Mas 02 - CVP

MANAGEMENT ADVISORY SERVICES
HANDOUT #2: CVP ANALYSIS INSTRUCTOR: JOHN BO S. CAYETANO
1) What is Cost – Volume – Profit Analysis?
Answer:
a. It analyzes the effect of changes in product cost, selling price, and volume or number of outputs, and its effect to
the overall operating profit of the firm. CVP analysis enable the firm to determine how many units of a new product
must be sold to break-even or how many units of a product must be sold to achieve a target or planned profit.
b. It is useful in profit planning by way of a systematic analysis of the profit’s relationship with various costs and
volume of sales.
2) What are the factors affecting profit and what will be the effect?
Answer: There are four important factors that will affect the operating profit of the company, namely:
a. Selling Price – the selling price will have a direct (same) effect on the profit.
(i.e., increase in selling price = increase in profit, decrease in selling price = decrease in profit)
b. Variable Cost Per Unit – the variable cost per unit will have an inverse (opposite) effect on the profit.
(i.e., increase in variable cost/unit = decrease in profit, decrease in variable cost/unit = increase in profit)
c. Total Fixed Cost – the total fixed cost will have an inverse (opposite) effect on the profit.
(i.e., increase in total fixed cost = decrease in profit, decrease in total fixed cost = increase in profit)
d. Volume (a.k.a. units sold) – the volume will have a direct (same) effect on the profit.
(i.e., increase in volume = increase in profit, decrease in volume = decrease in profit)
3) What is the approach that will be used by the company in CVP analysis?
Answer: The approach or the statement that the company will be using is the contribution margin income statement
approach. This approach is for internal decision-making purposes only and cannot be used for preparation of financial
statement because it is not compliant with PFRS and PAS.
In this approach we segregate costs according to their behavior (variable or fixed) instead of whether they are product
costs or period costs (cost of goods sold vs. selling and general and administrative expenses). This contribution
margin income statement is helpful in aiding sensitivity (“What if?”) analysis. Sensitivity analysis refers to estimating
the operating profit if one of the four factors change.
CONTRIBUTION MARGIN INCOME STATEMENT

Sales XX
Less: Variable cost (variable product cost + variable period cost) XX
Contribution margin XX
Less: Fixed cost (fixed product cost + fixed period cost) XX
Operating income (profit) XX
TRADITIONAL INCOME STATEMENT

Sales XX
Less: Cost of goods sold (variable product cost + fixed product cost) XX
Gross profit XX
Less: Operating expenses (variable period cost + fixed period cost) XX
Operating income (profit) XX
Strategic Cost Management by: Bernadette L. Baul, CPA Page 1 of 24

4) What is contribution margin and how it can be computed?
Answer: Contribution margin (CM) is the difference between sales and variable costs. It is otherwise known as
marginal income, profit contribution, contribution to fixed cost or incremental contribution. Contribution margin per
unit is the amount of increase in profit for every unit sold. CM can be expressed in:
a) Total basis:
Total sales X
Less: Total variable cost (product and period variable cost) X
Total contribution margin X
b) Per unit basis:
Selling price per unit (refer to important notes!) X

Less: Variable cost per unit (refer to important notes!) X
Contribution margin per unit X
c) Percentage (ratio) basis:
Contribution margin per unit

= Contribution margin ratio (a.k.a. CMR)
Selling price per unit
Contribution margin in peso

Sales in peso
Change in Profit
Change in Sales
Important notes!
1. If selling price is not available, it can be computed as follows:
Total sales
= Selling price per unit
Number of units sold
2. If variable cost per unit is not available, it can be determined by following these steps:
Given in the problem is TOTAL variable cost:
First – determine the variable PRODUCT cost per unit. Be careful on the given information, the basis of the per
unit variable cost is either units produced or units sold depending on the information given:
(1) “total variable cost incurred during the production”; or
Total variable cost incurred during the period

= Variable product cost per unit
Number of units PRODUCED
(2) “total variable cost included in the cost of goods sold (income statement)”
Total variable cost included in the income statement

= Variable product cost per unit
Number of units SOLD
Second – determine the variable PERIOD cost per unit. Unlike variable product cost, the basis for variable
period cost per unit is always the number of units sold.
Total variable cost incurred during the period

= Variable period cost per unit
Number of units SOLD
Third – compute the variable cost per unit (product and period combined)
Variable product cost per unit X

Add: Variable period cost per unit X
Variable cost per unit X
Given in the problem is PER UNIT variable cost:
Direct material cost per unit X

Add: Direct labor cost per unit X
Add: Variable overhead cost per unit X
Add: Variable selling & general and administrative cost per unit X
Variable cost per unit X
5) What will be the new operating income when there are changes in the four factors that affects the operating
income?
Answer: The four factors affecting the operating income are: (1) selling price; (2) unit variable cost; (3) fixed cost; and
(4) volume. The expected question is “after one or both factors change what will be the new operating profit?”
This question can be answered by using the contribution margin approach:
CONTRIBUTION MARGIN INCOME STATEMENT

Sales (selling price x units sold) XX
Less: Variable cost (variable unit cost x units sold) XX
Contribution margin XX
Less: Fixed cost (constant) XX
Operating profit XX
6) What is break-even point and how it can be computed?
Answer: The point of activity (sales in peso or in units) where total revenues equal total costs (i.e., there is neither profit
or loss). Break even point can be expressed in either (1) peso; or (2) units. The procedure is, to recover the fixed cost
from earnings of contribution margin from sale.
a) Break-even point in peso.
Alternative 1.
Total fixed cost (fixed product cost + fixed period cost)

= Break-even point in peso
Contribution margin ratio (CMR)
Alternative 2.
Break-even point in units X

Times: Selling per unit X
Break-even point in peso X
b) Break-even point in units.
Alternative 1.
Total fixed cost

