INTRODUCTION

To manage any size of business, you must understand how costs respond to
CHAPTER II changes in sales volume and the effects of costs and revenue on profits, hence,
known as Cost-Volume-Profit Analysis.
COST-VOLUME-PROFIT A prerequisite to understanding CVP relationships is knowledge of how costs
ANALYSIS behave which was discussed in the previous chapter. In this chapter we will
discuss and illustrate the relevance of CVP Analysis.

ASSUMPTIONS OF CVP
Like most models, there are certain inherent assumptions.  Violating the
STUDY OBJECTIVE: assumptions has the potential to undermine the conclusions of the model.  Some
After studying this chapter, you should be able to: of these assumptions have been touched on throughout the chapter: 
1. Distinguish between variable and fixed costs.
2. Explain the significance of the relevant range. 1. The behavior of both costs and revenues is linear throughout the relevant range
3. Explain the concept of mixed costs. of the
4. List the five components of cost-volume-profit analysis. activity index.
5. Indicate what a contribution margin is and how it can be expressed. 2. Costs can be classified accurately as either variable or fixed.
6. Identify the ways to determine the break-even point. 3. Changes in activity are the only factors that affect costs.
7. Give the formula(s) for determining sales required to earn target net 4. All units produced are sold.
income. 5. When more than one type of product is sold, the sales mix will remain constant.
8. Define margin of safety, and give the formula(s) for computing it. That is, the
9. Explain the significance of margin of safety. percentage that each product represents of total sales will stay the same. Sales
mix
complicates CVP Analysis because different products will have different cost
relationships.

“A pencil maker told the pencil 5 important lessons: 1st, everything

you do will always leave a mark. 2nd, you can always correct the
COST-VOLUME-PROFIT ANALYSIS
mistakes you’ve made. 3rd, what is important is what’s inside you.
COST-VOLUME-PROFIT (CVP):  CVP analysis is imperative for
4th, in life you will undergo painful sharpenings which will make management.  It is used to build an understanding of the relationship between
you a better pencil. 5th and the most important is, to be the best costs, business volume, and profitability.  The analysis focuses on the interplay of
pencil you can be, you must allow yourself to be held and guided by pricing, volume, variable and fixed costs, and product mix.  This analysis will
the hand that holds you.” drive decisions about what products to offer, how to price them, and how to
manage an organization's cost structure.  CVP is at the heart of techniques that are
useful for calculating the break-even point, volume levels necessary to achieve

