CVP Exercise Maria Cristina P.

Obeso, CPA, MBA

PROBLEM 1

Contribution margin, breakeven point, margin of safety. Dianne Company makes a product that
sells for P160 per unit. Variable costs are P104 per unit, and fixed costs total P1,568,000
annually. The company sold 35,000 units during the current year.

Required:

1. Unit contribution margin, contribution margin ratio, and variable cost ratio.
Unit Contribution Margin
P160 Selling Price
(104) Variable cost
P56
Contribution Margin Ratio
P56 Unit Contribution Margin
÷160 Selling Price
35%
Variable cost ratio
P104 Variable cost
÷160 Selling price
65%

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2. Breakeven point in units and in pesos.

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P1,568,000 Fixed cost
÷56 Unit Contribution Margin
28,000 Units o.
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3. Margin of safety in units and in pesos.

35,000 Actual sales (units)
(28,000) Breakeven sales (Units)
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7,000 Margin of Safety (Units)

aC s

X160 Selling Price

vi y re

P1,120,000 Margin of Safety (Pesos)

4. Margin of safety ratio.

ed d

7,000 Margin of Safety

ar stu

÷35,000 Actual Sales

20%
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PROBLEM 2
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Basic CVP analysis, margin of safety, CM Ratio. KG Company manufactures and sells a single
product. The company’s sales and expenses for a recent month are shown below:
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Total Per Unit

Sales P 600,000 P 40
Less: Variable expenses 420,000 28
Contribution margin 180,000 P. 12
Less: Fixed expenses 150,000
Net income P 30,000
Required:
1. Breakeven point in units and in pesos.
P150,000 Fixed expenses
÷12 Contribution margin
12,500 Units

P150,000 Fixed expenses

÷30% Contribution margin ratio(12/40)
P500,000

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 2. What is the contribution margin at breakeven point?
Answer: P150,000
Contribution margin at breakeven is only enough to cover the fixed expenses, to generate no
loss nor profit

3. How much is the total fixed costs and expenses at breakeven point?
Answer: P150,000

4. Margin of safety in pesos, in units and in percentage.

P600,000 Actual Sales
(500,000) Breakeven Sales
P100,000 Margin of Safety (Pesos)

15,000 Actual Sales (Units)

(12,500) Breakeven Sales (Units)
2,500 Margin of Safety(Units)

15,000 Actual Sales (Units)

÷2,500 Margin of Safety(Units)
16.67%

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5. Compute the net income using the margin of safety ratio.

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P100,000 Margin of Safety
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x30% Contribution
P30,000 Net Income o.
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6. How many units must be sold to earn a minimum net income of P18,000?
P150,000 Fixed expenses
18,000 Target Profit
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P168,000 Target CM
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÷12 CM per unit

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14,000 Units

7. If sales increase by P80,000, how much would you expect income to increase?
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P80,000 Increase in sale

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x30% CM ratio
24,000 Increase in Income
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PROBLEM 3
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Breakeven point, sales price at breakeven point. Apo Ni Aga Sorority is planning its annual A
Night of Extravaganza. The committee would like to charge P800 per person for the activity.
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Dinner per person P 250

Favors and programs per person 300
Band 25,000
Tickets and advertising 40,000
Venue rental 20,000
Floorshow 15,000
Required:

1. Breakeven point in terms of units and pesos.

P25,000 Band
40,000 Ticket and Advertising
20,000 Venue rental
15,000 Floorshow
P100,000 Total Fixed cost

Breakeven (Units)
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 100,000 Fixed cost
÷250 CM per unit (800 - 250- 300)
400 Units

Breakeven (Pesos)
100,000 Fixed cost
÷31.25% CM ratio (250/800)
P320,000
2. Assume that last year only 200 persons attended the event and the same number of
attendees is expected this year, what price per ticket must be charged to breakeven?

P100,000 Fixed cost

÷200 Target Units
P500 CM Unit
550 Variable cost Unit
P1,050 Sales price

3. The committee has learned that Mega ShaSha will make an appearance during the evening.
Accordingly, the committee has decided to raise the ticket price to P850 per person.
Compute the expected breakeven point in units and in pesos.

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Breakeven (Units)
P100,000 Fixed cost
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÷300 CM Pesos (850-550)
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333 Units
o.
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Breakeven (Pesos)
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P100,000 Fixed cost

÷35.29% CM Ratio (300/850)
P283,336
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vi y re

PROBLEM 4

BEP, change in net income. Highlands, Inc. Produces and sells camping equipment. One of the
company’s products, a camp lantern, sells for P90 per unit. Variable expenses are P63 per
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lantern, and fixed expenses associated with the lantern total P135,000 per month.
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Required:
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1. Determine the breakeven point in units and in pesos.

Breakeven (Units)
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P135,000 Fixed cost

÷27 CM Pesos (90-63)
5,000 Units
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Breakeven (Pesos)
P135,000 Fixed cost
30% CM Ratio (27/90)
P450,000
2. At present, the company is selling 8,000 lanterns a month. The sales manager is
convinced that a 10% reduction in the selling price would result in a 25% increase in the
number of lanterns sold each. How much is the change in net income if the sales
manager’s expectations are correct?
P72,000 Decrease on Selling Price (8,000 x 9)
162,000 Increase in sales 25% (2,000 x 81)
126,000 Increase in Variable cost
(P36,000) Decrease in Profit

PROBLEM 5

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 Sales with profit. Rang-ayan Company produces a single product and presented below are data
taken from its recent income statement.

