MAS.

M 1416
PROFIT PLANNING AND CVP ANALYSIS
STRAIGHT PROBLEMS
1. BASIC CVP RELATIONSHIPS. Ariel Company produces a product that has the
following data per annum:
Unit sales price
Unit variable costs
Total fixed costs
Units sold

P400 per unit

P260 per unit
P7.0 MILLION
70,000 units

Required:
a. Unit contribution margin, contribution margin ratio, and variable cost ratio.
b. Breakeven point in units and in pesos.
c. Margin of safety in units, in pesos, and margin of safety ratio.
d. Amount of profit using the margin of safety analysis.
e. Net profit ratio.
f. If sales increase by P450,000, how much would you expect profit to increase?
g. Degree of operating leverage?
Answer:
a. UCM= 140, CMR= 35%, VCR=65%
b. BEPU=50,000, BEPP= 20M
c. MSU=20,000 units, MSP=8M, MSR=28,57%
d. 2,800,000
e. 10%
f. 1,575,000
g. 3.5times
2. SALES WITH PROFIT. ABC Corporation presently sells product SIMPLE LANG with
the following related data:
Unit contribution margin
P80
Variable cost ratio
75%
Total fixed costs
P8 million
Tax rate
40%
Required: The sales in units and in pesos be if:
A. Profit before tax is P3 million.
B. Profit after tax is P3 million.
C. Profit ratio before tax is 10% of sales.
D. Profit ratio after tax is 7.2%
Answer:

E. Unit profit margin before tax is P8.

F. Unit profit margin after tax is P9.
G. Profit ratio before tax is 10% of CM.

Item
a.
b.
c.
d.
e.
f.
g.

Sales in units
137,500
162,500
166,667
192,308
111,111
123,077
111,111

Sales in pesos
44,000,000
52,000,000
53,333,333
61,538,462
35,555,556
39,384,650
35,555,556

3. CVP SENSITIVITY ANALYSIS. Dynamics Corporation manufactures and sells a

single product that has a retail price of P250; unit variable cost of P175, and total fixed
costs of P1,050,000. It expects to sell 25,000 units in the next period.
Required:
a. The CMR, BEP in units, and profit as expected in the coming period.
b. The new CMR, BEP in units, profit, MSU, and DOL for the coming period if:
1. unit sales price increases by 10%.
2. unit variable costs decrease by 20%.
3. total fixed costs increase to P1,820,000.
4. the number of units sold increases to 52,000.
5. unit sales price decreases by Pl0, unit variable cost decreases by 10%, and total
fixed costs increase by P100,000.
Answer:
No.
a.
b.
B2.

CMR
30%
36.36%
44%
30%
30%
34%

BEPU
14,000
10,500
9,545
24,267
14,000
13,939

Profit
825,000
1450,000
1,700,000
55,000
2,850,000
912,500

MSU
11,000
14,500
15,455
733
38,000
11,061

DOL
2.27
1.72
1.62
34.10
2.27
2.26

4. MULTI-PRODUCT SALES. Cebu Corporation produces three products, D, E and F,

with the following related data:
D

Total

Unit sales price

Unit variable costs
Sales In units
Production in units

P200
100
30,000
29,000

P 50
20
50,000
53,000

Total fixed costs,

Tax rate

P120
90
20,000
18,000

100,000
100,000
P 6.00M
40%

Required: Compute the following and round your rates up to two decimal places:
a. Using the sales mix ratio based in pesos:
1. Average contribution margin ratio.
2. Composite BEPP and allocation of CBEPP.
3. Sales required to realize a combined profit before tax of P1.5 million.
4. Sales required to realize a combined profit after tax of P1.0 million
b. Using the sales mix ratio based in units:
1. Average unit contribution margin.
2. Composite BEPU and allocation of CBEPU.
Solution Guide:
Item
A

Required
1.Average CMR
2.Composite BEPP
Allocation of CBEPP

3.Sales with PBT

4.Sales with PAT
1.Average UCM
2.Composite BEPU
Allocation of the CBEPU

Answers
12,823,480
D 7,058,800
E 2,941,200
F 2,823,480
16,029,412
16,385,621
51
117,647
D 35,294
E 58,824
F 23,529