1
targeted income levels, and similar computations.  The starting point for these P800)
calculations is to consider the contribution margin. Contribution Margin 2,400,000 1,200 60%
Fixed Costs (1,200,000)
CONTRIBUTION MARGIN:  The contribution margin is revenues minus Net Income 1,200,000
variable expenses.  Do not confuse the contribution margin with gross profit
(revenues minus cost of sales).  Gross profit would be calculated after deducting What would happen if Leyland sold only 500 units?
all manufacturing costs associated with sold units, whether fixed or variable. 
Instead, the contribution margin is a conceptual number reflecting the amount Total Per Unit Ratio
available from each sale, after deducting all variable costs associated with the Sales (500 x P2,000) 1,000,000 2,000 100%
units sold.  Some of these variable costs are product costs, and some are selling Variable Costs (500 x (400,000) (800) (40%)
and administrative in nature.  The contribution margin is generally a number P800)
calculated for internal use and analysis; it does not ordinarily become a part of the Contribution Margin 600,000 1,200 60%
externally reported data set. Fixed Costs (1,200,000)
Net Income (600,0000)
CONTRIBUTION MARGIN: AGGREGATED, PER UNIT, OR RATIO?: 
When speaking of the contribution margin, one might be referring to aggregated Notice that changes in volume only impact certain amounts within the "total
data, per unit data, or ratios.  This point is illustrated below for Leyland Sports, a column."  Volume changes did not impact fixed costs, or change the per unit or
manufacturer of score board signs.  The production cost is P500 per sign, and ratio calculations.  By reviewing the above data, also note that 1,000 units achieved
Leyland pays its sales representatives P300 per sign sold.  Thus, variable costs are breakeven net income.  At 2,000 units, Leyland managed to achieve a P1,200,000
P800 per sign.  Each signs sells for P2,000.  Leyland's contribution margin is net income.  Conversely, 500 units resulted in a P600,000 loss.
P1,200 (P2,000 - (P500 + P300)) per sign.  In addition, assume that Leyland
incurs P1,200,000 of fixed costs, regardless of the level of activity.  Below is a
BREAK-EVEN CALCULATIONS
schedule with contribution margin information, assuming 1,000 units are
produced and sold: 
GRAPHICAL PRESENTATION: As they say, a picture is worth a thousand
words, and that is certainly true for the CVP graphical presentation. However,
everyone is not an artist, and you may find it more precise to do a little algebra to
calculate the break-even point.  This is method is called MATHEMATICAL
Total Per Unit Ratio APPROACH. Consider that:
Sales (1,000 x P2,000) 2,000,000 2,000 100%
Variable costs (1,000 x P800) (800,000) (800) (40%)
Break-even results when: Sales = Total Variable Costs + Total Fixed
Contribution Margin 1,200,000 1,200 60%
Costs
Fixed Costs (1,200,000)
Net income -0-
For Leyland, the math turns out this way: (Units X P2,000) =  (Units X
P800) + P1,200,000
What would happen if Leyland sold 2,000 units?
Solving:
Total Per Unit Ratio
Sales (2,000 x P2,000) 4,000,000 2,000 100%
Variable Costs (2,000 x (1,600,000) (800) (40%) Step (Units X P800)
(Units X P2,000) =
a: + P1,200,000
2
 Units to Achieve a Target Income = (Total Fixed Costs + Target Income)  /
Step Contribution Margin Per Unit
(Units X P1,200) = P1,200,000
b:
Step 1,500 Units  = P1,800,000 / P1,200
Units = 1,000
c:
If you want to know the dollar level of sales to achieve a target net income:
Now, it is possible to "jump to step b" above by dividing the fixed costs by the
contribution margin per unit.  This approach of solving the break-even-point is Sales to Achieve a Target Income = (Total Fixed Costs + Target Income) /
termed as CONTRIBUTION MARGIN APPROACH. Thus, a break-even short Contribution Margin Ratio
cut is:
P3,000,000  = P1,800,000 / 0.60
Break-Even Point in Units = Total Fixed Costs / Contribution Margin Per Unit
CRITICAL THINKING ABOUT CVP:  CVP is more than just a mathematical
1,000 Units  = P1,200,000 / P1,200 tool to calculate values like the break-even point.  It can be used for critical
evaluations about business viability.
Sometimes, you may want to know the break-even point in dollars of sales (rather
than units).  This approach is especially useful for companies with more than one For instance, a manager should be aware of the "margin of safety."  The margin
product, where those products all have a similar contribution margin ratio: of safety is the degree to which sales exceed the break-even point.  For Leyland,
the degree to which sales exceed P2,000,000 (its break-even point) is the margin
Break-Even Point in Sales = Total Fixed Costs / Contribution Margin Ratio of safety.  This will give a manager valuable information as they plan for
inevitable business cycles.
P2,000,000  = P1,200,000 / 0.60
SENSITIVITY ANALYSIS
TARGET INCOME CALCULATIONS:  Breaking even is not a bad thing, but
hardly a satisfactory outcome for most businesses.  Instead, a manager may be COST STRUCTURE SHIFTS:  The only sure thing is that nothing is a sure
more interested in learning the necessary sales level to achieve a targeted profit.  thing.  Cost structures can be anticipated to change over time.  Management must
The approach to solving this problem is to treat the "target income" like an added carefully analyze these changes to manage profitability.  CVP is useful for
increment of fixed costs.  In other words, the margin must cover the fixed costs studying sensitivity of profit for shifts in fixed costs, variable costs, sales volume,
and the desired profit: and sales price.
Target Income results when: Sales =  Total Variable Costs + Total Fixed Costs CHANGING FIXED COSTS:  Changes in fixed costs are perhaps the easiest to
+ Target Income analyze.  To determine a revised break-even level requires that the new total fixed
cost be divided by the contribution margin.  Return to the example for Leyland
Assume Leyland wants to know the level of sales to reach a P600,000 income: Sports.  Recall one of the original break-even calculations:

Again, it is possible to "jump to step b" by dividing the fixed costs and target Break-Even Point in Sales = Total Fixed Costs / Contribution Margin Ratio
income by the per unit contribution margin: (CONTRIBUTION MARGIN
APPROACH) P2,000,000  = P1,200,000 / 0.60

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If Leyland added a sales manager at a fixed salary oP120,000, the revised break- P8,000,000 break-even (P4,000,000/0.50).  At P9,000,000 of revenue, the new jet is
even would be: 2,200,000  = 1,320,000 / 0.60 profitable while continuing to use the old jet will result in a loss.

In this case, the fixed cost increased from P1,200,000 to P1,320,000, and sales must CVP FOR MULTIPLE PRODUCTS
reach P2,200,000 to break even.  This increase in break-even means that the
manager needs to produce at least P200,000 of additional sales to justify their post. MULTIPLE PRODUCTS AND CVP ANALYSIS:  How many businesses sell
only one product?  The reality is that firms usually offer a diverse product line, and
CHANGING VARIABLE COSTS:  In recruiting the new sales manager, Leyland the individual products will have different selling prices, contribution margins, and
became interested in an aggressive individual who was willing to take the post on a contribution margin ratios.  Yet, the firm's total fixed cost picture may be the same,
"4% of sales" commission-only basis.  Let's see how this would change the no matter the mix of products sold.  This can cloud the ability to perform simple
breakeven point: CVP analysis.  To lift this cloud requires some knowledge of the product mix.

Break-Even Point in Sales = Total Fixed Costs / Contribution Margin Ratio Let's assume Hummingbird Feeders produces and sells a brightly colored feeding
container for P15 (variable cost of production is P10, and contribution margin is
P2,142,857  = P1,200,000 / 0.56 P5) and a nectar formula for P3 per packet (P1 variable cost to produce, resulting
in a P2 contribution margin).  Hummingbird Feeders sells 10 packets of nectar for
You have probably marveled at the salaries of some movie stars and professional every feeder sold.  Its fixed cost is P100,000.  How many feeders and packets
athletes.  Rest assured that some serious CVP analysis has gone into the contract must be sold to break even?  To answer this question requires a redefinition of the
negotiations for these celebrities.  For example, how much additional revenue must "unit."  If we assume the "unit" is 1 feeder and 10 packets, we would then see that
be generated by a movie to justify casting a high-dollar movie star (versus using a each "unit" would have a contribution margin of 25.
low-cost unknown actor)?  And, you have probably read about deals where
musicians get a percentage of the revenue from ticket sales and concessions at a To recover P100,000 of fixed cost, at P25 of contribution per "unit," would
concert.  These arrangements are likely based on detailed calculations; what may require selling 4,000 "units" (P100,000/P25).  To be clear, this translates into
seem foolish is actually quite logical in terms of a comprehensive CVP analysis. 4,000 feeders and 40,000 packets of nectar.  Total break-even sales would be
P180,000 ((P15 X 4,000 feeders) + (P3 X 40,000 packets)).  Of course, the
BLENDED COST SHIFTS:  Sometimes, a business will contemplate changes in validity of this analysis depends upon actual sales occurring in the predicted ratio. 
fixed and variable costs.  For example, an airline is considering the acquisition of a Changes in product mix will result in changes in break-even levels.  If
new jet.  The new jet entails a higher fixed cost for the equipment, but is more fuel Hummingbird Feeders sold P180,000 in feeders, and no packets of nectar, they
efficient.  The proper CVP analysis requires that the new fixed cost be divided by would come no where near breakeven (because the contribution margin ratio on
the new unit contribution margin to determine the new break-even level.  Such feeders is much lower than on the packets of nectar).
analysis is important to evaluate whether an increase in fixed costs is justified.
Note that one could also get the P180,000 result by dividing the fixed cost by the
To illustrate, assume Flynn Flying Service currently has a jet with a fixed operating weighted-average contribution margin (P100,000/0.555 = P180,000).  The
cost of P3,000,000 per year, and a contribution margin of 30%.  Flynn is offered an weighted-average contribution margin of 0.555 is calculated as follows:
exchange for a new jet that will cost P4,000,000 per year to operate, but produce a
50% contribution margin.  Flynn is expecting to produce P9,000,000 in revenue Product Sales to Product Weighted
each year.  Should Flynn make the deal?  The answer is yes.  The break-even point Total Sales Ratio Contribution Average Ratio
on the old jet is P10,000,000 of revenue (P3,000,000/0.30), while the new jet has an (mix) Margin Ratio
Feeder (1@P15) P15/P45 x P5/P15 = 0.1111
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Nectar Packets (10 @ P3) P30/P45 x P2/P3 = 0.4444 BEP units = Fixed Cost ÷ CM per unit.
0.5555 BEP peso sales = Fixed Cost ÷ CM ratio