= Break-even point in units
Alternative 2.
Break-even point in peso


7) How to determine the amount of sales needed (peso and units) to obtain a target operating income (a.k.a. target
sales)?
Answer: The target operating income will be added to total fixed cost to obtain the amount that should be recovered
from contribution margin. If tax is involved, the target profit should be “gross up”.
a) Target sales in peso without tax involved.
Alternative 1.
Total fixed cost + target profit

= Target sales in peso
Alternative 2.
Target sales in units X
Target sales in peso X
b) Target sales in units without tax involved.
Alternative 1.
Total fixed cost + target profit

= Target sales in units
Alternative 2.
Target sales in peso

c) Target sales in peso with tax involved.
Alternative 1.
Total fixed cost + [target profit ÷ (100% - tax rate)]

Alternative 2.

d) Target sales in units with tax involved.
Alternative 1.
Total fixed cost + [target profit ÷ (100% - tax rate)]

Alternative 2.


e) Target sales expressed in percentage of sales (e.g., desired profit is 15% of sales)
(1) In Peso
Total fixed cost

CMR – Desired Percentage of Profit (%)
(2) In Units

f) Target sales expressed in peso per unit sold (e.g., desired profit is P2 per unit sold)
(1) In Peso
Total fixed cost

CM per unit – Desired Profit per unit
(2) In Units

Times: Selling price per unit X
8) What is margin of safety (MOS) and how can it be computed?
Answer: Indicates the amount by which actual or planned sales may be reduced without incurring a loss. It is the
difference between actual or planned sales volume and break-even sales.
Stated otherwise, it is the difference between actual sales and break even sales. It indicates the maximum amount by
which sales could decline without incurring a loss. It can be expressed in either (1) peso; or (2) ratio.
a) Margin of safety in peso.
Sales in peso (actual or planned) X

Less: Break even in peso (refer to Question 6) X
Margin of safety in peso X
b) Margin of safety ratio
Alternative 1:
Margin of safety in peso (refer above)

= Margin of safety ratio
Sales in peso
Alternative 2:
(Net income ÷ Sales)

= Margin of safety ratio
(Contribution margin in peso ÷ Sales)

Profit ratio

9) What is indifference point and how can it be computed?
Answer: this is the level of sales (peso or units) at which two alternatives being analyzed would yield the same amount
of profits. It is at this point where the decision maker would be indifferent as to what alternative to take. If the
company has no alternative, no indifference point will be computed.
Indifference point in units.
First – Compute the difference in fixed cost:
Fixed cost of Alternative-A X

Less: Fixed cost of Alternative-B X
Difference in fixed cost X
Second – Compute the difference contribution margin per unit for each alternative:
Selling price of Alternative-A X
Less: Variable cost per unit of Alternative-A X
Contribution margin per unit of Alternative-A X
Selling price of Alternative-B X

Less: Variable cost per unit of Alternative-B X
Contribution margin per unit of Alternative-B X
Contribution margin per unit of Alternative-A X

Less: Contribution margin per unit of Alternative-B X
Difference in contribution margin per unit X
Third – Compute the indifference point in units:
Difference in fixed cost (first step)

= Indifference point in units
Difference in contribution margin per unit (second step)
Indifference point in peso.
First – Compute the difference in fixed cost:
Fixed cost of Alternative-A X

Less: Fixed cost of Alternative-B X
Difference in fixed cost X
Second – Compute the difference contribution margin ratio for each alternative:
Contribution margin ratio of Alternative-A X

Less: Contribution margin ratio of Alternative-B X
Difference in contribution margin ratio (CMR) X
Third – Compute the indifference point in units:
Difference in fixed cost (first step)

= Indifference point in peso
Difference in contribution margin ratio (CMR)
10) What is degree of operating leverage (DOL) and how it is being computed?
Answer: it is a measure of the sensitivity of profit changes to changes in sales volume. DOL measures the percentage
in profit that results from a percentage of change in sales. The higher the degree of operating leverage, the greater the
change in profit when sales change.
Alternative 1:
Contribution margin in peso

= Degree of Operating Leverage (DOL)
Operating income
Alternative 2:
Percentage Change in Operating Income

= Degree of Operating Leverage (DOL)
Percentage Change in Sales in Peso

11) How to compute the break-even point of the company with multiple products (a.k.a. sales mix)?
Answer: Sales mix is the relative combination of quantities of sales of various products that make up the total sales of
a company.
Break-even point in units.
First – determine the weighted average contribution margin per unit.
Illustration: A company is selling two products: Product Y and Product Z. The total sales composed of 20% of
Product Y and 80% of Product Z (or a ratio of is 2:8).
Product Y Product Z Weighted CM/unit

Selling price per unit X X
Less: Variable cost per unit X X
Contribution margin per unit X X
Times: Percentage composing the sales 20% 80%
Weighted average contribution margin per unit X + X X
Second – compute the break-even point in units.
Total fixed cost

Weighted average contribution margin per unit
Break-even point in peso.
First – determine the weighted average contribution margin per unit.
For better illustration: A company is selling two products: Product Y and Product Z. The total sales composed of 20%
of Product Y and 80% of Product Z (or ratio is 2:8).
Product Y Product Z Weighted CM/unit

Selling price per unit X X
Less: Variable cost per unit X X
Contribution margin per unit X X
Divide: Selling price per unit X X
Contribution margin ratio (CMR) X X
Times: Percentage composing the sales 20% 80%
Weighted average contribution margin ratio (CMR) X + X X
Second – compute the break-even point in units.
Total fixed cost

= Break-even point in peso.
Weighted average contribution margin ratio (CMR)
12) What are the assumptions when performing CVP analysis?
Answer:
a. Changes in the level of revenues and costs arise only because of changes in the number of product (or service)
units produced and sold.
b. Total costs can be separated into fixed component that does not vary with the output level and a component that
is variable with respect to the output level.
c. When represented graphically, the behavior of total revenues and total costs are linear (represented as a straight
line) in relation to output level within a relevant range and time period.
d. The selling price, variable cost per unit, and fixed costs are known and constant.
e. The analysis either covers a single product or assumes that the sales mix, when multiple products are sold, will
remain constant as the level of total units sold changes.
f. All revenues and costs can be added and compared without taking into account the time value of money.

