ReSA - THE REVIEW SCHOOL OF ACCOUNTANCY

CPA Review Batch 41  May 2021 CPA Licensure Examination  Week No. 2

MANAGEMENT ADVISORY SERVICES C.P. Lee  E.S Arañas  K.L. Manuel

MAS-03: COST-VOLUME-PROFIT (CVP) ANALYSIS

CVP ANALYSIS - is a profit planning tool that deals with profit’s relationship 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 = 100% - BEP Ratio
Like BEP, safety margin can also be expressed in units or in peso sales.
INDIFFERENCE POINT is the level of volume at which total costs, and hence profits, are the same between
two alternatives under consideration.
Alternative A Alternative B .
 (Unit CM x Q) – Fixed Costs = (Unit CM x Q) – Fixed Costs
 Fixed Costs + (Unit VC x Q) = Fixed Costs + (Unit VC x Q)
Legend: Q – number of units (indifference point)
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 profit is to sales volume increases and
decreases. It is also known as operating leverage factor.
 DOL = Contribution Margin ÷ Profit before tax = 1 ÷ MS Ratio
 Δ% in Sales x DOL = Δ% in profit before tax
CVP analysis assumptions and limitations
 Behavior of both sales and costs (variable and fixed) is linear and predictable throughout the entire
relevant range of activity and within a specified time span.
 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 ANALYSIS
1. Ana Company sells a single product. The company’s sales and expenses for a recent month follows:
Sales (15,000 units) P 375,000
Less: Variable Costs 150,000
Contribution Margin P 225,000
Less: Fixed Costs 150,000
Profit P 75,000
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 unit sales are required to earn P 90,000 profit for the month?
4. What peso sales are required to earn an after-tax profit of P 81,000 (assuming tax rate is 10%)?
5. Assuming Ana is currently selling 8,000 units per month, the company president believes that sales
would increase if advertising were increased by P 60,000. How many units should sales increase to
give Ana the same profit or loss that it is currently earning?
(NOTE: although you know that 8,000 units are being sold at present, you do not need this
information to solve the problem.)
6. What is the margin of safety at its present sales of P 375,000?
7. At present, Ana pays its salespeople a monthly salary of P 40,000 without any commission. It
considers a plan whereby salespeople receive a 10% commission, but their monthly salary would
fall to P 25,000. What sales level will Ana be indifferent between the two compensation plans?
(Management Accounting by Louderback, et.al.)

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY MAS-03
Week No. 2: COST-VOLUME-PROFIT ANALYSIS

2. Tong-Its Company sells two products, tables and chairs. Following is income budget for next month:
Chairs Tables Total
Unit sales 60 u 15 u 75 u
Sales P 750.00 P 300.00 P 1,050.00
Variable Costs 600.00 225.00 825.00
Contribution Margin P 150.00 P 75.00 P 225.00
Fixed Costs 90.00
Profit P 135.00
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 150?

3. Sir K has recently opened a Fitness Gym. The income statement for its 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 the gym’s first year of operations. He observed that despite the high
contribution margin, profit was still low because of the high fixed costs. He therefore concludes that an
increase in sales would not result 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.)
(Managerial Accounting by Garrison, et.al.)
4. UP’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 5. Margin of Safety
2. Sales 6. Margin of Safety Ratio
3. Profit 7. Degree of Operating Leverage
4. Break-Even Ratio
(AICPA)
WRAP-UP EXERCISES
1. At the break-even point, total contribution margin is
a. Zero c. Equal to total costs
b. Equal to total fixed costs d. Equal to total variable costs
2. Which of the following does NOT affect a company’s break-even point?
a. Total fixed costs c. Unit selling price
b. Unit variable cost d. Number of units sold
3. Contribution margin is best defined as the amount available to cover
a. Variable costs c. Variable costs and profit
b. Fixed costs and profit d. Variable costs and fixed costs
4. 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
5. A company with a negative margin of safety also has a (an)
a. Operating loss c. Sales above its break-even point
b. Operating profit d. Sales equal to its break-even point
6. Under CVP analysis, which of the following is NOT assumed to be constant?
a. Unit variable cost c. Unit fixed cost
b. Unit selling price d. Sales mix
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. One of the assumptions in Cost-Volume-Profit analysis is that:
a. Production is higher than sales c. Production and sales are equal
b. Production is less than sales d. Production and sales are not equal
10. If inventories are expected to change, the type of costing that provides the best information for
breakeven analysis is
a. Job-order costing c. Joint costing
b. Variable costing d. Absorption costing