SUMMARY OF CVP-RELATED TERMINOLOGIES

FACTORS AFFECTING PROFIT 3. Target Net Income
 The objective net income set by the management.
 Computed as follows:
Selling Price Unit Variable Cost Volume (Units) Sales Mix
Unit Sales with Target Profit = (Fixed Cost + *Profit) ÷
CM per unit.

CVP-related Terminologies
1. Contribution Margin Note: *Profit must be expressed before tax: Profit after tax ÷
 Is the difference between sales and variable cost. (100% - tax rate)
 Also known as Marginal Income, Profit Contribution,
Contribution to Fixed Cost or Incremental Peso Sales with Target Return on Sales = Fixed Costs ÷
Contribution. (CM ratio–Return on Sales)
 Computed as:
*Sales xx
- Variable Costs (xx) 4. Margin of Safety
Contribution Margin xx  The difference between actual sales volume and break-even
sales.
CM ratio = CM ÷ Sales or Unit CM ÷ Unit Selling  This indicates the maximum amount by which sales could
Price decline without incurring a loss
CM ratio = ∆ CM ÷ ∆ Sales.  Computed as follows:

Margin of Safety = Sales – Breakeven Sales

Note: The sign ‘∆’ denotes “change” or Margin of Safety Ratio = Margin of Safety ÷ Sales
“difference”. Given the underlying CVP
assumptions, CM ratio is constant regardless of the
number of units sold or produced. 5. Indifference Point
 The level of volume at which two alternatives being analyzed
2. Break-Even Point (BEP) would yield equal amount of total costs or profits.
 A level of activity, in units (break-even in volume) or in pesos  Computed as follows:
(break-even in sales), at which total revenues equal total costs.
At break even point, there is neither profit nor loss. Alternative A Alternative B
 Computed as follows: (CM/u x Q) – FC = (CM/u x Q) –FC
FC + (VC/u x Q) = FC + (VC/u x Q)
Sales = Variable costs + Fixed costs
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 Note: Q – number of units (indifference point). b. Lowers the break-even point
c. Decreases the sales required to earn a particular after-tax
6. Sales Mix profit
 The relative combination of quantities of sales of various d. Increases sales required to earn a particular after-tax profit.
products that make up the total sales of a company. 6. A company that has a negative margin of safety necessarily operates
 Computed as follows: at a loss. T
7. Under CVP analysis, which of the following is not assumed to be
BEP in units = Fixed Cost ÷ Weighted Average CM per constant?
unit. a. Sales mix c. Unit
BEP in pesos = Fixed Cost ÷ Weighted Average CM variable cost
ratio. b. Unit selling price d. Unit
fixed cost
8. The operating leverage factor is equal to
7. Degree of Operating Leverage (DOL) a. Gross margin ÷ profit after tax c. Contribution
 Measures how a percentage change in sales from the margin ÷ profit after tax
current level will affect company profits. b. Gross margin ÷ profit before tax d. Contribution
 This indicates how sensitive the company is to sales margin ÷ profit before tax
volume increases and decreases known as operating 9. If the degree of operating leverage is 2, then a 4% change in quantity
leverage factor. sold should result in a 6% change in profit before tax. F (8%)
 Computed as follows: 10. If inventories are expected to change, the type of costing that provides
the best information for break-even analysis is
DOL = CM ÷ Profit before tax a. Job-order Costing c. Joint
% ∆ Sales x DOL = % ∆ profit Costing
before tax b. Variable Costing d.
Absorption Costing