FAR EASTERN UNIVERSITY
Manila City
Strategic Cost Management (SCM)

Classroom Discussion Problems – 2.0 Cost Volume Profit Analysis
2.1 CONTRIBUTION INCOME STATEMENT.
1) At a volume of 15,000 units, Boston reported sales revenues of P600,000, variable costs of P225,000, and fixed
costs of P120,000. The company's contribution margin per unit is:
A. 17
B. 25
C. 47
D. 55
2) A tile manufacturer has supplied the following data:

Boxes of tiles produced and sold 240,000 units
Sales revenue P 1,128,000

Variable manufacturing expense 456,000
Fixed manufacturing expense 320,000
Variable selling and administrative expense 156,000
Fixed selling and administrative expense 96,000
Net operating income P 100,000
What is the company's unit contribution margin?
A. 4.70
B. 0.42
C. 2.15
D. 2.55
3) A recent income statement of Nixon Corporation reported the following data:
Sales revenue P 5,000,000

Variable costs 3,000,000
Fixed costs 1,600,000
If these data are based on the sale of 10,000 units, the contribution margin per unit would be:
A. 40
B. 140
C. 200
D. 460
4) Double Dragon Company produced 500 units of a product and incurred the following costs:
Direct materials P 8,000
Direct labor 10,000
Overhead (20% fixed) 45,000
If sales revenue of 500 units is P102,000, what is the contribution margin percentage?
A. 44%
B. 47%
C. 53%
D. 74%
5) The following is Addison Corporation's contribution format income statement for last month:
Sales P1,000,000
Less variable expenses 700,000
Contribution margin 300,000
Less fixed expenses 180,000
Net income P 120,000
The company has no beginning or ending inventories. A total of 20,000 units were produced and sold last month.
What is the company's contribution margin ratio?
A. 250%
B. 150%
C. 70%
D. 30%

6) Janet Company produces a game that sells for P17 per game. Variable expenses are P9 per game and fixed
expenses total P172,000 annually. The contribution margin ratio is closest to:
A. 47.1%
B. 2.1%
C. 1.9%
D. 52.9%
Use the following information for the next six (6) questions:
Given the following projected contribution income statement for the coming year:
Sales (100 units) P 10,000

Variable costs 3,000
Fixed cost 4,000
Operating income 3,000
7) What is the unit contribution margin?
A. 70
B. 30
C. 60
D. 100
8) What is the contribution margin ratio?

A. 70%
B. 30%
C. 60%
D. 40%
9) How much is the operating income if only 80 units will be sold instead of 100 units?
A. 1,000
B. 2,400
C. 3,000
D. 1,600
10) How much is the increase in operating income if 150 units will be sold instead of 100 units?
A. 6,500
B. 3,500
C. 4,500
D. 1,500
11) How much is the operating income if the variable cost per unit is P32 and sold 100 units?
A. 2,800
B. 2,450
C. 3,200
D. 5,000
12) Tierra Company prepared the following preliminary forecast concerning Product X for 2021 assuming no
expenditure for advertising:
Selling price per unit P 10

Unit sales 100,000 units
Variable costs P 600,000
Fixed costs P 300,000
Based on a market study in December 2020, Tierra estimated that it could increase the units selling price by 15%
and increase the unit sales volume by 10% if P100,000 was spent in advertising. Assuming that Tierra
incorporated these changes in its 2021 forecast, what should be the operating income for Product X?
A. 175,000
B. 190,000
C. 205,000
D. 365,000

Use the following information for the next two (2) questions:
Stairway Company sells a single product. The company’s most recent income statement is given below:
Sales (5,000 units) 200,000
Less: Variable expenses 120,000
Less Fixed overhead 48,000
Operating income 32,000
13) What is the contribution margin per unit?
A. 16 per unit
B. 6.4 per unit
C. 40 per unit
D. 24 per unit
14) If sales are doubled to P400,000, how much is the total expected variable cost?
A. 240,000
B. 200,000
C. 360,000
D. 300,000
15) If sales are doubled to P400,000, how much is the expected total fixed cost?
A. 96,000
B. 48,000
C. 116,000
D. 57,500
16) If 100 more units are sold, how much increase in profit is expected?
A. 1,600
B. 33,600
C. 6,000
D. 640
Basic Company incurred the following costs in the production of P10,000 units of its main product, product X:
Selling price per unit P 100
Direct material 15
Direct labor 12
Variable overhead 10
Variable selling and administrative expense 18
Total fixed overhead 220,000
Total fixed selling and administrative expense 88,000
17) Assuming all the 10,000 units produced was subsequently sold, the contribution margin of Basic Company is:
A. 692,000
B. 242,000
C. 410,000
D. 450,000
18) What is the contribution margin ratio of Basic Company?

A. 41%
B. 45%
C. 55%
D. 59%
19) What is the operating income of Basic Company?

A. 142,000
B. 322,000
C. 450,000
D. 230,000

Grip Company manufactured 10,000 units during the month. It incurred the following costs for production:
Direct materials 200,000

Direct labor 100,000
Variable overhead 50,000
Fixed overhead 150,000
Total 500,000
The company was able to sell 8,000 units for P100 each. It incurred selling and administrative expenses of P100,000,
P40,000 of which are variable.
20) What is the contribution margin of Grip Company?

