Cost-Volume Profit Analysis

1. JPIA, Inc. produces and sells the finest quality golf clubs in all of Clay County. The company
expects the following revenues and costs in 2022 for its Elite Quality golf club sets:

Revenues (400 sets sold @ P600 per set) P240,000

Variable costs 160,000
Fixed costs 50,000

How many sets of clubs must be sold for JPIA, Inc. to reach their breakeven point?
How many sets of clubs must be sold to earn a target operating income of P90,000?
What amount of sales must JPIA, Inc. have to earn a target net income of P63,000 if they have
a tax rate of 30%?

2. At a sales level of P365,000, JPIA Company’s gross margin is P20,000 less than its contribution
margin, its net operating income is P70,000 and its selling and administrative expenses total
P130,000.

At this sales level, its contribution margin would be?

3. JPIA Company produces a product which sells for P40. Variable manufacture costs are P18 per
unit. Fixed manufacturing costs are P5 per unit based on the current level of activity, and
fixed selling and administrative costs are P4 per unit. A selling commission of 15% of the
selling price is paid on each unit sold.

The contribution margin per unit is?

4. JPIA Company’s sales are P600,000, its fixed expenses are P150,000, and its variable expenses
are 60% of sales.

Based on this information, the margin of safety is?

5. Sales in JPIA Company declined from P100,000 per year to P80,000 per year, while net operating
income declined by 300 percent.

Given these data, the company must have had an operating leverage of?

6. JP an IA are the owners of JP Processing Company and the IA Manufacturing Company, respectively.
These companies manufacture and sell the same product, and competition between the two owners
has always been friendly. Cost and profit data have been freely exchanged. Uniform selling
prices have been set by market conditions.

JP and IA differ markedly in their management thinking. Operations at JP are highly mechanized,
and the direct labor force is pain on a fixed-salary basis. IA uses manual hourly paid labor
for the most part and pays incentive bonuses. JP’s salesmen are paid a fixed salary, whereas
IA’s salesmen are paid small salaries plus commissions. Mr. IA takes pride on his ability to
adapt his costs to fluctuations in sales volume and has frequently chide Mr. JP on his
“inflexible overhead.”

During 2021, both firms reported the same profit on sales of P100,000. However, when comparing
results at the end of 2022, Mr. IA was startled by the following results:

JP IA
2021 2022 2021 2022
Sales revenue P 100,000 P 120,000 P 100,000 P 150,000
Costs and
90,000 94,000 90,000 130,000
expenses
Net income P 10,000 P 26,000 P 10,000 P 20,000
Return on sales 10% 21 2/3% 10% 13 ½%

On the assumption that operating inefficiencies must have existed, IA and his accountant made
a thorough investigation of costs but could not uncover any evidence of costs that were out of
line. At a loss to explain the lower increase inf profits in a much higher increase in sales
volume, they have asked you to prepare an explanation.

You find that fixed costs and expenses recorder over the two-year period were as follows:

JP P70,000 each year

IA P10,000 each year

Prepare an explanation for Mr. IA showing why IA’s profit for 2022 were lower that those
reported by JP despite the fact that IA’s sales had been higher.

Redo the income statements emphasizing contribution margin.

Calculate the breakeven point for each company.
Calculate the operating leverage at revenue level of P100,000.
Calculate the volume of sales that IA would have to have had in 2022 to achieve the
profit of P26,000 realized by JP in 2022.

7. Smart Company is relocating its facilities. The company estimates that it will take three
trucks to move office contents. If the per truck rental charge is P1,000 plus 25 cents per
mile, what is the expected cost to move 800 miles?
8. A company is concerned about its operating performance, as summarized below:

Sales (P12.50 per unit) P300,000

Variable costs 180,000
Net operating loss (40,000)

How many additional units should have been sold in order for the company to break even for the
year?

