Since 1977
MANAGEMENT ADVISORY SERVICES
MAS.2903 – Costs Volume Profit Analysis
Cost-volume-profit (C-V-P) analysis as a tool for
planning and control.
I. C-V-P analysis:
A. a procedure that examines changes in costs and
volume levels and the resulting effects on profit.
B. Sales Revenue – Variable Costs – Fixed Costs =
Profit
C. Tool for both planning and control.
1. Can calculate net income when sales volume is
known
2. Can determine the level of sales need to reach
a targeted amount of income.
D. Only used under certain conditions and when
certain assumptions hold true.
1. The behavior of variable and fixed costs can be
measured reasonably.
2. Costs and revenues have a close linear
approximation.
3. Efficiency and productivity hold steady within
the relevant range.
4. Cost and price variables hold steady during the
period being planned.
5. The product sales mix does not change during
the period being planned.
6. Production and sales volume are approximately
equal.
Break-even sales is the point or sales volume where total
revenues equal total costs. This is the level of activity
where there neither profit nor loss. At break-even
point, the total contribution margin equals total fixed
expenses.
Methods of Computing Break-even Point
1. Equation method or algebraic approach
2. Contribution margin method or formula approach
3. Graphical calculation
ILLUSTRATIVE EXERCISES
Problem 1. The following data are available for
Diamond Company’s only one product line.
Unit selling price P120
Unit variable cost P72
Total fixed costs P960,000
Unit volume 45,000
Required:
1. Determine the breakeven point in units and
peso sales.
2. Determine the unit volume and peso sales
required to earn P1,478,400 profit before tax.
3. Determine the unit volume and peso sales
required to earn a 10% return on sales.
4. Determine the price that the company must
charge to increase the profit by 30% based on
the given information, still selling 45,000 units.
Problem 2. The following data are available for Silver
Company’s only one product.
Unit selling price P 75
Page 1 of 5 www.prtc.com.ph
BOBADILLA/URO/TRINIDAD
OCTOBER 2020
Contribution Margin. Unit contribution is the difference
between the unit selling price and the unit variable
expenses. Total contribution margin is difference
between the total revenues and the total variable
expenses.
Sales Mix. The composition of total sales in terms of
various products, i.e., the percentage of each product
included in total sales.
Margin of Safety – Indicates the amount by which actual or
planned sales may be reduced without incurring a loss.
It is the excess of actual or planned sales volume over
break-even sales. This can be expressed in terms of
units or in pesos. Margin of safety is the percentage of
margin of safety to total actual or planned sales.
Factors Affecting Break-even Point
1. Selling price per unit
2. Variable cost per unit
3. Fixed cost
4. Sales mix
Operating Leverage. A measure of the extent to which
fixed costs are being used in an organization. The
greater the fixed costs in relation to variable cost, the
greater is the operating leverage available and the
greater is the sensitivity of net income to change in
sales.
Degree of Operating Leverage. A measure, at a given
level of sales, of how a percentage change in sales
volume will affect profits. DOL is computed:
DOL = Total contribution margin/Net income
% Increase in Net Income = (% Increase in Sales x DOL)
Unit variable cost
Manufacturing 24
Selling and Administrative 6
Fixed costs
Manufacturing 900,000
Selling and Administrative 450,000
Unit Volume 40,000
Required: Using the data above, determine:
1. Total contribution margin and the amount of
before-tax profit.
2. Break even volume in units and pesos
3. Margin of safety in units, pesos and ratio
4. Degree of operating average
6. Number of units required to earn a 20% return on
sales. Assume that the company is not liable to
pay income tax.
7. Selling price that Silver should charge to raise the
operating profit by 20 percent based on the given
cost structure, still selling 40,000.
8. Assuming Silver is subject to pay 40% income tax,
how much sales in units are required to:
a. breakeven?
MAS.2903
EXCEL PROFESSIONAL SERVICES, INC.