A. 480,000
B. 410,000
C. 600,000
D. 390,000
21) What is the operating income of Grip Company?

A. 270,000
B. 330,000
C. 250,000
D. 230,000
Jumpman Corporation produces and sells a single product. The company has provided its contribution format income
statement for July:
Sales (3,200 units) P 238,080

Variable expenses 145,920
Fixed expenses 74,400
Net operating income 17,760
22) If the company sells 3,000 units, its total contribution margin should be
A. 92,160
B. 108,000
C. 86,400
D. 96,600
23) If the company sells 4,000 units, its net operating income would be
A. 115,200
B. 92,160
C. 40,800
D. 17,760
24) Jo Company sells its only product for P60 per unit and incurs the following variable costs per unit:
Direct material P 16
Direct labor 12
Manufacturing overhead 7
Total variable manufacturing cost 35
Variable selling expenses 5
Total variable costs 40
Jo’s annual fixed costs are P880,000. 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)?
A. 75%
B. 30%
C. 24%
D. 20%
25) DSP Company earned P100,000 on sales of P1,000,000. It earned P130,000 on sales of P1,100,000. Contribution
margin as a percentage of sales is:
A. 30%
B. 40%
C. 70%
D. 90%

2.2 BREAK-EVEN POINT.
26) Miguel Corporation budgets fixed expenses of P250,000; variable expenses of P180,000 and sales of 15,000 units
for P28 each. The breakeven point in units is
A. 14,000 units
B. 15,625 units
C. 16,400 units
D. 16,625 units
27) A recent income statement of Fox Corporation reported the following data:
Sales revenue P3,600,000

Fixed costs 1,000,000
If these data are based on the sale of 10,000 units, the break-even point would be:
A. 2,000 units
B. 2,778 units
C. 3,600 units
D. 5,000 units
28) The following information pertains to Rica Company:
Variable Fixed
Manufacturing costs P340,000 P 70,000
Selling and administrative expenses 10,000 60,000
During the year, the company sold 50,000 units for P1,000,000. How much is Rica's break-even point in number
of units?
A. 9,848
B. 10,000
C. 26,000
D. 18,571
29) Budget data for the Bidwell Company are as follows:
Fixed Variable Total

Sales (100,000 units) P1,000,000
Expenses:
Raw materials P300,000
Overhead P100,000 150,000
Selling and administrative 110,000 50,000
Total expenses P210,000 P700,000 (910,000)
Bidwell's break-even sales in units is:

A. 30,000 units
B. 91,000 units
C. 60,000 units
D. 70,000 units
30) Abet Company plans to market a new product. Based on its market studies, Abet estimates that it can sell P5,500
units in 2021. The selling price will be P2 per unit. Variable cost is estimated to be 40% of the selling price. Fixed
cost is estimated to be P6,000. What is the break even point?
A. 3,750 units
B. 5,000 units
C. 5,500 units
D. 7,500 units

31) DEF Company is a retailer for video disks. The projected net income for the current year is P200,000 based on
sales volume of 200,000 video disks. DEF has been selling the disk for P16 each. The variable cost consist of P10
unit purchase price of the disks and handling cost of P2 per disk.
DEF’s annual fixed costs are P600,000. What is the company’s break-even point for the current year in number of
video disks?
A. 152,000
B. 150,000
C. 155,000
D. 140,000
32) Asher Company manufactures fans with direct material costs of P10 per unit and direct labor of P7 per unit. A
local carrier charges Asher P5 per unit to make deliveries. Sales commissions are paid at 10% of the selling price.
Fans are sold for P100 each. Indirect factory costs and administrative costs are P6,800 and P37,200 per month,
respectively.
How many fans must Asher produce to break even?

A. 1,375
B. 647
C. 564
D. 530
33) What is the breakeven level of revenues for a firm with P4,000,000 in sales, variable costs of P2,800,000 and fixed
costs of P1,000,000?
A. 1,428,571
B. 3,333,333
C. 9,333,333
D. 13,333,333
34) Dynamic Company had sales of P1,500,000, fixed costs of P400,000 and variable costs of P900,000. What would
be the amount of the sales pesos at the break-even point?
A. 1,000,000
B. 1,200,000
C. 1,500,000
D. 1,800,000
35) The following is Allison Corporation's contribution format income statement for last month:
Sales P800,000
Net income P100,000
The company has no beginning or ending inventories. The company produced and sold 10,000 units last month.
What is the company's break-even sales in dollars?
A. P0
B. P640,000
C. P700,000
D. P400,000
36) The common-size income statement for BTS Company is presented below:
Revenue P 600,000
Cost of sales:
Variable 35%
Fixed 25%
Total 60%
Gross profit 40%
Operating expenses:
Variable 15%
Fixed 16% 31%
Operating income 9%
Determine the revenue needed to break even?
A. 360,000
B. 450,000
C. 485,000
D. 492,000
37) Barnes Corporation manufactures skateboards and is in the process of preparing next year’s budget. The pro
forma income statement for the current year is presented below.
Sales P1,500,000
Cost of sales:
Direct materials P 250,000
Variable overhead 75,000
Fixed overhead 100,000 575,000
Gross profit P 925,000
Selling and G&A
Variable P 200,000
Fixed 250,000 450,000
Operating income P 475,000
The breakeven point (rounded to the nearest dollar) for Barnes Corporation for the current year is
A. 146,341
B. 636,364
C. 729,730
D. 181,818
38) Given the selling price at P120 per unit; contribution margin ratio at 25% and fixed costs of P250,000, the total
variable expenses at the break-even point would be:
A. 350,000
B. 750,000
C. 450,000
D. 250,000
39) Hat Co. manufactures a western-style hat that sells for P10 per unit. This is its sole product and it has projected
the break-even point at 50,000 units in the coming period. If fixed costs are projected at P100,000, what is the
projected contribution margin ratio?
A. 80 percent
B. 20 percent
C. 40 percent
D. 60 percent
40) Apple Company has fixed costs of P200,000 and breakeven sales of P1,600,000. What is the projected profit at
P2,400,000 sales?
A. 600,000
B. 300,000
C. 800,000
D. 100,000
41) DSP Company earned P100,000 on sales of P1,000,000. It earned P130,000 on sales of P1,100,000. Contribution
margin as a percentage of sales is:
A. 30%
B. 40%
C. 70%
D. 90%
42) In planning its operations for 2021 based on a sales forecast of P6,000,000, Throne, Inc., prepared the following
estimated cost:
Variable cost Fixed cost
Direct material P1,600,000
Direct labor 1,400,000
Factory overhead 600,000 900,000
Selling expenses 240,000 360,000
Administrative expenses 60,000 140,000
3,900,000 1,400,000
What would be the amount of sales in pesos at the break-even point?
A. 2,250,000
B. 3,500,000
C. 4,000,000
D. 5,300,000