5. APPLYING THE BASIC CVP RELATIONSHIPS. Charmaine Corporation provided you

its condensed income statement as presented on the left side (values in millions):
(in PhP)
Sales
Costs and expenses
Net profit

2009
400
300
100

2010
600
420
180

Required:
a. Contribution margin ratio.
b. Breakeven pesos.
c. If sales are expected to increase by 25% in 2011, what is the percentage increase in profit?
d. If total fixed costs and expenses are expected to increase by 25%, what would be the new peso
breakeven point in 2011?
Answer:
a. 40%
b. 150M

c. 0.3333
d. 300M

6. OPERATING LEVERAGE. Flash Disk Corporation discloses the following data relative to
its product in 2010:
CM (40,000 units x P50)
Total FCE
CMR

P2,000,000
1,500,000
40%

Required:
a. Degree of operating leverage.
b. What would be the percentage increase in EBIT if sales are expected to increase by 20% in
2011?
c. What would be the percentage change in EBIT if sales are expected to increase by 30% in
2011?
Answer:
a. 4 times

b. 80%

c. 120%

7.0 INDIFFERENCE POINT. Manila Company has decided to introduce a new product. The
new product can be manufactured by either a fully-automated process or a semi-automated
process. The manufacturing process will not affect the quality of the product. The estimated unit
manufacturing costs by the two methods follow:
Fully

Semi-

Automated

Automated

Materials

P 5.00

P 6.00

Direct labour

6.00

7.00

Variable factory overhead

3.00

4.00

Directly traceable incremental fixed overhead is expected to be P 2,400,000 if the fullyautomated is chosen. Allocated fixed costs and expenses are P1 million and P2 million for fullautomated and semi-automated, respectively. The companys market Research Department has
recommended an introductory unit sales price of P40. Regardless of the manufacturing process
chosen, the incremental marketing expenses are estimated to be 500,000 per year plus P2 for
each unit sold.
Required:
a. The estimated breakeven point for the new product in annual units of sales if the company
uses the:
1. fully-automated manufacturing process.
2. semi-automated manufacturing process.
b. The annual sales units at which the choice between the two manufacturing processes would
not make a difference, if
1. the unit sales price is P50 for either process;
2 the unit sales price is P55 for fully automated process and P50 for semi automated process
c. The annual sales in pesos in which the profit for either of the alternatives would be the same.
Answer:
a.1. 100,000 units
a.2. 62,000 units
b.1. 366,000

b.2. 137,250
c. 14,640,000

MULTIPLE CHOICE QUESTIONS

1. At breakeven fixed cost is always
A. Less than contribution margin.
B. Equal to contribution margin.
C. More than variable cast.
D. More than the contribution margin.

2. Cost-volume-profit analysis is a key factor in many decisions, including choice of product

lines, pricing of products, marketing strategy, and use of productive facilities. A calculation
used in a CVP analysis is the breakeven point. Once the breakeven point has been reached,
operating income will increase by the
A. Gross margin per unit for each additional unit sold.
B. Contribution margin per unit for each additional unit sold.
C. Variable cost per unit for each additional unit sold.
D. Sales price per unit for each additional unit sold.
3. The term relevant range as used in cost accounting means the range over which
A. cost relationships are valid
B. production may vary
C. costs may fluctuate
D. relevant costs are incurred
4. Cost-volume-profit analysis assumes that over the relevant range total.
A. Revenues are linear.
B. Variable costs are nonlinear.
C. Costs are unchanged.
D. Fixed costs are nonlinear.
5. Breakeven analysis assumes linearity over the relevant range with respect to