Wrap-up Exercises (True or False; Multiple Choice) Brief Exercises:

1. At the break-even point, total contribution margin is 1. Uyabs Company manufactures and sells a single product. The
a. Zero c. Equal company’s sales and expenses for recent month follows:
to total costs Sales (15,000 units) 600,000
b. Equal to fixed costs d. Equal to total Less: Variable Costs 420,000
variable costs Contribution Margin 180,000
2. An increase in contribution margin percentage reduces the break even Less: Fixed Costs 150,000
point. T Profit 30,000
3. Given a positive contribution margin, a company with no fixed costs Required:
has break-even point of zero. T 1. Determine the following:
4. If the tax rate increases, then break-even point also increases. F a. Selling price per unit.
5. An increase in the income tax b. Variable cost per unit.
a. Raises the break-even point c. CM ratio.
2. What is the monthly break-even point in units sold and in sales pesos?
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 3. Without doing computations, what is the total contribution margin at the Chairs Tables Total
break-even point? Sales in units 600 u 150 u 750 u
Sales 1,200.00 187.50 1,387.50
2. Bandals Company sells its only product at P32 per unit. Variable costs are P24 Variable Costs 1,050.00 112.50 1,162.50
per unit and fixed costs amounted to P100,000 per month. Contribution Margin 150.00 75.00 225.00
Fixed Costs 90.00
Required: Income 135.00
1. If Bandals can sell 15,000 units in a particular month, what will be its
profit? Required:
2. What is the break-even point in units? In sales pesos? 1. How many units of tables should be sold next month to break-even?
3. What unit sales, are required to earn P40,000 for the month? 2. How many units of chairs should be sold to earn a profit of P150?
4. What sales in pesos, are required to earn after-20% tax profit of (Adapted: Managerial Accounting by Garrison, et.al.)
P32,000 for the month?
5. Suppose that Bandals is currently selling 10,000 units per month. The SOLUTION GUIDE: (item no. 5)
marketing manager believes that sales would increase if advertising Chairs Tables
were increased by P5,000. By how much unit sales have to increase to Contribution Margin (CM) per unit 0.25 0.50
give Bandals the same income or loss that it is currently earning? Sales Mix (4:1 – 80%: 20%) 80% 20%
(Although you know how many units are now being sold, you do not Weighted Average CM per unit:
need this fact to solve the problem.)
6. If Bandals is selling 20,000 units per month at P32, what is the margin 5. Ma. Jerry May has recently opened Macada Fitness Gym for
of safety? malnourished individuals. Actual operating results for the
7. Bandals currently pays its sales people salaries for a total of P40,000 shop’s first year of operations are presented as follows:
per month, but no commissions. The sales department is considering a
plan whereby the salespeople would receive a 5% commission, but Sales 250,000
their salaries would fall to a total of P25,000 per month. At what sales Variable (100,000)
level is the company indifferent between the two compensation plans? Costs
(Adapted: Managerial Accounting by Louderback, et.al.) Contribution 150,000
margin
3. Barack Company’s break-even sales are P528,000. The variable cost ratio to Fixed costs (120,000)
sales is 60%, while profit ratio is 8%. Income 30,000

Required: Determine the following: Ms. May is unhappy about the results of her gym’s first year of
1. Fixed costs operations. She observed that despite the very high contribution margin,
2. Actual sales income was still low because of the very high fixed costs. She concludes
3. Profit that an increase in sales would not yield a satisfactory increase in profit.
4. Margin of Safety
5. Margin of safety ratio Required:
1. Explain to Ms. May that what he feels is not right by
4. Mahjoka Company produces and sells two products, tables and chairs. Following computing the operating leverage
is next month’s income budget: factor.
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 2. If sales increase by 10%, then how many percent would selling price will be P2 per unit. Variable cost is estimated to be 40%
income increase, ceteris of the selling price. Fixed cost is estimated to be P6,000. What is the
paribus? (Determine the percentage change by using the break-even point?
operating leverage factor.) a. 3,750 units c. 5,500
(Adapted: Managerial Accounting by Garrison, units
et.al.) b. 5,000 units d. 7,500 units