2.3 TARGET PROFIT.
43) Selling price is P50, unit variable cost is P34, and fixed costs are P200,000. Unit sales required to earn a P60,000
profit are
A. 5,200 units
B. 7,647 units
C. 13,700 units
D. 16,250 units
44) A recent income statement of East Corporation reported the following data:
Sales revenue (5,000 units) P5,000,000

Fixed costs 800,000
If the company desired to earn a target net profit of P820,000, it would have to sell:
A. 2,000 units
B. 2,050 units
C. 4,050 units
D. 6,750 units
45) How many units would have to be sold to yield a target operating income of P22,000, assuming variable costs are
P15 per unit, total fixed costs are P2,000, and the unit selling price is P20?
A. 4,800 units
B. 4,400 units
C. 4,000 units
D. 3,600 units
46) Everywhere Company provided the income statement for 2022:
Sales P 300,000
Variable costs (150,000)
Contribution margin P 150,000
Fixed costs (100,000)
Profit before taxes P 50,000
If the units sales price for Everywhere’s sole product was P10, how many units would it have needed to sell in 2022
to produce a profit of P40,000?
A. 27,500 units
B. 29,000 units
C. 28,000 units
D. 26,667 units
Sales P1,000,000
Net income P 120,000
How many units would the company have to sell to attain target profits of P150,000?
A. 22,000 units
B. 37,500 units
C. 25,000 units
D. 26,667 units

48) Assume the following cost behavior data for Brooks Company:
Sales price P8.00 per unit
Variable costs P6.00 per unit
Fixed costs P10,000
What volume of sales dollars is required to earn a before-tax income of P12,000?
A. 44,000
B. 80,000
C. 88,000
D. 120,000
49) Archie sells a single product for P50. Variable costs are 60% of the selling price, and the company has fixed costs
that amount to P400,000. Current sales total 16,000 units. In order to produce a target profit of P22,000, Archie's
dollar sales must total:
A. 8,440
B. 21,100
C. 1,000,000
D. 1,055,000
50) Dynamic Company had sales of P1,500,000, fixed costs of P400,000 and variable costs of P900,000. How much
should the sales be in order to produce a net income of P30,000?
A. 2,500,000
B. 2,250,000
C. 2,000,000
D. 1,075,000
51) During March, Adams Company had sales of P5,000,000, variable expenses of P3,000,000, and fixed expenses of
P1,500,000. Assume that cost behavior and unit selling price remain unchanged during April. In order for the
company to realize net operating income of P300,000 for April, sales would have to be:
A. 3,750,000
B. 4,050,000
C. 4,500,000
D. 4,800,000
52) Yellow, Inc., sells a single product for P10. Variable costs are P4 per unit and fixed costs total P120,000 at a
volume level of 10,000 units. What dollar sales level would Yellow have to achieve to earn a target net profit of
P240,000?
A. 400,000
B. 500,000
C. 600,000
D. 750,000
53) Merissa Company is planning to sell 100,000 units of Product Z for P12 per unit. Fixed cost is P280,000. In order
to realize a profit of P200,000, what would the variable cost be?
A. 480,000
B. 720,000
C. 300,000
D. 220,000
54) Assume the following cost behavior data for Brooks Company:
Sales price P8.00 per unit

Variable costs P6.00 per unit
Fixed costs P10,000
Tax rate 40%
What volume of sales dollars is required to earn an after-tax income of P18,000?
A. 8,600 units
B. 27,500 units
C. 14,000 units
D. 20,000 units

55) Stephanie’s Bridal Shoppe sells wedding dresses. The average selling price of each dress is P1,000, variable
costs P400, and fixed costs P90,000. How many dresses must the Bridal Shoppe sell in order to yield after-tax net
income of P18,000, assuming the tax rate is 40%?
A. 200 dresses
B. 170 dresses
C. 150 dresses
D. 145 dresses
56) Barney, Inc., is subject to a 40% income tax rate. The following data pertain to the period just ended when the
company produced and sold 45,000 units:

Fixed costs 432,000
How many units must Barney sell to earn an after-tax profit of P180,000?
A. 42,000
B. 51,000
C. 45,000
D. 61,000
57) Madden Company has projected its income before taxes for next year as shown below. Madden is subject to a
40% income tax rate.
Sales (160,000 units) P8,000,000

Cost of Sales
Variable Costs P2,000,000
Fixed Costs 3,000,000 5,000,000
Income before Taxes P3,000,000
Madden’s net assets are P36,000,000. The peso sales that must be achieved for Madden to earn a 10% after-tax
return on assets would be
A. 8,800,000
B. 16,000,000
C. 12,000,000
D. 6,880,000
58) Buddy Company sells its single product for P40 per unit uses cost volume profit analysis in its planning. The
company’s after tax net income for the past year was P1,188,000 after applying an effective tax rate of 40%. The
projected costs for manufacturing and selling its single product in the coming year are in the next column:
Variable Costs Per Unit Fixed Costs

