UNIVERSITY OF NUEVA CACERES

College of Business and Accountancy

Second Semester
Academic Year 2024-2025

COST, VOLUME, PROFIT analysis Ian Francis L. Delos Santos, CPA

CVP ANALYSIS - Profit planning tool that deals with DEGREE OF OPERATING LEVERAGE(DOL)​
the relationship of profit with cost and sales volume. - A measure, at a given level of sales, of how a
percentage change in sales volume will affect profits.​
CONTRIBUTION INCOME STATEMENT
DOL = Total Contribution margin/ Net income.
SALES XXX %Increase in Net Income = ​
VARIABLE COST (XXX) (% Increase in sales x DOL)​
CONTRIBUTION MARGIN XXX ​
FIXED COST (XXX)​ SALES MIX - having a composition of more than
OPERATING INCOME XXX one products in a sale.

BASIC ASSUMPTIONS IN CVP STRAIGHT PROBLEMS​

❖​ The behavior of sales and costs are assumed
to be linear. EXERCISE NO.1
❖​ Inventory and unsold goods are disregarded. The following data are available for Luffy Company’s
one product.
CONTRIBUTION MARGIN - The measure of the
company’s ability to cover variable costs with sales. Unit selling price 800
Unit variable cost
BREAK-EVEN POINT - “Total cost = Total sales” Manufacturing 400
BEPu = Fixed Cost / Contribution margin unit Selling and admin. 240
BEPpeso = FC/CMratio Fixed costs​
Manufacturing 1,640,000
MARGIN OF SAFETY - Maximum amount of Selling and admin. 920,000
decrease in sales until breakeven point. Unit volume 24,000

MSu = Sales volume - BEPunits Requirements:​

MSp = Sales - BEPsales 1. Unit contribution margin and contribution margin
ratio
INDIFFERENCE POINT - State on which all alternatives 2. Total contribution margin
are equal. 3. Break-even volume in units and peso.​
Cost based = FC + (VCu x Quantity) 4. Margin of safety in units and margin of safety
Profit based =(CMu x Quantity)- FC ratio.
5. Degree of Operating Leverage.
6. The selling price that Luffy must charge to
double the operating profit based on the given
cost structure with the same activity level.
 2.​ If the company wants a P90,000 before-tax
EXERCISE NO. 2 profit, how many units must it sell?
SASUKE Inc. sells a single product. The company’s 3.​ If the company wants a 10% before-tax
most recent income statement is given below. return on sales, what level of sales, in pesos
Sales (5,000 units) P750,000​ does it need?
Less: Var. expenses 300,000 4.​ If the company wants a P90,000 after-tax
Contribution Margin 450,000 profit, how many units must it sell?
Less: Fixed expenses 270,000 5.​ If the company wants an after-tax return on
Operating income P180,000 sales of 9% how many units must it sell?
6.​ The company is considering offering its
Requirements: salespeople a 5% commission on sales.
1.​ If 1,500 more units are sold, how much What would the total sales, in pesos, have to
increase in profit is expected? be to implement the commission plan and
2.​ If sales volume increases 15% compute the still earn the planned before-tax income of
new profit. P97,500?
3.​ If the firm were able to increase its sales
volume by 15% without a change in its selling price, EXERCISE NO. 4
variable costs, or fixed costs would this change the The CHO Company manufactures and sells two
break-even point? products. The selling prices and variable costs of
4.​ If the firm could increase its selling price and the products are as follows:
variable cost by 20% would the breakeven point in
CHOlit SCHOpid
units or peso change?
Selling price P20 P40
EXERCISE NO. 3
After its cost structure (Variable costs P11.25 per Variable costs 8 24
unit and monthly fixed costs of P90,000) and The sales for the year were in the ratio of 3
potential market, Bunny company established what CHOlit and 1 SCHOpid. Sales volume for the
it considered to be a reasonable selling price. The year was P1 million. Fixed costs amounted to
company expected to sell 50,000 units per month P390,000.
and planned its monthly results as follows:
Sales ​ ​ P750,000 Requirements:
Variable costs ​ ​ 562,500 1.​ Compute the number of units sold for
Contribution Margin ​ 187,500 each product.
Fixed costs ​ ​ 90,000 2.​ Compute the breakeven sales in pesos
Income before taxes ​ 97,500 and in units
Income taxes ​ ​ 39,000 3.​ Compute the composite breakeven for
Net income ​ P58,500 the company in units and in pesos.

