 ÷ MS Ratio
LIMITATIONS & ASSUMPTIONS of CVP ANALYSIS
✓ Both sales and costs behave linearly and are predictable within a specific period and relevant range.
✓ Fixed costs, unit variable costs, selling price and sales mix must behave as constants.
✓ There are no changes in inventory levels (i.e., production equals sales).
✓ Volume is the only factor affecting sales, variable costs and profit.
✓ Time value of money is ignored.
EXERCISES: COST-VOLUME-PROFIT (CVP) ANALYSIS
1. South Korea (SK) Company sells a single product. The sales and expenses for a recent month follows:
Sales (12,000 units) P 300,000
Less: Variable Costs 120,000
Contribution Margin P 180,000
Less: Fixed Costs 150,000
Profit P 30,000
REQUIRED:
1. Determine the following:
A) Unit selling price B) Unit variable cost C) CM ratio (CMR)
2. For profit planning purposes, compute the following:
A) Break-even point in units B) Break-even peso sales
3. What is the margin of safety at its present sales of P 300,000?
4. What unit sales are required to earn P 90,000 profit for the month?
5. What peso sales are required to earn an after-tax profit of P 72,000 (tax rate: 20%)?
6. What peso sales are required to reach a return on sales or profit margin ratio of 22.5%?
7. Assuming SK is currently selling 8,000 units per month: SK believes that sales would increase if
advertising were increased by P 75,000. How many units should sales increase to maintain the same
loss that it is currently incurring?
(NOTE: Although current sales of 8,000 units are given, you need not use this info to solve the problem.)
8. Assuming SK currently pays its salespeople a monthly salary of P 10,000 without any commission:
SK considers a plan whereby salespeople receive a 10% commission, but their monthly salary would
fall to P 7,000. What sales level will SK be indifferent between the two compensation plans?

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
COST-VOLUME-PROFIT ANALYSIS MS-03
2. China Company sells tables and chairs in sets. The projected profit for next month is as follows:
Chairs Tables Total
Unit sales 60 units 15 units 75 units
Sales P 540 P 135 P 675
Variable Costs 450 75 525
Contribution Margin P 90 P 60 P 150
Fixed Costs 100
Profit P 50
REQUIRED:
1. How many units of chairs should be sold next month to break-even?
2. How many units of tables should be sold to earn a profit of P 200?

3. Sir K opened a fitness gym exclusive for male celebrities. The result of the first year of operations follows:
Sales P 250,000
Variable Costs (100,000)
Contribution Margin P 150,000
Fixed Costs (120,000)
Profit P 30,000
Sir K is not happy about the results of his gym’s first year of operations due to the following:
 Sir K observes that despite the high contribution margin, profit was still low due to the high fixed costs.
 Sir K concludes that an increase in sales would not produce a satisfactory increase in profit.
REQUIRED:
1. Explain to Sir K that his conclusion is not right by computing the operating leverage factor.
2. If sales increase by 10%, then how many percent would profit increase, ceteris paribus?
(NOTE: determine the percentage Δ in profit by using the operating leverage factor.)

4. A company’s break-even sales are P 528,000. The variable cost ratio is 60% while the profit ratio is 8%.

REQUIRED: Determine the following:

1. Fixed Costs 7. Margin of Safety Ratio (using Sales)
2. Sales 8. Margin of Safety Ratio (using CM Ratio)
3. Variable Costs 9. Break-Even Ratio (using Sales)
4. Contribution Margin 10. Break-Even Ratio (using Margin of Safety Ratio)
5. Profit 11. Degree of Operating Leverage (using Profit)
6. Margin of Safety 12. Degree of Operating Leverage (using Margin of Safety Ratio)