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY MAS-03
Week No. 2: COST-VOLUME-PROFIT ANALYSIS

SELF-TEST QUESTIONS - with suggested answers

(Sources: CMA/CIA/RPCPA/AICPA/Various test banks)
1. Which cost is NOT subtracted from selling price to calculate contribution margin per unit?
D a. Variable manufacturing overhead c. Direct labor
b. Variable selling expenses d. Fixed manufacturing overhead
2. 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
3. Jo 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
Jo’s annual fixed costs are P 880,000. If prime costs increased by 20% and all other values remained the same, what
would be Jo Company’s contribution margin ratio (to the nearest whole percentage)?
C a. 75% c. 24%
b. 30% d. 20%
4. In planning its operations for 2022 based on a sales forecast of P 6,000,000, Cynthia, Inc. prepared the following
estimated 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
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. For the period just ended, Val 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
7. 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
8. The following data refer to cost-volume-profit relationship of Albert 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
9. 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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Week No. 2: COST-VOLUME-PROFIT ANALYSIS

10. 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
11. The present break-even sale of Beng 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
12. 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
13. 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
14. August Company sells Product Rhea 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
15. Dalen Company prepared the following preliminary forecast concerning Product D for 2022:
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, Dalen 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 that Dalen incorporates these changes in its
2022 forecast, what should be the operating income for Product D?
C a. P 175,000 c. P 205,000
b. P 190,000 d. P 365,000
16. Alice Corp. aims to earn a 25% return on its P 500,000 investment in equipment used in the manufacture of Product Y.
Based on estimated sales of 10,000 units of Product Y, 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 Y?
C a. P 45.00 c. P 52.50
b. P 50.00 d. P 55.00
17. Chris 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
18. Delfin 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
19. Heth 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. Heth Electronics’
effective income tax rate is 40%. How many surge protectors (rounded to nearest hundred) must Heth 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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Week No. 2: COST-VOLUME-PROFIT ANALYSIS

20. 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
21. Mars 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. Mars 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
22. 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
23. Delphi 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, Delphi’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. Delphi 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
Delphi 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
24. The following data pertain to the two products manufactured by Bong, 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 Bong sell to break-even?
C a. 857 c. 2,000
b. 1,111 d. 2,459
25. Dan, Inc. is planning to produce two products, A and B. Dan 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
26. Kris Company sells Products M, T and V. Kris sells three units of M for each unit of V and two units of T for each unit
of M. The contribution margins are P 1 per unit of M, P 1.50 per unit of T, and P 3 per unit of V. Fixed costs are
P600,000. How many units of Product T would Kris sell at the break-even point?
C a. 40,000 units c. 240,000 units
b. 120,000 units d. 400,000 units
27. 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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Week No. 2: COST-VOLUME-PROFIT ANALYSIS

28. 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
29. Employee, Inc. had the following sales results for 2021:
TV sets CD player Radios
Peso sales component ratio 0.30 0.30 0.40
Contribution margin ratio 0.40 0.40 0.60
Employee, Inc. had fixed costs of P 2,400,000. The break-even sales in pesos for Employee, 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
30. 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
31. 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
32. Dani Company has sales of P 100,000, fixed costs of P 50,000, and a profit of P 10,000. What is Dani Company’s
margin of safety?
B a. P 10,000 c. P 33,333
b. P 16,667 d. P 83,333
33. 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
34. Vivian Corporation sells sets of encyclopedias. Vivian 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 Vivian were P 100,000, what is the Vivian’s degree of operating leverage (DOL)?
C a. 0.67 c. 1.5
b. 0.75 d. 3.0
35. Ube 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
36. 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
37. Candy 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
38. 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
39. 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
40. 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
41. Bona 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. Bona 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 Bona 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
42. John 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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