Requirements: MULTIPLE CHOICE QUESTIONS

1.​ Suppose the company determined that a
particular advertising campaign had a high 1.​ Assuming a company has net income, which
probability of increasing sales by 3,000 units. How of the following statements is true regarding
much could it pay for such a campaign without the contribution margin per unit?
reducing its planned profits?
 a.​ It will decrease as the number of units 6. The contribution margin ratio always
sold increases. decreases when the
b.​ It will decrease as the number of units a.​ Variable costs as a percentage of net
sold decreases sales increases
c.​ It indicates the amount that net income b.​ Variable costs as a percentage of net
will increase with the sale of each sales decreases
additional unit. c.​ Break-even point decreases
d.​ It indicates the amount that variable d.​ Break-even point increases
costs will decrease with the sale of each
additional unit. 7. After the level of volume exceeds the
breakeven point
2. If a company raises its target peso profit, its a.​ The contribution margin ratio increases
a.​ Break-even point rises b.​ The total contribution margin exceeds the
b.​ Fixed cost increase total fixed costs
c.​ Required total contribution margin c.​ Total fixed costs per unit will remain
increases constant
d.​ Selling price rises d.​ The total contribution margin will turn
from negative to positive.
3. CVP analysis assumes all of the following
except: 8. Leverage company changed its cost structure
a.​ All costs are variable or fixed by decreasing fixed costs and increasing its
b.​ Units manufactured equal units sold per-unit variable costs. The change
c.​ Total variable costs remain the same a.​ Increase risk and increase potential profit
over the relevant range. b.​ Increase risk and decrease potential
d.​ Total fixed costs remain the same over profit
the relevant range. c.​ Decreases risk and decreases potential
4. The contribution income statement: profit
a.​ Reports gross margin d.​ Decreases risk and increases potential
b.​ Is allowed for external reporting to profit
shareholders
c.​ Categories costs as either direct or 9. The margin of safety would be negative if a
indirect company
d.​ It can be used to predict future profits at a.​ Was presently operating at a volume that
different levels of activity. is below the break-even point.
b.​ Present fixed costs were less than its
5. Which of the following would increase the contribution margin
contribution margin per unit the most, if the entity c.​ Variable costs exceeded its fixed costs
has a P5 CM per unit? d.​ Degree of operating leverage is greater
a.​ A 15% decrease in selling price than 100
b.​ A 15% increase in variable expense
c.​ A 15% increase in selling price 10. If the sales mix shifts toward lower
d.​ A 15% decrease in variable expenses contribution margin products, the break-even
point
a.​ Increases
 b.​ Decreases company at a fixed cost of 14,000 per month.
c.​ Remains constant Variable costs in the rented facility would total
d.​ None of the above P4.00 per unit, due to somewhat less efficient
operations than in the main plant. The new
11. Which of the following best describes the cream will sell for P12.00 per unit. The monthly
impact of selling more units? break-even point for the new cream in units is:
a.​ The increase in sales volume increases a.​ 41,750 c. 43,111
the total variable cost b.​ 41,647 d. 44,250
b.​ The increase in sales volume means an
increase in total fixed costs 14. The BLEEMING, the diehard followers of
c.​ The increase in sales increases the BONA, is planning its annual fans day. The
contribution margin, causing net income operating committee has assembled the
to stay constant following expected costs for the event:
d.​ The increase in sales increases the Dinner per person 70
contribution margin per unit causing the Programs and Souvenir per person 30
break-even point to increase. Orchestra 15,000
Tickets and advertising 7,000
12. The degree of operating leverage for Balloon Auditorium rental 48,000
Company is 7 and the degree of operating Floor show and entertainment 10,000
leverage for Dirigible company is 4. The two
companies have identical sales levels and net The committee members would like to charge
incomes. Which of the following statements is P300 per person for the evening’s activities.
incorrect? Assuming that only 250 persons are expected to
a.​ The break-even quantity for Balloon will attend the extravaganza, what ticket price must
be more than that for Dirigible be charged to break even?
b.​ The margin of safety or Ballon will be a.​ P420 c. P320
less than that for Dirigible. b.​ P350 d. P390
c.​ The contribution margin for Balloon will
be more than that for Dirigible 16. The following information pertains to Black
d.​ A 10% reduction in sales will cause net Company
income for Dirigible to be lower than that Cost-volume-profit relationship
for Balloon. Break-even point in units sold 1,000
Variable costs per unit 500
13. Blooming Corporation produces skincare Total fixed costs P150,000
products. Enough Capacity exists in the How much will be contributed to profit before
company’s plant to produce 40,000 units of the income taxes by the 1001st unit sold?
cream each month. Variable costs to a.​ P500 c. P150
manufacture and sell one unit would be P3.50, b.​ P650 d. P 0
and fixed costs associated with the cream would
total P340,000 per month. The company’s 17. Matias Corporation wishes to market a new
marketing department predicts that demand for product for P12.00 a unit. Fixed costs to
the new cream will exceed the 40,000 units that manufacture this product are P800,000 for less
the company can produce. Additional than 500,000 units and P1,200,000 for 500,000
manufacturing space can be rented from another or more units. Contribution margin is 20%. How
many units must be sold to realize a net income additional units that would be shipped out of the
from this product of P500,000? normal market area?
a.​ 433,333 a.​ P5.10 c.P4.10
b.​ 500,000 b.​ P5.60 ​ d. P5.00
c.​ 541,667
d.​ 708,334 21. Bauan Company had a 25% margin of
safety. Its after-tax return on sale is 3.6%, and a
18. Clark Corporation’s goal is for operating tax rate of 40%. What is Bauan’s contribution
income to equal 6% of sales. Clark estimates margin ratio?
that the highest sleeping price the market will a.​ 9%​ ​ c. 24%
bear is P115 per unit. Clark expects to sell b.​ 14.4% d. 62.5%
100,000 units expects to incur fixed costs of
P3,500,000 and has an effective income tax rate 22. The Bonifacio Marketing Company is
of 40%. To achieve these plans, the target expecting an increase of fixed costs by
variable cost per unit must be P78,7590 upon moving their place of business to
a.​ P108.10 c. P68.50 the downtown area. Likewise, it is anticipating
b.​ P73.10 d. P62.75 that the selling price per unit and the variable
expenses will not change. At present, the sales
19. The marketing department of Jerry Co. necessary to break even is P750,000 but with
proposed a price cut on its leading brand, a the expected increase in fixed costs, the sales
product called “Tom”. From the accounting necessary to break even would go up to
records, these are available: P975,000. Based on these projections, what
Price per unit P92 would be the total fixed costs after the increase
Discount to customers 10% of P78,750?
Direct cost per unit P52.60 a.​ P341,250 c. P262,500
Var. operating expense per unit P5.60 b.​ P183,750 d. P300,000
Proposed price cut per unit P10
Estimated sales volume before 1,220 units 23. Gardiner Furniture Company produces two
the price cut kinds of chairs: an oak model and a chestnut
How much contribution margin will be lost due to wood model. The oak model sells for P60 and
a price cut? the chestnut wood model sells for 100. The
a.​ P13,000 c. 18,000 variable expenses are as follows:
b.​ P10,980 d. 17,990