9. Singsing, Inc. manufactures and sells key rings embossed with college names and slogans. Last
year, the key rings sold for P75 each, and the variable costs to manufacture them were P22.50
per unit. The company needed to sell 20,000 key rings to break even. The net income last year
was P50,400. The company expects the following for the coming year:

- The selling price of the key rings will be P90.

- Variable manufacturing costs per unit will increase by one-third.
- Fixed costs will increase by 10%.
- The income tax rate will remain unchanged.

For the company to breakeven the coming year, the company should sell?

10. NCB, Inc. manufactures computer tables. It has an investment of P1,750,000 in assets and expects
a 25% return on investment. Its total fixed production costs for 2,000 units are P550,000 plus
an additional P150,000 for selling and administrative expenses. The variable cost to manufacture
is P1,500 per table.

The selling price per table should be?

11. Nette and Co. has sales of P400,000 with variable costs of P300,000 fixed costs of P120,000,
and an operating loss of P20,000.

By how much would Nette need to increase its net sales in order to achieve a target operating
income of 10% of sales?

12. Lindsay Company reported the following results from sales of P5,000 units of Product A for
June:

Sales P200,000
Variable costs (120,000)
Fixed costs (60,000)
Operating income 20,000

Assume that Lindsay increases the selling price of Product A by 10% in July. How many units of
Product A would have to be sold in July to generate an operating income of P20,000?

13. A company sells two products, X and Y. The sales mix consists of a composite unit of two units
of X for every five units of Y (2:5). Fixed costs are P49,500. The unit’s contribution margins
for X and Y are P2.50 and P1.20, respectively

Considering the company as a whole, the number of composite units to breakeven is?
If the company had a profit of P22,000, the unit sales must have been (for each product)?

14. Almo Company manufactures and sells adjustable canopies that attach to motor homes and trailers.
The market covers both new unit purchasers as well as replacement canopies. Almo developed its
business plan based in the assumption that canopies would sell at a price of P400 each. The
variable costs for each canopy were projected at P200 and the annual fixed costs were budgeted
at P100,000. Almo’s after-tax profit objective was P240,000; the company’s effective tax rate
is 40%.

While Almo’s sales usually rise during the second quarter, the May financial statements reported
that sales were not meeting expectations. For the first 5 months of the year, only 350 units
had been sold at the established price, with variable costs as planned, and it was clear that
after-tax profit projection would not be reached unless some actions were taken. Almo’s
president assigned a management committee to analyze the situation and develop an alternative
course of action. The following was presented to the president.

Reduce the sales by P40. The sales organization forecasts that with the significantly reduced
sales price, 2,700 units can be sold during the remainder of the year. Total fixed and variable
unit costs will stay as budgeted.

Assuming no changes were made to the selling price or cost structure, how many units must Almo
sell to breakeven?
Assuming no changers were made to the selling price or cost structure, how many units must Almo
sell to achieve its after-tax profit objective?
If management decides to reduce the selling price by P40, what will Almo’s after-tax profit
be?

15. JPIA Company’s sales are P600,000, its fixed expenses are P150,000, and its variable expenses
are 60% of sales.

Based on this information, the margin of safety is?

16. JPIA Company manufactures and sells two types of beach towels, A and B. JPIA expects the
following operating results next year for each type of towel:

A B
Sales P450,000 P50,000
Variable expenses(total) P360,000 P20,000

JPIA expects to have a total of P57,600 in fixed expenses.

What is JPIA’s breakeven point next year in sales pesos?

17. JPIA Company’s tentative budget for the next year is as follows:

Sales P600,000
Variable expenses 360,000
Fixed expenses:
Manufacturing 90,000
Selling and administrative 110,000
Net operating income 40,000

Mr. JP, the marketing manager, has proposed an aggressive advertising campaign costing an
additional P50,000 that he predicts will results in a 30%-unit sales increase. Assuming that
JPIA’s proposal is incorporated into the budget, what should be the increase in the budgeted
net operating income for the next year?