b. earn the same amount of income? sales to compensate for the increase in advertising
cost?
Problem 3. Blue Sapphire Company sells a single
product. The company's most recent income 2) The operations manager believes that the variable
statement is given below. cost will increase to P22 per unit. The sales
Sales (8,000 units) P1,200,000 manager believes the selling price can be
Less variable expenses 480,000 increased. What is the new selling price that will
Contribution margin 720,000 give the same contribution margin ratio of 60%?
Less fixed expenses 330,000
Operating income 390,000 3) Assume that the amount of total fixed cost
Less fixed interest expense 30,000 increases by 10%. What is the effect of this
Income before tax P 330,000 increase on each of the following?
a. Break-even sales volume
1. Compute the degree of operating leverage. b. Before-tax profit
2. If 1,000 more units are sold, how much increase c. Contribution margin
d. Required sales to earn same amount of profit
in profit is expected?
e. Degree of operating leverage
3. Based on Number 2 information, what is the new
degree of operating leverage? Problem 6. The Coral Company manufactures and
4. If sales volume increases by 10 percent, sells two products. The selling prices and variable
compute the new profit. costs of the products are as follows:
5. If the firm were able to increase its sales volume
by 15 percent without a change in its selling Rare Common
price, variable costs, or fixed costs, would this Selling prices P40 P20
change the breakeven point? Variable costs 24 8
6. If the firm were able to increase both its selling
price and variable cost by 20 percent, would the Total fixed costs for 2020 amounted to P450,000.
breakeven point in units or in pesos change?
Required:
1) Compute the number of units and pesos to
Problem 4. Based on its cost structure and potential
breakeven for 2020 for each product assuming the
market, Ruby Company established what it considers
sales mix of 60% of Rare and 40% of Common.
to be a reasonable selling price. The company
2) Compute the breakeven sales in pesos and in units
expects to sell 20,000 units per month and planned
assuming that the sales mix of 40% Rare and 60%
its monthly results as follows:
Common.
3) Compute the composite breakeven for the
Sales P1,200,000
company using the sales mix for question number
Variable costs 540,000
1.
Contribution margin 660,000
4) What sales revenue would be required if the firm
Fixed costs 330,000
wishes to generate an operating income of
Income before taxes 330,000
P320,000 if the original mix in question number 1
Income taxes 132,000
prevailed?
Net income P198,000
Exercise 7. Relax Company and Recline Company both
Required: On the basis of the preceding information,
make rocking chairs. They have the same
answer the following independent questions.
production capacity, but Relax is more automated
than Recline. At an output of 1,000 chairs per year,
1. If the company determines that a particular
the two companies have the following costs:
advertising campaign potentially increase sales by
4,500 units, how much could it pay for such a
Relax Recline
campaign without reducing its planned profits?
2. If the company wants a P429,000 before-tax profit, Fixed costs P400,000 P200,000
how many units must it sell? Variable costs at P100 100,000
3. It the company wants a 30% before-tax return on per chair
sales, what level of unit sales does it need? Variable costs at P300 . 300,000
4. If the company wants a P216,000 after-tax profit, per chair .
how many units must it sell? Total cost P500,000 P500,000
5. The company is considering offering its salespeople a Unit cost (1,000 units) P500 P500
7.5% commission on sales. What would the total
sales, in pesos, have to be in order to implement the Assuming that both companies sell chairs for P700
commission plan and still earn the planned before- each and that there are no other costs or expenses
tax income of P330,000? for the two firms, complete the following:
1. Which company will lose the least money if
Problem 5. Gold Company has, for the coming year, production and sales fall to 500 chairs per year?
budgeted sales of P2,500,000 with contribution 2. How much would each company lose at
margin of 60 percent and fixed costs of P600,000. production and sales level of 500 chairs per
The company’s only one product line sells for P50. year?
The company is subject to 40 percent tax bracket. 3. How much would each company make at
production and sales levels of 2,000 chairs per
1) A plan includes an increase in advertising cost of year?
P480,000. What is the minimum increase in peso