WRAP-UP EXERCISES
1. Which specific cost is not subtracted from the selling price to calculate contribution margin per unit?
a. Direct labor c. Fixed manufacturing overhead
b. Variable selling expenses d. Variable manufacturing overhead
2. Contribution margin is best defined as the amount available to cover
a. Fixed costs and profit c. Fixed costs and sales
b. Variable costs and profit d. Variable costs and fixed costs
3. At the break-even point, fixed cost is always
a. Less than contribution margin c. More than the variable costs
b. More than contribution margin d. Equal to the contribution margin
4. All of the following items affect a company’s break-even point, except
a. Total fixed costs c. Unit selling price
b. Unit variable cost d. Number of units sold
5. An increase in the income tax rate
a. Raises the break-even point
b. Lowers the break-even point
c. Increases sales required to earn a particular after-tax profit
d. Decreases sales required to earn a particular after-tax profit
6. A profitable company’s margin of safety decreases following a
a. Decrease in sales unit c. Increase in selling price
b. Decrease in fixed costs d. Decrease in variable costs
7. Operating leverage factor =
a. Gross margin ÷ profit after tax c. Contribution margin ÷ profit after tax
b. Gross margin ÷ profit before tax d. Contribution margin ÷ profit before tax
8. Degree of operating leverage measures how sensitive the profit is to a given change in
a. Selling price c. Fixed costs
b. Sales volume d. Variable costs
9. Under CVP analysis, which of the following is NOT assumed to be constant?
a. Unit variable cost c. Sales mix
b. Unit selling price d. Unit fixed cost
10. The costing method that lends itself to break-even analysis is:
a. Normal c. Variable
b. Standard d. Absorption