Direct material P 5.00
Direct labor 4.00
Manufacturing overhead 6.00 P6,200,000
Selling and administrative costs 3.00 3,700,000
Total P18.00 P9,900,000
The peso volume required in the coming to earn the same after tax profit as the past year is
A. 20,160,000
B. 21,600,000
C. 23,400,000
D. 26,400,000
59) Merchandisers, Inc. sells Product O to retailers for P200. The unit variable cost is P40 with a selling commission of
10%. Fixed manufacturing costs total P1,000,000 per month while fixed selling and administrative costs total
P420,000. The income tax rate is 30%. The target sales if after tax income is P123,200 would be
A. 10,950 units
B. 15,640 units
C. 13,750 units
D. 11,400 units

60) Jose Manufacturing incurs annual fixed costs of P250,000 in producing and selling a single product. Estimated
unit sales are 125,000. An after-tax income of P75,000 is desired by management. The company projects its
income tax rate at 40 percent.
What is the maximum amount that Jose can expend for variable costs per unit and still meet its profit objective if
the sales price per unit is estimated at P6.
A. 3.37
B. 3.59
C. 3.00
D. 3.70
61) August Company sells Product Lamig for P5 per unit. The fixed cost is P210,000 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. 700,000
B. 525,000
C. 472,500
D. 420,000
2.4 INDIFFERENCE POINT.
62) Machine A has fixed costs of P225,000 and a variable cost of P20. Machine B has fixed costs of P300,000 and a
variable cost of P14. What is the indifference point, in units?
A. 11,250 units
B. 12,500 units
C. 21,429 units
D. 21,249 units
63) Edifer Tools, Inc. uses a semi-automated process in its production. It is faced with a proposal to completely
automate its production. Below are data for these alternative methods:
Complete Automation Semi-Automated

Materials cost per unit P12.00 P10.50
Labor cost per unit 3.00 15.00
Other variable cost per unit 4.50 3.00
Lease cost per year 75,000 30,000
Maintenance cost per year 15,000 6,000
The cost indifference point is at

A. 3,300 units
B. 3,000 units
C. 6,000 units
D. 6,300 units
64) J J Motors, Inc. employs 45 sales personnel to market its line of luxury automobiles. The average car sells for
P23,000, and a 6% commission is paid to the salesperson. J.J. Motors is considering a change to a commission
arrangement that would pay each salesperson a salary of P2,000 per month plus a commission of 2% of the sales
made by that salesperson. The amount of total monthly car sales at which J J Motors would be indifferent as to
which plan to select is
A. 2,250,000
B. 3,000,000
C. 1,500,000
D. 1,250,000
65) Wheels Corp. employs 45 sales personnel to market its sedan cars. The average car sells for P690,000 and a 6%
commission is paid to the sales person. It is considering changing the scheme to a commission arrangement that
would pay each person a package of P30,000 plus a commission of 2% of the sales made by the person. The
amount of total monthly car sales at which Wheels Corp. would be indifferent (answer may be rounded off) as to
which plan to select is
A. 45,000,000 B. 36,500,000 C. 33,750,000 D. 22,500,000
66) A company wants to open a new store in one of two nearby shopping malls. In Mall A, the rent will be P250,000
per year. In Mall B, the rent will be 4% of gross revenues. Assuming that revenues and all other elements under
consideration are the same for both malls, at what level of revenues will the company be indifferent between the
two malls?
A. 1,000,000
B. 4,000,000
C. 6,250,000
D. 12,500,000

67) Eat N Eat Shop operates sandwiches on the go in shopping malls. The average selling price of a sandwich is
P100. And the average cost of each sandwich is P80. A new mall is opening where Eat N Eat wants to locate a
shop but the location manager is not sure about the rent method to accept. The mall operators offer two options
for shop rentals as follows:
§ Paying a base rent of P40,000 plus 8% of revenue received, or
§ Paying a base rent of P20,000 plus 14% of revenue received up to a maximum of P80,000
Eat N Eat will be indifferent between options 1 and 2 when its level of sales is
A. 1,000 B. 750 C. 900 D. 3,333
68) Mickey is planning to operate a water refilling station. She is considering two alternatives on how to purify water
that she will sell.
Alternative 1, called Auto Fill is highly automated. It will use an expensive machine that sucks water from the sea,
purifies the water, and bottled purified water comes out. Auto Fill’s costs are P5,000 per month plus P2 per bottle
of purified water.
Alternative 2, is called Sinala Water. Rainwater is collected and manually filtered using an old socks. Sinala
Water’s costs are P2,000 per month plus P4 per bottled of filtered water.
The cost per bottle at the indifference point will be:

A. 1,500 B. P5.33 C. P2.00 D. P3.00
2.4 MARGIN OF SAFETY.
Sales P 1,000,000
What is the company's margin of safety in peso?
A. 400,000
B. 600,000
C. 120,000
D. 880,000
70) The following information relates to Snorbird Corporation.

Sales at the breakeven point P 312,500
Total fixed expenses 250,000
Net operating income 150,000
What is Snowbird’s margin of safety?
A. 62,500
B. 187,500
C. 100,000
D. 212,000
71) Narchie sells a single product for P50. Variable costs are 60% of the selling price, and the company has fixed
costs that amount to P400,000. Current sales total 16,000 units. If Narchie sells 24,000 units, its safety margin will
be in peso:
A. 200,000
B. 400,000
C. 1,000,000
D. 1,200,000
72) If current sales are P1,000,000 and break-even sales are P600,000, the margin of safety ratio is:
A. 6%
B. 60%
C. 40%
D. 167%

73) Selected budgeted data of JZ Company for the coming year:
Selling price per unit P 12.00
Budgeted sales 600,000.00
Fixed expenses 150,000.00
Variable cost per unit 8.00
What is the margin of safety ratio in percent?
A. 15%
B. 20%
C. 30%
D. 25%
74) Every Second Stuff toys manufactures and sells dolls. The following information relates to the operating results for
the last quarter:
Stuff toys sold 19,375
Break-even point in number of toys 15,500
Break-even point in peso sales P65,875
Total fixed costs P47,275
What was the margin of safety percentage for the last quarter of Tropical Stuff toys? (round off to the nearest
percent)
A. 20%
B. 25%
C. 28%
D. 72%
Laguna Corporation’s sales for the month of May resulted in a margin of safety ratio of 25%, and after tax return on
sales of 6%. The company is subject to an average income tax rate of 40% and its monthly fixed cost is estimated to
be at P100,000.
75) What is the contribution margin ratio?