A.
B.
C.
D.

Total costs

Total revenue

Yes
Yes
No
No

No
Yes
Yes
No

6. An assembly plant accumulates its variable and fixed manufacturing overhead costs in a
single cost pool, which is then applied to work-in-process using a single application base. The
assembly plant management wants to estimate the magnitude of the total manufacturing
overhead costs for different volume levels of the application activity base using a flexible budget
formula. If there is an increase in the application activity base that is within the relevant range of

activity for the assembly plant, which one of the following relationship regarding variable and
fixed costs is correct?
A. The variable cost per unit is constant, and the total fixed costs decrease.
B. The variable cost per unit is constant, and the total fixed costs increase.
C. The variable cost per unit and the total fixed costs remain constant.
D. The variable cost per unit increases, and the total fixed costs remain constant.
7. One of the major assumptions limiting the reliability of breakeven analysis is that
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. (cma)
8. When an organization is operating above the breakeven point, the degree or amount that
revenues may decline before losses are incurred is the
A. Residual income rate.
B. Marginal rate of return
C Margin of safety.
D. Target (hurdle) rate of return
9. Total unit costs are
A. Relevant for cost-volume-profit analysis
B. Independent of the cost system used to generate them.
C. Irrelevant in marginal analysis.
D. Needed for determining product contribution.
Breakeven point
10. A company manufactures a single product. Estimated cost data regarding this product and
other information for the product and the companies are as follows:
Sales price per unit
Total variable production cost per unit

P40
P22

Sales commission (on sales)

Fixed costs and expenses:
Manufacturing overhead
General and administrative
Effective income tax rate

5%
P5,598,720
P3,732,480
40%

The number of units the company must sell in the coming year in order to reach its breakeven
point is
A. 388,800 units.

C. 583,200 units.

B. 518,400 units.

D. 972,000 units.

11. Mothers Co. reported the following for the year just ended:
Budgeted sales
Break-even sales
Budgeted contribution margin
Cash flow break-even

P 3,000,000
2,100,000
1,800,000
600,000

The companys margin of safety is

A. 900,000

C. P1,200,000

B. P2,400,000

D. P1,500,000

12. A company is concerned about its operating performance, as summarized below:

Revenues (P12.50 per unit)

P300,000

Variable costs

P180,000

Operating loss

(40,000)

How many additional units should have been sold in order for the company to break even in
2013?
A. 32,000
B. 24,000

C. 16,000
D. 8,000

13. For the period just ended Chanda Inc. generated the following operating results in
percentages

Sales

100%

Cost of sales
Variable

50%

Fixed

10%

Gross profit

60%
40%

Operating expense
Variable

20%

Fixed

15%

Operating income

35%
5%

Total sales amounted to P3.0 million, at what level is break-even sales?

A. P3,750,000
B. P1,850,000

C. P1,875,000
D. P2,500,000

14. The following information pertains to Nova Companys cost-volume-profit relationships:

Breakeven point in units sold

1,000

Variable costs per unit

P 500

Total fixed costs

P150,000

How much will be contributed to profit before income taxes by the 1,001st unit sold?
A.P650

C. P150

B. P500

D. P 0

Data for questions 15 and 16 are as follows:

Tropical Stuff Toys manufactures and sells dolls. operating results for the last quarter:
Stuff toys sold

19,375

Breakeven point in number of toys

15,500

Breakeven point in peso sales

P 65,875

Total fixed costs

P 47,275

15. What was Tropicals variable cost per doll?

A. P 4.25

C. P 1.20

B.P3.05

D. P 0.96

16 What was the margin of safety percentage for the last quarter of Tropical? (rounded to the
nearest percent)
A. 20%

C. 28%

B. 25%

D. 72%

17. Mann Corp. has a contribution margin ratio of .26. It aims to have a net income of P320,00
with a sales volume of P2 million. Its total fixed costs amount to
A. P200,000

C. P230,777

B. P83,200

D. P520,000

18. Asian Corporation, a manufacturing company, is operating at 90% capacity. Since there is no
other use of the 10% idle capacity, an offer for a new order at P8.20 per unit requiring 15%
capacity is being considered. If the order will be accepted, the required 5% additional capacity
will be sub-contracted at the cost of P7.80 per unit. The variable cost per unit of production of
Asian Corporation follows:
Materials

P 4.00

Labour

1.75

Variable overhead

1.75
P 7.50

What is the expected contribution margin per unit on the new order?
A. P0.40

C. P0.60

B. P0.50

D.P0.55

19. Which of the following will decrease the breakeven point?

Decrease in Increase in
Increase in
Selling Price Direct Labor Fixed Cost
A. Yes

Yes

Yes

B. Yes

No

Yes

C.