Page 2 of 5 www.prtc.com.ph MAS.2903

EXCEL PROFESSIONAL SERVICES, INC.
Problem 8. The controller of Mahal Company is
examining the following budgeted and actual income
statements for its principal product for 2019. All
amounts are in thousands of pesos.
Budget Actual
Sales P4,800.0 P4,967.2
Variable cost 1,668.0 1,780.8
Contribution margin P3,120.0 P3,186.4
The budgeted unit selling price is P8.00. Actual unit
volume is 6% over budget, but the actual selling
price is below budget. Per-unit variable costs are
incurred as budgeted.
Determine the sales price variance and sales volume
variance.
Problem 9. Basic Foods expected to sell 30,000 of its
fishcharon at P300 each. It actually sold 29,000 at
P298. Variable cost per pack is P140.
Required: Determine the sales price variance and
sales volume variance.
LET’S DO IT (LDI)
1. Flame Company had a 25 percent margin of safety.
Its after-tax return on sales is 6 percent, and tax
rate of 40 percent. What is Flame’s contribution
margin ratio?
2. DEF Company earned P50,000 on sales of P800,000.
It earned P110,000 on sales of P1,000,000. Compute
the total fixed costs.
3. The Childers Company sells widgets. At an annual
sales volume of 75,000 units the company breaks
even. At an annual sales volume of 100,000 units
the company reports a profit of P200,000. The
annual fixed costs for the Childers Company are
______.
4. Machine A has fixed costs of P450,000 and a variable
cost of P20. Machine B has fixed costs of P600,000
and a variable cost of P14. What is the indifference
point, in units?
5. The Makatao Marketing Co., is expecting an increase
of fixed costs by P78,750 upon moving their place of
business to the downtown area. Likewise it is
anticipating that the selling price per unit and the
variable expenses will not change. At present, the
sales volume necessary to breakeven is P750,000
but with the expected increase in fixed costs, the
sales volume necessary to breakeven would go up to
P975,000. Based on these projections, what was the
total fixed costs before and after the increase of
P78,750?
6. Thomas Co. sells products X, Y, and Z. Thomas sells
three units of X for each unit of Z, and two units of Y
for each unit of X. The contribution margin are
P1.00 per unit of X, P1.50 per unit of Y, and P3.00
per unit of Z. Fixed costs are P600,000. How many
units of X would Thomas sell at the breakeven point?
MULTIPLE CHOICE
1. Assuming a company has net income, which of the
following statements is true regarding the
contribution margin per unit?
a. It will decrease as the number of units sold
increases.
Page 3 of 5 www.prtc.com.ph
b. It will decrease as the number of units sold
decreases.
c. It indicates the amount that net income will
increase with the sale of each additional unit.
d. It indicates the amount that variable costs will
decrease with the sale of each additional unit.
2. CVP analysis relies on the assumptions that costs
are either strictly fixed or strictly variable.
Consistent with these assumptions, as volume
decreases total
a. fixed costs decrease
b. variable costs remain constant
c. costs decrease
d. costs remain constant
3. At the break-even point, fixed cost is always
a. less than the contribution margin
b. more than the contribution margin
c. equal to the contribution margin
d. more than the variable cost
4. The peso amount of sales needed to attain a desired
profit is calculated by dividing the contribution
margin ratio into
a. fixed cost
b. desired profit plus fixed cost
c. desired profit
d. desired profit less fixed cost
5. If a company raises its target peso profit, its
a. break-even point rises
b. fixed costs increase
c. required total contribution margin increases
d. selling price rises
6. One of the first steps to take when using CVP
analysis to help make decisions is:
a. finding out where the total costs line intersects
with the total revenues line on a graph.
b. identifying which costs are variable and which
costs are fixed.
c. calculation of the degree of operating leverage
for the company.
d. estimating how many products will have to be
sold to make a decent profit.
7. Cost-volume-profit analysis assumes all of the
following EXCEPT:
a. all costs are variable or fixed
b. units manufactured equal units sold
c. total variable costs remain the same over the
relevant range
d. total fixed costs remain the same over the
relevant range
8. The contribution income statement:
a. reports gross margin
b. is allowed for external reporting to shareholders
c. categorizes costs as either direct or indirect
d. can be used to predict future profits at different
levels of activity
9. Which of the following would decrease contribution
margin per unit the most?
a. A 15% decrease in selling price
b. A 15% increase in variable expenses
c. A 15% increase in selling price
d. A 15% decrease in variable expenses
10. Breakeven analysis assumes over the relevant range
that
MAS.2903
EXCEL PROFESSIONAL SERVICES, INC.
a. Total costs are linear
b. Variable costs are nonlinear
c. Fixed costs are nonlinear
d. Selling prices are nonlinear
11. 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 relevant range).
The equal percentage changes in selling price and
variable cost per unit will cause the breakeven point
in peso sales to
a. Decrease by less than the percentage increase
in selling price.
b. Decrease by more than the percentage increase
in the selling price.
c. Increase by less than the percentage increase in
selling price.
d. Remain unchanged.
12. If a company’s variable costs are 70% of sales,
which formula represents the computation of peso
sales that will yield a profit equal to 10% of the
contribution margin when P equals sales in pesos for
the period and FC equals total fixed costs for the
period?
a. P = .2/FC
b. P = FC/.2
c. P = .27/FC
d. P = FC/.27
13. Cost-volume-profit (CVP) analysis is a key factor in
many decisions, including choice of product lines,
pricing of products, marketing strategy, and
utilization of productive facilities. A calculation used
in a CVP analysis is the breakeven point. Once the
breakeven point has been reached, operating income
will increase by the
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.
14. The contribution margin ratio always increases when
the
a. Variable costs as a percentage of net sales
increase.
b. Variable costs as a percentage of net sales
decrease.
c. Breakeven point increases.
d. Breakeven point decreases.
15. After the level of volume exceeds the breakeven
point
a. the contribution margin ratio increases
b. the total contribution margin exceeds the total
fixed costs
c. total fixed costs per unit will remain constant
d. the total contribution margin will turn form
negative to positive
16. In CVP analysis, focusing on target net income rather
than operating income:
a. will increase the breakeven point
b. will decrease the breakeven point
c. will not change the breakeven point
d. does not allow calculation of breakeven point
Page 4 of 5 www.prtc.com.ph
17. Cost-volume-profit (CVP) analysis allows
management to determine the relative profitability
of a product by
a. Highlighting potential bottlenecks in the
production process.
b. Keeping fixed costs to an absolute minimum.
c. Determining the contribution margin per unit
and the projected profits at various levels of
production.
d. Assigning costs to a product in a manner that
maximizes the contribution margin.
18. Which of the following statements is true?
a. A shift in sales mix toward less profitable
products will cause the overall break-even point
to fall.
b. One way to compute break-even point is to
divide total sales by the cost margin ratio.
c. Once the break-even point has been reached,
income before tax will increase by the unit
contribution margin for each additional unit sold.
d. As sales exceed the break-even point, a high
contribution margin ratio will result in lower
profits than will a lower contribution margin
ratio.
19. Love Corp. is operationally, a highly leveraged
company, that is, it has high fixed costs and low
variable costs. As such, A small change in sales
volume resultS in
a. Proportionate change in net income
b. Large changes in net income
c. Negligible change in net income
d. No change in net income
20. If a company desires to increase its safety margin,
it should:
a. increase fixed costs.
b. decrease the contribution margin.
c. decrease selling prices, assuming the price
change will have no effect on demand.
d. stimulate sales volume.
DO IT YOURSELF (DIY)
1. Minor Company has a 30% contribution margin
percentage and fixed costs of P30,000. To earn a
10% return on sales, what peso sales should Minor
make?
2. Clark Company breaks even at P300,000 sales and
earns P40,000 at P400,000 sales. What is the
amount of fixed costs?
3. At present sales the company has a margin of safety
ratio of 30 percent. If the contribution margin ratio
is 40 percent, what is the return percentage on
sales?
4. The following information pertains to Nova Co.’s cost-
volume-profit relationships:
Breakeven point in units sold 1,000
Variable costs per unit P 500
Total fixed costs 150,000
How much will be contributed to profit before income
taxes by the 1,001st unit sold?
5. In planning its operations for next year based on a
sales forecast of P6,000,000, Wallace, Inc. prepared
the following estimated costs and expenses:
Variable Fixed
Direct materials P1,600,000
MAS.2903
EXCEL PROFESSIONAL SERVICES, INC.