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
COST-VOLUME-PROFIT ANALYSIS MS-03
SELF-TEST QUESTIONS - with suggested answers
(Sources: CMA/CIA/RPCPA/AICPA/Various test banks)
1. When volume equals zero units,
D a. Fixed cost equals zero c. Net income equals zero
b. Total costs equal zero d. Variable cost equals zero
2. The contribution margin will increase when sales volume remains the same and
D a. Fixed costs will increase c. Variable costs will increase
b. Fixed costs will decrease d. Variable costs will decrease
3. Which of the following would decrease unit contribution margin the most?
A a. A 15% decrease in selling price c. A 15% decrease in variable expenses
b. A 15% increase in variable expenses d. A 15% increase in fixed expenses
4. Jungkook Company sells its only product for P 60 per unit and incurs the following variable costs per unit:
Direct material P 16
Direct labor 12
Manufacturing overhead 7
Total variable manufacturing overhead P 35
Selling expenses 5
Total variable costs P 40
Jungkook’s annual fixed costs are P 880,000. If prime costs increased by 20% and all other values remained the same,
what would be Jungkook Company’s contribution margin ratio (to the nearest whole percentage)?
C a. 75% c. 24%
b. 30% d. 20%
5. The most likely strategy to reduce the breakeven point would be to
C a. Increase both the fixed cost and the contribution margin
b. Decrease both the fixed costs and the contribution margin
c. Decrease the fixed costs and increase the contribution margin
d. Increase the fixed costs and decrease the contribution margin
6. In planning its 2023 operations based on a sales forecast of P 6,000,000, Jimin, Inc. prepared the following 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 peso sales at the break-even point?
C a. P 2,250,000 c. P 4,000,000
b. P 3,500,000 d. P 5,300,000
7. For the period just ended, V Company generated the following operating results in percentages:
Revenues 100%
Cost of sales:
Variable 50%
Fixed 10%
Total 60%
Gross profit 40%
Operating expenses:
Variable 20%
Fixed 15%
Total 35%
Net operating income 5%
Total sales amounted to P 3 million. How much was the break-even sales?
B a. P 1,875,000 c. P 2,850,000
b. P 2,500,000 d. P 3,750,000
8. Once the breakeven point has been reached, operating income will increase by the
B a. Gross margin per unit for each additional unit sold
b. Contribution margin per unit for each additional unit sold
c. Fixed costs per unit for each additional unit sold
d. Variable costs per unit for each additional unit sold
9. The following data refer to cost-volume-profit relationship of Jin Company:
Break-even 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 st unit sold?
C a. P 250 c. P 75
b. P 325 d. Zero
10. Which of the following would cause the break-even point to change?
D a. Sales increased
b. Total production decreased
c. Total variable costs increased as a function of higher production
d. Fixed costs increased owing to additional equipment in physical plant
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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
COST-VOLUME-PROFIT ANALYSIS MS-03
11. A company manufactures a single product. Estimated cost data regarding this product and other information for the
product and the company are as follows (effective income tax rate: 40%):
Sales price per unit P 40
Total variable production cost per unit 22
Sales commission (on sales) per unit 5%
Fixed costs and expenses:
Manufacturing overhead P 5,598,720
General and administrative P 3,732,480
What number of units must the company sell in the coming year in order to reach its breakeven point?
C a. 388,800 units c. 583,200 units
b. 518,400 units d. 972,000 units
12. The present break-even sale of J-Hope Company is P 550,000 per year. It is computed that if the fixed cost will go up
by P 60,000, the sales required to break-even will also increase to P 700,000, without any change in the selling price
per unit and on the variable expenses. How much is the total fixed cost after the increase of P 60,000?
C a. P 200,000 c. P 280,000
b. P 220,000 d. P 330,000
13. One of the major assumptions limiting the reliability of breakeven analysis is that
C a. Efficiency and productivity will continually increase
b. Total variable costs will remain unchanged over the relevant range
c. Total fixed costs will remain unchanged over the relevant range
d. The cost of production factors varies with changes in technology
14. How much will income change if a company makes an advertising campaign given the following data?
Cost of advertising campaign P 25,000
Increase in sales P 60,000
Variable expense as a percentage of sales 42%
B a. P 200 increase c. P 15,000 increase
b. P 9,800 increase d. P 25,200 increase
15. RM Company sells a product for P 5 per unit. The fixed cost is P 210,000 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 a. P 700,000 c. P 472,500
b. P 525,000 d. P 420,000
16. Suga Company prepared the following preliminary forecast concerning Product BTS for 2023:
Selling price per unit P 10
Unit sales 100,000
Variable costs P 600,000
Fixed costs P 300,000
Based on a market study, Suga estimates that it could increase the unit selling price by 15% and increase the unit sales
volume by 10% if P 100,000 was spent in advertising. Assuming Suga incorporates these changes in its 2022 forecast,
what should be the operating income for Product BTS?
C a. P 175,000 c. P 205,000
b. P 190,000 d. P 365,000
17. Lisa Corp. aims to earn a 25% return on its P 500,000 investment in equipment used in the manufacture of Product YG.
Based on estimated sales of 10,000 units of Product YG, the cost per unit were estimated as follows:
Variable manufacturing cost P 25
Fixed selling and administrative cost 10
Fixed manufacturing cost 5
What should be the price of Product YG?
C a. P 45.00 c. P 52.50
b. P 50.00 d. P 55.00
18. Rose Company has fixed costs of P 100,000 and breakeven sales of P 800,000. What is its profit at P 1,200,000 sales?
A a. P 50,000 c. P 200,000
b. P 150,000 d. P 400,000
19. Jisoo Company sells a product to retailers for P 200. The unit variable cost is P 40 plus a selling commission of 10%.
Fixed manufacturing cost totals P 1,000,000 per month, while fixed selling and administrative cost equals P 420,000.
The income tax rate is 30%. What will be the required sales to achieve an after-tax profit of P 123,200?
D a. 19,950 units c. 15,640 units
b. 18,750 units d. 11,400 units
20. Jennie Electronics Company is developing a new product, surge protectors for high-voltage electrical flows. The cost
information for this product is as follows:
Unit costs
Direct materials P 3.25
Direct labor P 4.00
Distribution P 0.75
The company will also be absorbing P 120,000 of additional fixed costs associated with this new product. A corporate
fixed charge of P 20,000 currently absorbed by other products will be allocated to this new product. Jennie Electronics’
effective income tax rate is 40%. How many surge protectors (rounded to nearest hundred) must Jennie Electronics sell
at a selling price of P 14 per unit to increase after-tax income by P 30,000? (Hint: consider only additional fixed cost)
D a. 10,700 units c. 20,000 units
b. 12,100 units d. 28,300 units