No

No

No

Yes

No

D. No

20. Which of the following will result in raising the breakeven point?
A. A decrease in the variable cost per unit.
B. An increase in the semi-variable cost per unit
C. An increase in the contribution margin per unit.
D. A decrease in income tax rates.
21. The contribution margin ratio always increases when the
A. Breakeven point increases.
B. Breakeven point decreases.
C. Variable costs as a percentage of net sales decrease.
D. Variable costs as a percentage of net sales increase.
22. In a profit volume graph, the cost/volume/profit relationships are represented. The vertical
axis is the profit in pesos and the horizontal axis is the volume in units. The diagonal line is the
contribution margin line. The point at which are contribution margin line intersects the zero
profit line is the point:
A. At which the volume level is zero.
B. At which the total costs equal the total sales.
C. At which sales increase.
D. At which total variable costs equal total sales.
23. When using the graph method, if unit outputs exceed the break-even point,
A. Expenses are extremely high relative to revenues.
B: There is loss because the total cost line exceeds the total revenue line.
C. Total sales exceed total cost.
D. There is profit since the total cost line exceeds the total revenue line.
24. The most important use of the cost-volume-profit graph is to show
A. The breakeven point.
B. The cost/margin ratio at various levels of sale activity.
C. The relationships-among volume, cost, revenues, over wide ranges of activity.
D. The determination of cross over point.

25. Marston Enterprises sells three chemicals: petrol, septine and tridol. Petrol is the companys
most profitable product; tridol is the least profitable. Which one of the following events will
definitely decrease the firms overall breakeven point for the upcoming accounting period?
A .The installation of a new computer-controlled machinery and subsequent layoff of
assembly line workers.
B. A decrease in tridols selling price.
C. An increase in anticipated sales of petrol relative to sales of septine and tridol.
D. An increase in petrols raw material cost.
Sales with profit
Questions 26 through 27 are based on the following information: Tribal Corporation is
developing a new product, surge protectors for high-voltage electrical flows. The cost
information below relates to the product.
Direct materials

P3.25

Direct labour

4.00

Distribution

0.75

The company will also be absorbing P120,000 of additional fixed costs associated with this new
product. A corporate fixed charge of P20,000 currently absorbed by other products will be
allocated to the new product.
26. If the selling price is P14 per unit, the breakeven point in units (rounded to the nearest
hundred) for the for surge protectors is:
A. 8,600 units

C. 15,000 units

B. 10,000 units

D. 20,000 units

27. How many surge protectors (rounded to the nearest hundred) must Tribal sell at a selling
price of P14 per unit to gain P30,000 additional operating income before taxes?
A. 10,700 units

C. 25,000 unit

B. 20,000 units

D. 25,300 units

28. How many surge protectors (rounded to the nearest hundred) must Tribal sell at a selling
price of P14 per unit to increase after tax income by P30,000? Tribals effective rate is 40%.
A. 10,700 units

C. 25,000 units

B. 20,000 units

D. 28,300 units

29. Anna Co would like to market a new product at a selling price of P15 per unit. Fixed costs for
this product are P1,000,000 for less than 500,000 units of output and P1,500,000 for 500 ,000 or
more units of output. The contribution margin percentage is 20%. How many units of this
product must be sold to earn a target operating income of P1 million?
A. 754,900

C 825,530

B. 833,334

D. 785,320

30. LC & Company has sales of P400,00 with variable costs of P300,000, fixed costs of
P120,000 and an operating loss of P20,000. By how much would LC need to increase its sales in
order to achieve a target operating income of 10% of sales7
A. P400,000

C. P500,000

B. P462,000

D. P800,000

31. In using cost-volume-profit analysis to calculate an expected sales level expressed in units,
which of the following should be subtracted from fixed costs in the numerator?
A. Predicted operating loss.