20. The cost to produce 24,000 units at 70%

OAK CHESTNUT
capacity is:
Direct materials P36,000 Variable P30 P35
Direct labor 54,000 production per unit
Factory overhead, all fixed 29,000 Variable selling & 6 5
Selling expense (35% variable; 24,000​ admin. Expenses
65% fixed) per unit
What unit price would the company have to
charge to make P2,250 on a sale of 1,500
Expected sales in units next year are: 5,000 oak 26. Saber has a potential foreign customer who
chairs and 1,000 chestnut chairs. Fixed has offered to buy 1,500 tons at P450 per ton.
expenses are budgeted at P135,000 per year. Assume that Saber’s costs would be at the
The company’s overall contribution margin ratio same levels and rates as last year. What net
for the expected sales mix is: income after taxes would Saber make if it takes
a.​ 40% c. 50% this order and rejects some business from
b.​ 45% d. 60% regular customers so as not to exceed capacity?
a.​ P297,500​ ​ c. P283,500
Use the following information for the next five b.​ P252,000 ​ ​ d. P184,500
questions.
Saber Company's income statement represents 27. Without prejudice to your answers to
the operating results for the current calendar previous questions, assume that Saber plans to
year ending December 31. Saber had sales of market its product in a new territory. Saber
1,800 tons of product during the current year. estimates that an advertising and promotion
The manufacturing capacity of Saber facilities is program costing P61,500 annually would need
3,000 tons of product. Consider each question’s to be undertaken for the next two or three years.
situation separately. In addition, a P25 per ton sales commission over
Sales ​ ​ ​ P900,000 and above the current commission to the sales
Variable Costs​ ​ force in the new territory would be required. How
Manufacturing​ ​ P315,000 many tons would have to be sold in the new
Selling Costs​ ​ 180,000 territory to maintain Saber’s current after-tax
Total variable costs​ P495,000 income of P94,500?
Contribution margin​ P405,000 a.​ 307.5​ ​ ​ c. 273.33
Fixed costs b.​ 1,095​ ​ ​ d. 1,545
Manufacturing​ ​ ​ P 90,000
Selling​ ​ ​ ​ 112,500 28. Without prejudice to the preceding
Admin​ ​ ​ ​ 45,000 questions, assume that Saber estimates that the
Total fixed costs​ P247,500 per ton selling price will decline 10% next year.
Net income before tax​ P157,500 Variable costs will increase P40 per ton and the
Income tax​ ​ ​ ​ (63,000)​ fixed costs will not change. What sales volume
Net Income after tax​ P 94,500 in pesos will be required to earn an after-tax net
income of P94,500 next year?
24 The breakeven volume in tons of product for
the year is a.​ P1,140,000​ ​ c. P1,500,000
a.​ 420​ ​ ​ c. 495 b.​ P 825,000​ ​ d. P1,350,000
b.​ 1,100​ ​ ​ d. 550

25. If the sales volume is estimated to be 2,100 <Wash me wep wash me ney ney>
tons in the next year, and if the prices and costs
stay at the same levels and amounts next year,
the after-tax net income that Saber can expect <Eat well, live well>
for next year is
a.​ P135,000​ ​ c. P283,500
b.​ 110,250​ ​ d. P184,500