Additional Exercises: 6. Once the break-even point has been reached, operating income will increase by
(Sources: CMA/CIA/RPCPA/AICPA/Various test banks) the
a. Gross margin per unit for each additional unit sold.
1. All else constant, if selling price falls, b. Contribution margin per unit for each additional unit sold.
a. Total variable cost will be lower than expected. c. Fixed cost per unit for each additional unit sold.
b. Contribution margin percentage will be higher than expected. d. Variable costs per unit for each additional unit sold.
c. Total contribution margin will be higher than expected.
d. Per-unit contribution margin will be lower than expected. 7. The following data refer to cost-volume-profit relationship of Albert Co.
Break-even point in units 1,000
2. Which of the following is a characteristic of a contribution income Variable cost per unit P250
statement? Total fixed cost P75,000
a. Fixed and variable expenses are combined as one line item.
b. Fixed expenses are listed separately from variable expenses. How much will be contributed to operating income by the 1,001st unit sold?
c. Fixed and variable manufacturing costs are combined as one a. 250 c. 75
line item, but fixed operating expenses are shown separately b. 325 d. Zero
from variable operating expenses. 8. Jo Company sells its only product for P60 per unit and incurs the following
d. Fixed and variable operating expenses are combined as one variable costs per unit:
lime item, but fixed manufacturing expenses are shown Direct material 16
separately from variable manufacturing expenses. Direct labor 12
Manufacturing overhead 7
3. Which of the following would decrease unit contribution the most? Total variable manufacturing overhead 35
a. A 15% decrease in selling price. Selling expenses 5
b. A 15% increase in variable expenses. Total variable costs 40
c. A 15% decrease in variable expenses.
d. A 15% increase in fixed expenses. Jo’s annual fixed costs are P880,000 and Jo is subject to a 30% income tax rate. If
prime costs increased by 20% and all other values remained the same, Jo
4. At break-even point, the contribution margin equals total Company’s contribution margin (to the nearest whole percent) would be
a. Variable costs. c. Selling and a. 0.75 c. 0.24
administrative costs b. 0.30 d. 0.20
b. Sales revenues d. Fixed costs
9. In planning its operations for 2010 based on sales forecast of P6,000,000,
5. Abet Company plans to market a new product. Based on its market Candy Inc. prepared the following estimated data:
value studies. Abet estimates that it can sell 5,500 units in 2009. The
8
 Cost and Expenses b. 220,000 d.
Variable Fixed 330,000
Direct materials 1,600,000
Direct labor 1,400,000 12. A company manufactures a single product. Estimated cost data
Factory overhead 600,000 900,000 regarding this product and other information for the product and the
Selling expenses 240,000 360,000 company are as follows:
Administrative expenses 60,000 140,000 Sales price per unit 40
3,900,000 1,400,000 Total variable production cost per unit 22
Sales commission (on sales) per unit 5%
What would be the amount of sales in pesos at the break-even point? Fixed costs and expenses:
a. 2,250,000 c. 4,000,000 Manufacturing overhead
b. 3,500,000 d. 5,300,000 5,598,720
General and administrative 3,732,480
10. For the period just ended, Lorna Company generated the following operating Effective income tax rate 40%
results in percentages:
Revenues 100% The number of units the company must sell in the coming year in
Cost of Sales: order to reach its breakeven point is
Variable 50% a. 388,800 units c.
Fixed 10% 583,200 units
Total 60% b. 518,400 units d.
Gross profit 40% 972,000 units
Operating expenses:
Variable 20% 13. The most likely strategy to reduce the breakeven point would be to
Fixed 15% a. Increase both the fixed cost and contribution margin.
Total 35% b. Decrease both fixed costs and the contribution margin.
Operating income 5% c. Decrease the fixed costs and increase the contribution margin.
d. Increase the fixed costs and decrease the contribution margin.
Total sales amounted to P3 million. How much was the break-even sales?
a. 1,875,000 c. 2,850,000 14. One of the major assumptions limiting the reliability of breakeven
b. 2,500,000 d. 3,750,000 analysis is that
a. Efficiency and productivity will continually increase.
11. The present break-even sale of Inday Company is P550,000 per year. b. Total variable costs will remain unchanged over the relevant