C. Unit contribution margin.

B. Predicted operating profit.

D. Variable costs.

Multiple product sales

Items 32 and 33 are based on the following information.
The data below pertain to two types of products manufactured by Korn Corporation:
Per Unit
Sales price

Variable costs

Product Y

P 120

P70

Product Z

500

200

Fixed costs total P300,000 annually. The expected mix in units is 60% for product Y and 40% for
product Z.
32. How much is Korns breakeven sales in units?
A. 857

C. 2,000

B. 1,111

D. 2,459

33. How much is Korns breakeven sales in pesos?

A. P300,000

C. P475,000

B. P420,000

D. P544,000

34. Chemicals, Inc. formulates and sells three major chemicals: C1, C2, and C3. It sells to
industrial users who use and buy these chemicals in the following ratio: these (3) measures of C1
for one (1) measure of C3, two (2) of C2 for one(1) measure of C1. The company makes the
following contribution margin per measure:
C1

P30

C2

P45

C3

P90

Fixed costs amounted to 1.8 million. At break-even point, the volume of C3 to be sold would be
A. 12,000

C. 24,000

B. 36,000

D. 4,000

35. Considering the company as a whole, the number of composite units to breakeven is
A. 31,500

C. 8,250

B. 4,500

D. 9,900

36. If the company had an operating income of P22,000, the unit sales must have been
Product X

Product Y

Product X

Product Y

A.

5,000

12,500

C.

23,800

59,500

B.

13,000

32,500

D.

28,600

71,500

37. Bush Electronics, Inc. had the following sales results for 2010:
TV Sets

CD Player

Radios

Peso sales component ratio

0.30

0.30

0.40

Contribution margin ratio

0.40

0.40

0.60

Bush electronics, Inc had fixed costs of P2,400,000.

The break-even sales in pesos for Bush Electronics, Inc.are:
TV sets

CD Player

Radios

A. P1,800,000

P1,800,000

P3,600,000

B. P1,800,000

P1,800,000

P1,600,000

C. P1,500,000

P1,500,000

P2,000,000

D. P1,531,915

P1,531,915

P2,042,553

38. Mason enterprises has prepared the following budget for the month of July:
Selling Price Variable Cost
Per Unit

Per Unit

Unit Sales

Product A

P10.00

P4.00

15,000

Product B

15.00

8.00

20,000

Product C

18.00

9.00

5,000

Assuming that total fixed costs will be P150,000 and the mix remains constant, the breakeven
point rounded to the next higher whole unity will be
A. 20,455 units.
B. 21,429 units.
C. 21,819 units.
D. 6,818 units. (cma)
CVP Sensitivity Analysis
Items 39 and 40 are based on the following information: Laguna Marketing Company is
expected an increase of fixed costs by P78,750 upon moving their place of business to the
downtown area. Likewise, it is anticipating that the selling price per unit and the variable
expenses will not change. At the present, the sales volume necessary to breakeven is P750,000
but with the expected increase in final sales, the sales volume necessary to breakeven would go
up to P975,000. Based on these projections,
39. What is the profit volume ratio of Laguna Marketing?
A. 35%

C. 45%

B. 40%

D. answer not given

40. What would be the total fixed costs of Laguna Marketing after the increase of P78,750?
A. P341,250

C. P2,183,750

B. P262,500

D. P300,000

41. Variable cost per unit is P3.50. Contribution margin is 30%. Breakeven sales is P1 million.
To sell an additional, 50,000 units at the same price and contribution margin, how much will
fixed costs increase to have a gross margin equal to 10% of the sales value of the additional cost
of 50,000 units to be sold?
A. P 67,500

C. P 57,500

B. P50,000

D.P 125,000

42. Birney Company is planning its advertising campaign for 2013 and has prepared the
following budget data based on a zero advertising expenditures:

Normal plant capacity

200,000 units

Sales

150,000 units

Selling price

P25 per unit

Variable manufacturing costs

P 15 per unit

Fixed costs:
Manufacturing

P 800,000

Selling and administration

P 700,000

An advertising agency claims that an aggressive advertising campaign would enable Birney to
increase its unit sales by 20%. What is the maximum amount that Birney can pay for advertising
and obtain an operating profit of P200,000.
A. P 100,000

C. P300,000

B. P200,000

D. P550,000

Questions 43 and 44 are based on the following information.