Direct labor 1,400,000 12. Whitmore Corporation predicts it will produce and
Factory overhead 600,000 P 900,000 sell 40,000 units of its sole product in the current
Selling expenses 240,000 360,000 year. At that level of volume, it projects a sales
Administrative expenses 60,000 140,000 price of P30 per unit, a contribution margin ratio
P3,900,000 P1,400,000 of 40 percent, and fixed costs of P5 per unit.
What would be the amount of peso sales at the a. What is the company's projected breakeven
breakeven point? point in pesos and units?
b. Refer to Whitmore Corporation. What would the
6. Maroons Co. has a 40% contribution margin company's projected profit be if it produced
percentage and fixed costs of P30,000. To earn a and sold 30,000 units?
10% return on sales, Maroons must have sales of:

7. A digitized music tuner has been a staple in

Smooth Sounds' product line for several years.
– end -
Annual fixed costs of production and
administration related to this product in the past
have been P643,500. Variable costs of production
and sales have been P17 per unit. The selling price
in the past has been P28 per unit. For the year
just ended, the company sold 100,000 units. In
the coming year, based on the appearance of
competing products on the market, the company
expects a decrease of 10 percent in unit sales.

Assuming that the company wants a profit before

tax of P405,000, what is the required selling price
if it expects to sell 90,000 units? P28.65

8. The Big & Sturdy Company manufactures an engine

for carpet cleaners called the "Snooper."
Budgeted cost and revenue data for the "Snooper"
are given below, based on sales of 40,000 units.

Sales P1,600,000
Less: Cost of goods sold 1,120,000
Gross margin P 480,000
Less: Operating 100,000
expenses
Net income P 380,000

Cost of goods sold consists of P800,000 of variable

costs and P320,000 of fixed costs. Operating
expenses consist of P40,000 of variable costs and
P60,000 of fixed costs.

What is the margin of safety ratio based on the

sale of 40,000 units? 50.00%

9. A month’s operations of Surepassers Company show

fixed cost of P9,300, a margin of safety ratio of 25%,
and a C/M ratio of 62%.
Compute:
1. Breakeven sales
2. Actual sales
3. Profit for the month

10. Semiconductor Company is planning to produce and

sell 100,000 units of Chip A at P4 a unit and 200,000
units of Chip B at P3 a unit. Variable costs are 50%
of sales for Chip A and 60% of sales for Chip B. If
total planned operating profit is P140,000, what
must the total fixed cost be?

11. Rattan Furniture Company manufactures two

products, tables and chairs. Tables sell for P1,000
each and chairs for P300 each. Four times as many
chairs are sold each year as tables. Variable costs
per unit are P530 and P170 for tables and chairs,
respectively.
Total fixed cost is P672,000.
Compute the breakeven point in pesos and in units
of product.

Page 5 of 5 www.prtc.com.ph MAS.2903