It is computed that if fixed expense will go up by P60,000, the sales range.
required to break-even will also increase to P700,000 without any c. Total fixed costs will remain unchanged over the relevant
change in the selling price per unit and on the variable expenses. range.
d. The cost of production factors varies with changes in
Before the increase of P60,000, the total fixed expense of Inday technology.
Company is:
a. 200,000 c. 15. Which of the following would cause the break-even point to change?
280,000 a. Sales increased.
9
 b. Total production decreased. Unit sales 100,000
c. Total variable costs increased as a function of higher Variable costs 600,000
production. Fixed costs 300,000
d. Fixed costs increased owing to additional equipment in
physical plant. Base on a market study, Dalen estimates that it could increase the unit selling price
by 15% and
increase the unit sales volume by 10% if P100,000 was spent in advertising.
Assuming that
16. A fixed cost is the same percentage of sales in three different months. Dalen incorporates these changes in its 2009 forecast, what should be the
Which of the following is true? operating
a. The company has the same sales in each of those months. income for Product D?
b. The cost is both fixed and variable. a. 175,000 c. 205,000
c. The company is operating at its break-even point. b. 190,000 d. 365,000
d. The company is achieving its target level of profit.
21. August Company sells Product SM for P5 per unit. The fixed cost is P210,000
17. How much will income change if a company makes an advertising campaign and the variable cost is 60% of the selling price. What would be the amount of
given the following data? sales if August Company is to realize a profit of 10% of sales?
Cost of advertising campaign a. 700,000 c. 472,500
25,000 b. 525,000 d. 420,000
Variable expenses as a percentage of sales 42%
Increase in sales 22. Alice Corp. aims to earn a 25% return on its P500,000 investment in equipment
60,000 used in the manufacture of Product Y. Based on estimated sales of 10,000 units
of Product Y next year, the cost per unit were estimated as follows:
a. 200 increase c. 15,000 increase Variable manufacturing cost 25
b. 9,800 increase d. 25,200 increase Fixed selling and administrative cost 10
Fixed manufacturing cost 5
18. Francis Company is planning to sell 100,000 units of Product A for P12 a unit.
The fixed cost amounted to P280,000. In order to realize a profit of P200,000, Product Y should be priced at:
what would the variable cost be? a. 45.00 c. 52.50
a. 480,000 c. 300,000 b. 50.00 d. 55.00
b. 720,000 d. 220,000
23. Terry Company has a fixed costs of P100,000 and breakeven sales of
19. Yolly Company is planning to sell 200,000 units of Product F. The fixed cost is P800,000. What is its projected profit at P1,200,000 sales? (hint:
P400,000 and the variable cost is 60% of the selling price. In order to realize a compute the constant margin ratio)
profit of P100,000, the selling price per unit would have to be a. 50,000 c.
a. 3.75 c. 6.00 200,000
b. 4.17 d. 6.25 b. 150,000 d.
20. Dalen Company prepared the following preliminary forecast concerning 400,000
Product D for 2011 assuming no expenditure for advertising:
Selling price per unit 10
10
24. Jerry Boy Company sells a product to retailers for P200. The unit be incurred on a monthly basis for the normal production level of
variable cost is P40 plus a selling commission of 10%. Fixed 1,000,000 pounds of the new product:
manufacturing cost totals P1,000,000 per month, while fixed selling
and administrative cost equals P420,000. The income tax rate is 30%. 1,000,000
The target sales assuming after tax income of P123,200 would be: lbs.
a. 19,950 units c. Direct materials 300,000
18,750 units Direct labor 1,250,000
b. 15,640 units d. Variable factory overhead 450,000
11,400 units Fixed factory overhead 2,000,000
Variable selling, general and administrative 90
25. Heth Electronics Company is developing a new product, surge expenses 0,000
protectors for high-voltage electrical flows. The cost information for Fixed selling, general and administrative 1,500,000
this product is as follows: expenses
Total 6,400,000
Unit
Costs At sales price of P5.90 per pound, the sales in pounds necessary to ensure
Direct 3.25 a P3,000,000 profit in the first year would be
materials a. 13,017,000 pounds c. 15,000,000
Direct labor 4.00 pounds
Distributio 0.75 b. 14,000,000 pounds d. 25,600,000
n pounds