A. 24%
B. 40%
C. 25%
D. 36%
76) What is the current sales in peso for the month of May?
A. 333,333
B. 714,286
C. 666,667
D. 384,615
77) For its most recent fiscal year, Corn Company reported that its contribution margin was equal to 40 percent of
sales and that its net income amounted to 10 percent of sales. If its fixed cost for the year were P60,000, how
much was the margin of safety?
A. 150,000
B. 200,000
C. 600,000
D. 50,000
2.5 DEGREE OF OPERATING LEVERAGE.
78) The following information relates to Paterno Company:

Contribution margin 4,000,000
Net income 1,000,000
If a manager at Paterno desired to determine the percentage impact on net income of a given percentage change
in sales, the manager would multiply the percentage increase/decrease in sales revenue by:
A. 0.25
B. 0.40
C. 2.50
D. 4.00

79) A firm has fixed operating costs of P175,000, total sales revenue of P3,000,000 and total variable costs of
P2,250,000. The firm's degree of operating leverage is ______.
A. 0.77
B. 1.30
C. 0.81
D. 4.29
80) Paxton Corp has provided the following data concerning its operations last month:
Sales P400,000
Paxton Corp is a retailing organization. The operating leverage is:

A. 3.00
B. 8.00
C. 0.33
D. 5.00
81) Edco Company produced and sold 45,000 units of a single product last year, with the following results:

Variable Fixed
Manufacturing costs 585,000 270,000
Selling costs 40,500 54,000
Administrative costs 184,500 108,000
Edco's operating leverage factor was:
A. 4.00
B. 5.00
C. 7.00
D. 8.00
82) Kendall Company has sales of 1,000 units at P60 a unit. Variable expenses are 30% of the selling price. If total
fixed expenses are P30,000, the degree of operating leverage is:
A. 1.50
B. 5.00
C. 1.67
D. 3.50
83) Brown Company has sales of 2,000 units at P70 per unit. Variable expenses are 40% of the selling price. If total
fixed expenses are P44,000, the degree of operating leverage is:
A. 0.79
B. 1.40
C. 3.50
D. 2.10
84) The Comway Sales Company manufactures a line of ladies watches which is sold through discount houses. Each
watch is sold for P1,500, the fixed costs are P3,600,000 for 60,000 watches or less; variable costs are P900 per
watch.
What is Comway’s degree of operating leverage at sales of 12,000 watches?
A. 2.0 times
B. 0.5 times
C. 5.0 times
D. 0.2 times
85) The following is last month's contribution format income statement:
Sales (8,000 units) P800,000

Net income P100,000
What is the company's degree of operating leverage?

A. 0.125
B. 8.000
C. 3.000
D. 0.333

86) Carpenter Company have the following income statements for 2021:
Sales P100,000
Fixed costs 50,000
Net income P 30,000
What is the degree of operating leverage for Carpenter Company for 2021?
A. 2.667
B. 0.375
C. 1.667
D. 1.250
87) Green Company's variable expenses are 75% of sales. At a sales level of P400,000, the company's degree of
operating leverage is 8. At this sales level, fixed expenses equal:
A. 87,500
B. 100,000
C. 50,000
D. 75,000
88) Fox Company's contribution margin ratio is 20%. If the degree of operating leverage is 15 at the P225,000 sales
level, net operating income at the P225,000 sales level must equal:
A. 2,250
B. 6,750
C. 3,000
D. 5,063
89) Turner Company's contribution margin ratio is 15%. If the degree of operating leverage is 12 at the P150,000 sales
level, net operating income at the P150,000 sales level must equal:
A. 1,500
B. 2,160
C. 1,875
D. 2,160
90) Sales in North Company increased from P60,000 per year to P63,000 per year while net operating income
increased from P10,000 to P12,000. Given this data, the company's degree of operating leverage must have been:
A. 4.0
B. 1.5
C. 5.0
D. 21.0
91) If a firm's sales increase from P100,000,000 to P110,000,000, its earnings before interest and taxes (EBIT) increase
from P20,000,000 to P25,000,000. This suggests that the firm's degree of operating leverage (DOL) is:
A. 2.00
B. 1.50
C. 1.25
D. 2.50
92) Eric Company sells 100,000 wrenches for P12.00 a unit. Operating leverage is 2.4 times and operating income is
P200,000. What should be reported as variable expenses in the cost volume profit income statement?
A. 920,000 B. 900,000 C. 720,000 D. 480,000
93) Sales in Kenya 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:
A. 15 B. 2.7 C. 30 D. 12

2.6 SALES MIX.
Lamar & Co., makes and sells two types of shoes, Plain and Fancy. Data concerning these products are as follows:
Plain Fancy
Unit selling price P20.00 P35.00
Variable cost per unit 12.00 24.50
Sixty percent of the unit sales are Plain, and annual fixed expenses are P45,000.
94) The weighted-average unit contribution margin is:

A. 4.80
B. 9.00
C. 9.25
D. 17.00
95) Assuming that the sales mix remains constant, the total number of units that the company must sell to break even
is:
A. 2,432
B. 2,647
C. 4,737
D. 5,000
96) Assuming a constant mix of 3 units of Small for every 1 unit of Large.
Small Large Total