18. The JPIA Company sells kodaks for P6.00 per unit. Fixed expenses total P37,500 per month and
variable expenses are P2.00 per unit.

How many kodaks must be sold each month to realize a profit before income taxes of 15% of sales
(to the nearest whole unit)?

19. JPIA Enterprises has prepared the following budget for the month of July:

Selling price per unit Variable unit cost Unit sales

Product A P10.00 P4.00 15,000
Product B P15.00 P8.00 20,000
Product C P18.00 P9.00 5,000

Assuming that total fixed expenses will be P150,000 and the sales mix remains constant, the
break-even point would be closest to?

20. A company sells two products—J and P. The sales mix is expected to be P3.00 of sales of Product
P for every P1.00 of sales of Product J. Product J has a contribution margin ration of 40%
whereas Product P has a contribution margin ration of 50%. Annual fixed expenses are expected
to be P120,000.

The overall break-even point for the company in dollar sales is expected to be closest to?

21. A manufacturer of premium wire strippers has supplied the following data:

Units produced and sold 560,000

Sales revenue P4,704,000
Variable manufacturing expenses 2,436,000
Fixed manufacturing expense 1,200,000
Variable selling and administrative expenses 616,000
Fixed selling and administrative expense 272,000
Net operating income 180,000

The company’s margin of safety in units is closest to?

The company’s unit contribution margin is closest to?
The company’s degree of operating leverage is closest to?

22. The following information relates to the breakeven point at JPIA Corporation:

Sales dollars P120,000

Total fixed expenses 30,000

If JPIA wants to generate net operating income of P12,000, what will its sales pesos have to
be?

23. The following information related to JPIA Corporation:

Sales at the breakeven point P312,500

Total fixed expenses 250,000
Net operating income 150,000

What is JPIA’s margin of safety?

24. The JPIA food stand expects the following operating results for next year:
Sales P280,000
Net operating income 21,000
Contribution margin ratio 70%

What is JPIA’s breakeven point next year in sales dollars?

25. The following information relates to JPIA Corporation for last year:

Sales P500,000
Net operating income 25,000
Degree of operating leverage 5

Sales at JPIA are expected to be P600,000 next year. Assuming no change in cost structure, this
means that net operating income for next year should be?

26. JPIA Company is a medium-sized manufacturer of lamps. During the year a new line called
“Salsila” was made available to JPIA’s customers. The breakeven point for sales of Salsila is
P200,000 with a contribution margin of 40%. Assuming that the profit for the Salsila line
during the year amounted to P100,000, total sales during the year would have amounted to?

27. Product JPIA has sales of P200,000, a contribution margin of 20%, and a margin of safety of
P80,000.

What is JPIA’s fixed cost?

28. JPIA Company has 25% margin of safety. Its before-tax return on sales is 6% and its tax rate
is 40%. Assuming that current sales are P120,000, what is JPIA’s total fixed costs?

29. The marketing department of JPIA Co. proposed a price cut on its leading brand, a product
called “Happy”. From the accounting records, these are available:

Price per unit P92.00

Discount to customers 10%
Direct cost per unit P52.60
Variable operating expense per unit P 5.60
Proposed price cut per unit P10.00
Estimated sales volume before price cut 1,220 pcs

How much is the estimated contribution margin that will be lost due to price cut, assuming the
same pre-price cut sales volume?
What is the additional volume required after the price cut to get the same contribution margin
before the price cut? Round off to the nearest whole unit.

30. JPIA Company record show the following data relating to these two products:

A B
Selling price per unit P140 P155
Variable production costs per unit P110 P116
Variable selling and admin expense per unit P15 P12
Expected monthly sales in units 600 1,200

The breakeven in sales dollars for the expected sales mix is closest to?

31. A company has sales of P500,000, variable costs of P300,000, and pretax profit of P150,000. If
the company increased the sales price per unit by 10%, reduced fixed costs by 20%, and left
variable cost per unit unchanged, what would be the new breakeven point in sales pesos?