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
COST-VOLUME-PROFIT ANALYSIS MS-03
21. A company has just completed the production of its only product. The product has taken 3 years and P 6,000,000 to
develop. The following costs are expected to be incurred on a monthly basis for the normal production level of 1,000,000
pounds of the new product:
1,000,000 lbs.
Direct materials P 300,000
Direct labor 1,250,000
Variable factory overhead 450,000
Fixed factory overhead 2,000,000
Variable selling, general and administrative expenses 900,000
Fixed selling, general and administrative expenses 1,500,000
Total P 6,400,000
If sales price per pound is P 5.90, the sales needed to earn P 3,000,000 profit in the first year would be
C a. 13,017,000 pounds c. 15,000,000 pounds
b. 14,000,000 pounds d. 25,600,000 pounds
22. Nayeon Company, which is subject to 40% tax, had the following operating data for the period just ended:
Selling price per unit P 60
Variable cost per unit P 22
Fixed costs P 504,000
Management plans to improve the quality of its only product by way of implementing the following:
(1) Replacing a component that costs P 3.50 with a higher-grade unit that costs P 5.50, and
(2) Acquiring a P 180,000 packaging machine. Nayeon will depreciate the machine over a 10-year period with no
estimated salvage value by the straight-line method of depreciation.
If the company wants to earn after-tax of P 172,800 in the coming year, how many units must be sold?
C a. 10,300 units c. 22,500 units
b. 21,316 units d. 27,000 units
23. Cost-volume-profit relationships that are curvilinear may be analyzed linearly by considering only
D a. Fixed and semi-variable costs c. Relevant variable costs
b. Relevant fixed costs d. Relevant range of volume
24. Momo Company has developed a new project that will be marketed for the first time during the next fiscal year. Although
the Marketing Department estimates that 35,000 units could be sold at P 36 per unit, Momo’s management has allocated
only enough manufacturing capacity to produce a maximum of 25,000 units of the new product annually. The fixed
costs associated with the new product are budgeted at P 450,000 for the year, which includes P 60,000 for depreciation
on new manufacturing equipment. Momo is subject to a 40% income tax rate. Data associated with each unit of product
are presented on the next page:
Variable Costs
Direct material P 7.00
Direct labor 3.50
Manufacturing overhead 4.00
Total variable manufacturing cost P 14.50
Selling expenses 1.50
Total variable cost P 16.00
Momo Company’s management has stipulated that it will not approve the continued manufacture of the new product
after the next fiscal year unless the after-tax profit is at least P 75,000 the first year. The unit selling price to achieve
this target profit must be at least
D a. P 34.60 c. P 37.00
b. P 36.60 d. P 39.00
25. The following data pertain to the two products manufactured by Mina, Inc.:
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.
How many units of the two products together must Mina sell to break-even?
C a. 857 c. 2,000
b. 1,111 d. 2,459
26. Dahyun, Inc. is planning to produce two products, A and B. Dahyun is planning to sell 100,000 units of A at P 4 a unit
and 200,000 units of B at P 3 a unit. Variable cost is 70% of sales for A and 80% of sales for B. In order to realize a
total profit of P 160,000, what must the total fixed cost be?
A a. P 80,000 c. P 240,000
b. P 90,000 d. P 600,000
27. Sana Company sells Products K, T and V. Sana sells three units of K for each unit of V and two units of T for each unit
of K. The contribution margins are P 1 per unit of K, P 1.50 per unit of T, and P 3 per unit of V. Fixed costs are
P600,000. How many units of Product K would Sana sell at the break-even point?
B a. 40,000 units c. 240,000 units
b. 120,000 units d. 400,000 units
28. There are so many assumptions inherent in CVP analysis. Which of the following is not one of these assumptions?
D a. Cost and revenues are predictable and are linear over the relevant range
b. Variable costs fluctuate proportionately with volume
c. Changes in the beginning and ending inventory are insignificant in amount
d. Sales mix will change as fixed costs increase beyond the relevant range