Sales P20 P30
Variable cost per unit 14 18
Total fixed costs P48,000
The breakeven point in units would be

A. B. C. D.
Small 4,800 1,200 1,600 400
Large 1,600 400 4,800 1,200
97) The following information is for Barnett Corporation:
Product X Product Y
Revenue P10.00 P15.00
Variable Cost 2.50 5.00
Total Fixed Costs P50,000
What is the breakeven point, assuming the sales mix consists of two units of Product X and one unit of Product Y?
A. B. C. D.
Product X 2,000 units 2,025 units 4,025 units 4,000 units
Product Y 1,000 units 1,012.5 units 2,012.5 units 2,000 units
98) Von Stutgart International’s breakeven point is 8,000 racing bicycles and 12,000 5-speed bicycles. If the selling
price and variable costs are P570 and P200 for a racer and P180 and P90 for a 5-speed, respectively, what is the
weighted-average unit contribution margin?
A. 100
B. 145
C. 179
D. 202
99) Wren Co. manufactures and sells two products with selling prices and variable costs as follows:
N95 Mask Surgical Mask

Selling price P18.00 P22.00
Variable costs 12.00 14.00
Wren's total annual fixed costs are P38,400. Wren sells four units of N95 Mask for every unit of Surgical Mask. If
operating income last year was P28,800, what was the number of units Wren sold?
A. 5,486
B. 6,000
C. 9,600
D. 10,500

100) Catfur Company has fixed costs of P300,000. It produces two products, X and Y. Product X has a variable cost
percentage equal to 60% of its P10 per unit selling price. Product Y has a variable cost percentage equal to 70%
of its P30 selling price. For the past several years, sales of Product X have averaged 66-2/3% of the sale of
Product Y. That ratio is not expected to change. What is Catfur’s breakeven point in dollars?
A. 300,000
B. 750,000
C. 857,142
D. 942,857
101) The data below pertain to two type of products manufactured by Kron Corporation. Fixed costs total P300,000
annually. The expected mix in units is 60% for Product Sun and 40% for Product Moon.
Product Sun Product Moon

Sales price per unit P120 P500
Variable cost per unit 70 200
How much is Korn’s breakeven sales in peso?

A. 300,000
B. 400,000
C. 420,000
D. 544,000
102) Look At You is a company with P280,000 of fixed costs has the following data:
Product Sword Product Shield

Sales price per unit P5 P6
Variable cost per unit P3 P5
Assume three units of Product Sword are sold for each unit of Product Shield sold. How much will sales be in
peso of Product Shield at the breakeven point?
A. 200,000
B. 240,000
C. 280,000
D. 840,000
103) Gardner Furniture Company produces two kinds of chairs: an oak model and a chestnut wood model. The oak
model sells for P60 and the chestnut wood model sells for P100. The variable expenses are as follows:
Oak Chestnut
Variable production costs per unit P30 P35
Variable selling & admin. expenses per unit 6 5
Expected sales in units next year are: 5,000 oak chairs and 1,000 chestnut chairs. Fixed expenses are budgeted at
P135,000 per year. The company's overall contribution margin ratio for the expected sales mix is:
A. 40%
B. 45%
C. 50%
D. 60%
J -- END OF HANDOUT -- J

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MANAGEMENT ADVISORY SERVICES

HANDOUT #2: CVP ANALYSIS INSTRUCTOR: JOHN BO S. CAYETANO

1) What is Cost – Volume – Profit Analysis?

CONTRIBUTION MARGIN INCOME STATEMENT

TRADITIONAL INCOME STATEMENT

Strategic Cost Management by: Bernadette L. Baul, CPA Page 1 of 24

b) Per unit basis:

Selling price per unit (refer to important notes!) X

c) Percentage (ratio) basis:

Contribution margin per unit

Contribution margin in peso

1. If selling price is not available, it can be computed as follows:

Given in the problem is TOTAL variable cost:

Total variable cost incurred during the period

Total variable cost included in the income statement

Total variable cost incurred during the period

Variable product cost per unit X

Strategic Cost Management by: Bernadette L. Baul, CPA Page 2 of 24

Given in the problem is PER UNIT variable cost:

Direct material cost per unit X

This question can be answered by using the contribution margin approach:

CONTRIBUTION MARGIN INCOME STATEMENT

6) What is break-even point and how it can be computed?

a) Break-even point in peso.

Total fixed cost (fixed product cost + fixed period cost)

Break-even point in units X

b) Break-even point in units.

Total fixed cost

Break-even point in peso

Strategic Cost Management by: Bernadette L. Baul, CPA Page 3 of 24

a) Target sales in peso without tax involved.

Total fixed cost + target profit

b) Target sales in units without tax involved.

Total fixed cost + target profit

Target sales in peso

c) Target sales in peso with tax involved.

Total fixed cost + [target profit ÷ (100% - tax rate)]

Target sales in units X

d) Target sales in units with tax involved.

Total fixed cost + [target profit ÷ (100% - tax rate)]

Target sales in peso

Strategic Cost Management by: Bernadette L. Baul, CPA Page 4 of 24

Total fixed cost

Target sales in peso

Total fixed cost

Target sales in units X

8) What is margin of safety (MOS) and how can it be computed?

a) Margin of safety in peso.

Sales in peso (actual or planned) X

b) Margin of safety ratio

Margin of safety in peso (refer above)

(Net income ÷ Sales)

Contribution margin ratio (CMR)

Strategic Cost Management by: Bernadette L. Baul, CPA Page 5 of 24

Indifference point in units.

First – Compute the difference in fixed cost:

Fixed cost of Alternative-A X

Selling price of Alternative-B X

Contribution margin per unit of Alternative-A X