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
P36 per unit. Delphi 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 P450,000 for the year, which includes P60,000 for depreciation on new
manufacturing equipment.
Data associated with each unit of product are presented below. Delphi is subject to a 40% income
tax rate.
Variable Costs
Direct material

P 7.00

Direct labor

3.50

Manufacturing overhead

4.00

Total variable manufacturing cost

Selling price
Total variable cost

14.50
1.50
P16.00

43. The maximum after tax profit that can be earned by Delphi Company from sales of the new
product during the next fiscal year is
A. P 30,000
B. P 50,000
C. P110,000
D. P 66,000 (cma)

44. Delphi Companys 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
P75,000 the fiscal year. The unit selling price to achieve this target profit must be at least
A. P37.00

C. P34.60

B. P36.60

D. P39.00 (cma)

45. A company has revenues 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 pesos?
A. P 88,000

C. P110,000

B. P100,000

D P125,000

46. Austin Manufacturing, which is subject to a 40% income tax rate, had the following
operating data for the period just ended:
Selling price per unit
Variable cost per unit
Fixed costs

P 60
22
504,000

Management plans to improve the quality of its sole product by (1) replacing a component that
costs P3.50 with a higher-grade unit that costs P5.50 and (2) acquiring a P180,000 packing
machine. Austin will depreciate the machine over a 10-year life with no estimated salvage value
by the straight-line method of depreciation, If the company wants to earn after tax income of
P172,800 in the upcoming period, it must sell
A. 19,300 units.

C. 22,500 units.

B. 21,316 units.

D. 27,000 units.

47. 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 nest 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 cost will increase by 10%.
The income tax rate will remain unchanged.
For the company to break-even the coming year, the company should sell
A. 21,600

C. 21,250

B. 2,600

D. 19,250

48. Total production costs for Jordan, lnc. are budgeted at P2,300,000 for 50,000 units of
budgeted output and P2,800,000 for 60,000 units of budgeted output. Because of the need for
additional facilities, budgeted fixed costs for 60,000 units are 25 percent more than budgeted
fixed costs for 50,000 units. How much is Jordans budgeted variable cost per unit of output?

A. P 7.50

C. P30.00

B. P16.00

D. P62.50

49. Dana sells a single product at P20 per unit. The firms most recent income statement
revealed unit sales of 100,000, variable costs of P800,000, and fixed costs of P400.000. If a P4
drop in selling price will boost unit sales volume by20%, the company will experience:
A. no change in profit because a 20% drop in sales price is balanced by a 20% increase in
volume.
B. an P80,000 drop in profitability.
C. a P240,000 drop in profitability.
D. a P400,000 drop in profitability.
Questions 50 and 51-are based on the following information: Presented below are the results of
operations of Softtouch Products, Inc., for 2011:
Sales (150,000 units)

P 600,000

Cost of goods sold:

Fixed

P 150,000

Variable

300,000
Total

450,000
150,000

Selling and administrative:

Fixed

39,000

Variable

45,000
Income before taxes

84,000
P 66,000

The company is concerned about the expected increase in fixed manufacturing costs by 50% if it
will buy a new equipment with a higher production capacity. However, study shows that
production is expected to increase by 40% while variable manufacturing costs will decrease from
P2.00 to P1.50 per unit. The total fixed selling and administrative expenses and variable selling
and administrative expenses will remain the same .The selling price per unit will also remain the
same. The company has been operating at full capacity. If the company will buy the new
equipment
50. What would be the breakeven point in terms of units?
A. 120,000

C. 176,000

B. 66,000

D.105,000

51. What is the maximum expected income before income tax?

A. P198,000

C. P306,000

B. P216,000

D. P 288,000

52. Orange Companys controller developed the following variable-costing income statement for
2012:

Per unit
Revenues (150,000 units at P30)

P4,500,000

P30

Direct materials

1,050,000

P7

Direct labour

1,500,000

10

Mfg. overhead

300,000

Selling & marketing

300.000

(3,150,000)

21

P1350,000

P9

P 600,000

300,000

(900,000)

P 450.000

P3

Variable costs:

Contribution margin
Fixed costs:
Mfg. overhead
Selling & marketing
Operating income