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
COST-VOLUME-PROFIT ANALYSIS MS-03
29. If the sales mix shifts toward higher contribution margin products, then over-all break-even point generally
A a. Decreases c. Remains constant
b. Increases d. Is zero
30. K-Pop, Inc. had the following sales results for 2023:
TV sets CD player Radios
Peso sales component ratio 0.30 0.30 0.40
Contribution margin ratio 0.40 0.40 0.60
K-Pop, Inc. had fixed costs of P 2,400,000. The break-even sales in pesos for K-pop, Inc. are:
TV sets CD player Radios TV sets CD player Radios
C a. P 1.8 M P 1.8 M P 3.6 M c. P 1.5 M P 1.5 M P2M
b. P 1.8 M P 1.8 M P 1.6 M d. P 1,531,915 P 1,531,915 P 2,042,553
31. For a profitable company, the amount by which sales can decline before losses occur is known as the
D a. Sales volume variance c. Variable sales ratio
b. Hurdle rate d. Margin of safety
32. The margin of safety is a key concept of CVP analysis. The margin of safety is
B a. The contribution margin rate
b. The difference between budgeted sales and breakeven sales
c. The difference between the breakeven point in sales and cash flow breakeven
d. The difference between budgeted contribution margin and breakeven contribution margin
33. Tzuyu Company has sales of P 100,000, fixed costs of P 50,000, and a profit of P 10,000. What is Tzuyu Company’s
margin of safety?
B a. P 10,000 c. P 33,333
b. P 16,667 d. P 83,333
34. Operating leverage is greatest in companies that have
B a. Low fixed cost, low unit variable cost c. Low fixed cost, high unit variable cost
b. High fixed cost, low unit variable cost d. High fixed cost, high unit variable cost
35. Jihyo Corporation sells sets of encyclopedias. Jihyo sold 4,000 sets last year at P 250 a set. If the variable cost per set
was P 175, and the fixed costs for Jihyo were P 100,000, what is the Jihyo’s degree of operating leverage (DOL)?
C a. 0.67 c. 1.5
b. 0.75 d. 3.0
36. Chaeyoung Company’s variable costs are 75% of sales. At a sales level of P 400,000, the company’s degree of operating
leverage is 8. At this level, fixed costs equal
A a. P 87,500 c. P 50,000
b. P 100,000 d. P 75,000
37. A higher degree of operating leverage compared with industry average implies that the firm
B a. Has higher variable costs
b. Has profits that are more sensitive to changes in sales volume
c. Is more profitable
d. Is less risky
38. Jeongyeon Company’s variable costs are 70% of sales. At a P 300,000 sales level, the degree of operating leverage is
10. If sales increase by P 60,000, what will be the degree of operating leverage?
D a. 12 c. 6
b. 10 d. 4
39. If used in cost-volume-profit analysis, sensitivity analysis
C a. Determines the most profitable mix of products to be sold
b. Allows the decision maker to use probabilities in the evaluation of decision alternatives
c. Is done through various possible scenarios and computes the impact on profit of various predictions
of future events
d. Is limited because in cost-volume-profit analysis, costs are not separated into fixed and variable
components
40. The indifference point is the level of volume at which a company
D a. Earns no profit c. Earns large amount of profit
b. Earns its target profit d. Earns the same profit under different schemes
41. Machine XX has fixed costs of P 225,000 and a variable cost of P 20. Machine YY has fixed costs of P 300,000 and a
variable cost of P 14. What is the indifference point in units?
B a. 11,250 c. 21,429
b. 12,500 d. Cannot be determined from given information
42. Twice Motors employs 40 sales personnel to market its line of automobiles. The average car sells for P 1,200,000 and a
6% commission is paid to the salesperson. Twice Motors is considering a change to a scheme that would pay each
salesperson a salary of P 24,000 per month plus a 2% commission of the sales made by that salesperson. What is the
amount of total car sales at which Twice Motors would be indifferent as to which plan to select?
B a. P 30,000,000 c. P 22,500,000
b. P 24,000,000 d. P 12,000,000
43. Blackpink 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?
B a. 45% c. 67.85%
b. 55% d. 68.75%

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