The company will also be absorbing P120,000 of additional fixed costs 27. Cost-volume-profit relationships that are curvilinear may be analyzed linearly
associated with this new product. A corporate fixed charge of P20,000 by considering only
currently absorbed by other products will be allocated to this new product. a. Fixed and semi-variable costs c. Relevant
Heth Electronics’ effective income tax rate is 40%. variable costs
b. Relevant fixed costs d. Relevant range of
How many surge protectors (rounded to the nearest hundred) must Heth volume
Electronics sell at a selling price of P14 per unit to increase after-tax
income by P30,000? (hint: consider only additional fixed cost) 28. Delphi Company has developed a new project that will be marketed for the first
a. 10,700 units c. time during the next fiscal year. Although the Marketing Department estimates
20,000 units that 35,000 units could be sold at P36 per unit, Delphi’s management has
b. 12,100 units d. allocated only enough manufacturing capacity to produce a maximum of
28,300 units 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
26. A Company has just completed the final development of its only depreciation on new manufacturing equipment.
product, general recombinant bacteria, which can be programmed to
kill most insects before dying themselves. The product has taken 3 Data associated with each unit of product are presented below. Delphi is subject
years and P6,000,000 to develop. The following costs are expected to to a 40% income tax rate.

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 Variable costs a. 80,000 c. 240,000
Direct materials 7.00 b. 90,000 d. 600,000
Direct labor 3.50
Manufacturing overhead 4.00 31. The following data pertain to the two products manufactured by
Total variable manufacturing cost 14.50 Glory, Inc.
Selling expenses 1.50 Per unit
Total variable cost 16.00 Products Selling Variable
price cost
Delphi Company’s management has stipulated that it will not approve the A 240 140
continued manufacture of the new product after the next fiscal year unless the B 1,000 400
after-tax profit is at least P75,000 for the first year. The unit selling price to
achieve this target profit must be atleast. Fixed costs totals P600,000 annually. The expected sales mix in units is
a. 34.60 c. 37.00 60% for Product A and 40% for Product B. How many units of the two
b. 36.60 d. 39.00 products together must Glory sell to break-even?
a. 857 c. 2,000
29. Julie Company, which is subject to 40% income tax rate, had the following b. 1,111 d. 2,459
operating data for the period just ended:
Selling price per unit 60 32. If the sales mix shifts toward higher contribution margin products, the
Variable cost per unit 22 break-even point
Fixed costs 504,000 a. Decreases c.
Remains constant
Management plans to improve the quality of its sole product by way of b. Increases d. Is zero
implementing the
following changes: 33. Daryl Company sells product S, T and D. Daryl sells three units of S
(1) Replacing a component that costs P3.50 with a high-grade unit that costs for each unit of D and two units of T for each unit of S. The
P5.50 and contribution margins are P1 per unit of S, P1.50 per unit of T, and P3
(2) Acquiring a P180,000 packaging machine. Julie will depreciate the machine per unit of D. Fixed costs are P600,000. How many units of S would
over a 10-year period with no estimated salvage value by the straight line Daryl sell at the break-even point?
method of depreciation. a. 40,000 units c.
240,000 units
If the company wants to earn after-tax of P172,800 in the coming year, it must b. 120,000 units d.
sell 400,000 units
a. 10,300 units c. 22,500 units
b. 21,316 units d. 27,000 units

30. Danilyn Inc is planning to produce two products, A and B. Danilyn is planning
to sell 100,000 units of A at P4 a unit and 200,000 units of B at P3 a unit.
Variable cost is 70% of sales for A and 80% for sales of B. In order to realize a
total profit of P160,000, what must the total fixed cost be?

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