Orange Company based its 2013 budget on the assumption that fixed costs, unit sales, and the
sales price would remain as they were in 2012, but with operating income being reduced to
P300,000. By July of 2013, the controller was able to predict the unit sales would increase over
2012 levels by 10%. Based on the 2012 budget and the new information, the predicted 2013
operating income would be
A. P300,000

C. P420,000

B. P330,000

D. P585,000

53. During 2011, Thor Lab supplied hospital with a comprehensive diagnostic kit for P120. At a
volume of 80,000 kits, Thor had fixed costs of P 1 million and operating income before income
taxes of P200,000. Because of an adverse legal decision, Thors 2012 liability insurance
increased by P1.2 million over 2011. Assuming the volume and other costs are unchanged, what
should the 2012 price be if Thor is to make the same P200,000 operating income before taxes
A. P120.00

C. P150.00

B. P135.00

D. P240.00

Operating Leverage
Questions 54 and 55 are based on the following data: Hope Company sells a product with a unit
sales of P50 and a unit variable cost of P30. It needs to sell 40,000 units to breakeven. It expects
to sell p0,000 units in the coming period from a previous of 75,000 units.
54. Hopes degree of operating leverage is
A. 1.875
B. 1.800

C. 2.143
D. 1.250

55. The percentage change in EBIT in the coming period as compared to the last period is
A. 42.86%

C. 37.50%

B. 36.00%

D. 25.00%

56. Love Corp. is operationally a high leveraged company, that is, it has a high fixed costs and
low variable costs. As such, small changes in sales volume result in
A. Proportionate change in net income
B. Large changes in net income
C. Negligible change in net income
D. No change in net income
57. the percentage change in earnings before interest and taxes associated with the percentage
change in revenues is the degree of
A. Operating Leverage

C. Breakeven Leverage

B. Financial Leverage

D. Combined Leverage

58. You are analyzing Becker Corporation and Newton Corporation and have concluded that
Becker has a higher operating leverage factor than Newton. Which one of the following choices
correctly depicts (1) the relative use of fixed costs (as opposed to variable costs) for the two
companies and (2)the percentage change in income caused by a change in sales?
Relative Use of Fixed
Costs as Opposed to
Variable Costs a

Percentage Change in
Income Caused by
Change in Sales

A. Greater for Becker

Greater for Becker

B. Greater for Becker

Lower for Becker

C. Greater for Becker

Equal for both

D. Lower for Becker

Greater for Becker

59. LEVERAGE Company changed its cost structure by increasing fixed costs and decreasing its
per-unit variable costs. The change
A. Increases risk and increases potential profit
B. Increases risk and decreases potential profit
C. Decreases risk and decreases potential profit
D Decreases risk and increases potential profit
Indifference point
60. The indifference point is the level of volume at which a company
A. earns the same profit under different operating schemes.
B. earns no profit.
C. earns its target profit.

D. any of the above.

61. Two companies are expected to have annual sales of 1 million decks of playing cards next
year. Estimates for next year are presented below:
Company 1

Company2

Selling price per deck

P3.00

P 3.00

Cost of paper per deck

.62

.65

Printing ink per deck

.13

.15

Labor per deck

.75

1.25

Variable overhead per deck

.30

.35

P960,000

P252,000

Fixed costs

Given these data, which of the following responses is correct?

Volume in Units at which
BEPU Company

BEPU for

Profits of Company 1

Company 2

and Company 2 are equal

A.

800,000

420,000

1,180,000

B.

800,000

420,000

1,000,000

C.

533,334

105,000

1,000,000

D.

533,334

105,000

1,180,000

62. The following data relate to Homer Company which sells a single product:
Unit selling price

P 20.00

Purchase cost per unit

11.00

Sales commission, 10% of selling price

Monthly fixed costs

2.00
80,000

The firms salespersons would like to change their compensation from a 10 percent commission
to a 5 percent commission plus P20,000 per month in salary. They now receive only
commissions. At what sales volume would the two compensation plans be indifferent?
A. 12,500

C. 22,222

B. 20,000

D. 22,860

1. Two companies produce and sell the same product in a competitive industry. Thus, the selling
price of the product for each company is the same. Company 1 has a contribution margin ratio of
40% and fixed costs of P25 million. Company 2 is more automated, making its fixed costs 40%
higher than those of Company 1. Company 2 also has a contribution margin ratio that is 30%
greater than that of Company 1. By comparison, Company 1 will have the <List A> breakeven
point in terms of dollar sales volume and will have the <List B> dollar profit potential once the
indifference point in dollar sales volume is exceeded.

ListA

List B

A. Lower

Lesser

B. Lower

Greater

C. Higher

Lesser

D. Higher

Greater (cia)

Miscellaneous
Questions 63 through 64 are based on the following data: Plastic Company produces toys and
other items for use in beach and resort areas. A small, inflatable toy has come onto the market
that the company is anxious to produce and sell. Enough capacity exists in the companys plant
to produce 16,000 units of the toy each month. Variable costs to manufacture and sell one unit
would be P12.50, and fixed costs associated with the toy would total P350,000 per month.
The companys Marketing Department predicts that demand for the new toy will exceed the
16,000 units that the company is able to produce. Additional manufacturing space can be rented
from another company at a fixed cost of P10,000 per month. Variable costs in the rented facility
would total P14 per unit, due to somewhat less efficient operations than in the main plant. The
new toy will sell for P30 per unit.
The breakeven units for the new toy would be:
A. 20,000

C. 21,000

B. 18,000

D. 22,500

63. How many units should the company need to sell in order to earn a before-tax profit of
P150,000?
A. 9,143

C. 31,875

B. 30,375

D. 35,000

64. If the sales manager receives a bonus of P1.00 for each unit sold in excess of the break-even
point, how many units must be sold each month to earn a return of 25% on the monthly
investment in fixed costs?
A. 23,344

C. 29,833

B. 27,000

D. 30,000

65. Assuming that Plastic Company will just rent a manufacturing space for a month in order to
produce special order for 8,000 toys. What is the minimum selling price acceptable to Plastic
Company for the special sale?
A. P14.00

C. P22.00

8. P15.25

D. P24.00

Items 66 and 67 are based on the following information: Yakal Company shows the following
budgeted data for the year 2011:
Estimated sales
Estimated costs:

18,000 units

Amount

Per unit

P54,000

P3.00

Materials

8,100

45

Fixed overhead

13,500

.75

Administrative expense

16,200

.90

P91.800

P5.10

Direct labor

Total

Selling expenses are expected to be 20% of sales and profit before tax is to amount to P1.50 per
unit
66. In order to attain the companys goal for 2011 the selling price per unit must be set at:
A. P5.00

D. P9.75

B. P6.60

E. None of these

C. P8.25
67. The companys break-even point in units assuming that overhead and administrative
expenses are fixed but that other expenses are fully variable is equal to
A. 4,286 units

D. 18,000 units

B. 5,143 units

E. None of these

C. 9,428 units
Items 68 through 71 are based on the following information:
The owners of Bougavilla Supermarket have been looking for ways to improve sales at the store.
One of the proposal is to have a weekly raffle with a total price of P6,000 per week. For every
P20 worth of goods purchased, the customer shall received a numbered ticket for the raffle. The
variable cost to print and distribute the tickets has been estimated at one peso (P1.00).
Promotions and other fixed costs in connection with the raffle, likewise, have been estimated at
P5,000 per week. The current weekly operating results of Bougavilla are given below:
Sales

P600,000

Variable costs

450,000

Fixed costs for the week

80,000

68. What is the sales revenue required to break-even without the raffle?
A. P320,000

D. P600,000

B. P364.000

E. None of these

C. P455,000
69. How much is the margin of safety in relation to no. 68?
A. P150,000

D. P145,000

B. P280,000

E. None of these

C. P70,000
70. What is the sales revenue required to breakeven with the raffle?
A. P320,000

D. P765,000

B. P455,000

E. None of these

C. P600,000
71. If the raffle can increase sates to P1,000,000 per week, how much will be added to profit?
A. P109,000

D. P39,000

B. P159,000

E. None of these

C. P179,000