Sales (135,000 units at P20) P 2,700,000

Less: Variable costs 1,890,000
Contribution margin 810,000
Less: Fixed costs 900,000
Net loss P ( 90,000 )
Required:

1. The sales manager feels that an P80,000 increase in monthly advertising budget,
combined with an intensified effort by the sales staff, will result in a P700,000
increase in monthly sales. Considering these changes, will the company’s net income
increase or decrease?
P700,000 Increase in sales
(80,000) Increase in Advertising
(490,000) Increase in Variable cost
P130,000 Increase in Profit

2. The president is convinced that a 10% reduction in the selling price, combined with
an increase of P35,000 in the monthly advertising budget, will cause unit sales to
double. Considering these changes, how much is the company’s expected net

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income?

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P4,860,000 Sales (270,000 x 18)

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(3,780,000) Variables cost (270,000 x 14)
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(900,000) Fixed cost
(35,000) o.
Additional Cost
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P145,000 Net income

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3. A new package for the product is being considered to induce sales. This package
costs P0.60 per unit. Considering the new package cost, how many units would have
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to be sold each month to earn a profit of P45,000?

aC s

P45,000 Target Profit

vi y re

900,000 Fixed cost

P945,000
÷5.4 CM pesos (20-14.6)
ed d

175,000 Units
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PROBLEM 6

BEP, sales with profit. Castleton Company has analyzed the costs of producing and selling
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5,000 units of its only product to be as follows:

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Direct materials P 60,000

Direct labor 40,000
Variable factory overhead 20,000
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Fixed factory overhead 30,000

Variable marketing and administrative expenses 10,000
Fixed marketing and administrative expenses 15,000
Required:
1. Compute the number of units needed to breakeven at a per unit sales price of
P38.50.
P45,000 Fixed cost
÷12.50 CM Pesos (38.50-26)
3,600 Units
2. Determine the number of units that must be sold to produce an P18,000 profit, at a
P40 per unit sales price.
P18,000 Target Profit
45,000 Fixed cost
P63,000
÷14 CM pesos (40-26)

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 4,500 Units
3. Determine the price Castleton must charge at a 5,000-unit sales level, to produce a
profit equal to 20% of sales.
100% Sales
20% Target Profit
80% Cost

P175,000 Total Cost

÷80% Cost %
P218,750 Sales
÷5,000 Units
P43.75 Selling price (Unit)

PROBLEM 7

CMR, BEP, sensitivity analysis. Wild’s Company’s income statement is shown below

Total Per Unit

Sales (30,000 units) P 150,000 P 5.00
Less: Variable costs 90,000 3.00
Contribution margin 60,000 P 2.00
Less: Fixed expenses 50,000
Net Income P 10,000

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Required:

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1. Compute the contribution margin ratio, breakeven point in pesos, and operating
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income.
Contribution Margin Ratio
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P2.00/P5.00 = 40%
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Breakeven (Pesos)
P50,000 Fixed cost
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÷40% CM ratio
aC s

P125,000
vi y re

Operating Income
Total
P150,000 Sales
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90,000 Variable cost

ar stu

60,000 Contribution Margin

50,000 Fixed cost
P10,000 Operating Income
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2. Calculate the new contribution margin ratio, breakeven point in pesos and operating
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profit under each of the changes below:

a. Unit sales price increase by 15%
Contribution Margin Ratio
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P5.75 Sales price per unit (P5 x 1.15)

÷2.75 Contribution Margin (5.75 – 3)
47.83% CM Ratio

Breakeven (Pesos)
P50,000 Fixed cost
÷47.83% CM ratio
P104,537

Operating Profit
P82,500 Contribution Margin
(50,000) Fixed cost
P32,500

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 b. Unit variable costs decrease by 25%
Contribution Margin Ratio
P5 Sales Price per unit
÷2.75 CM (P5 – 2.25)
55%

Breakeven (Pesos)
P50,000 Fixed cost
÷55% CM ratio
P90,909

Operating Profit
P82,500 Contribution Margin
(50,000) Fixed cost
P32,500

c. Total fixed costs increase to P80,000

Contribution Margin Ratio
P2.00/P5.00 = 40%

Breakeven (Pesos)

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P80,000 Fixed cost
÷40%
er as CM ratio

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P200,000
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o.
Operating Profit
rs e

P60,000 Contribution Margin

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(80,000) Fixed cost

(P20,000) Operating loss
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d. Unit sales price decreases by 20% and the sales volume increases by 20%
aC s

Contribution Margin Ratio

vi y re

P1.00/P4.00 = 25%

Breakeven (Pesos)
ed d

P50,000 Fixed cost

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÷25% CM ratio
P200,000

Operating Profit
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P36,000 CM (36,000 x P1)

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(50,000) fixed cost

(P14,000) Operating loss

e. The selling price increases by P 0,50 per unit, fixed costs increase by P10,000,
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and the sales volume decreases by 5%

Contribution Margin Ratio
P2.50/P5.50 = 45.45%

Breakeven (Pesos)
P60,000 Fixed cost
÷45.45% CM Ratio
P132,013

Operating Profit
P78,750 Contribution Margin (31,500 x 2.5)
(60,000) Fixed cost
P18,750

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 f. Variable costs increase by P0.20 per unit, the selling price increases by 12%, and
the sales volume decreases by 10%
Contribution Margin Ratio
P2.40/P5.60 = 42.86%

Breakeven (Pesos)
P50,000 Fixed cost
÷42.86% CM Ratio
P116,659

Operating Profit
P64,800 Contribution Margin (P2.40 x27,000)
(50,000) Fixed cost
P14,800

PROBLEM 8

Unit sales price, sensitivity analysis. Montgomery Company expected to incur the following
costs to produce and sell 70,000 units of its product:

Variable manufacturing cost P210,000

Fixed manufacturing cost 80,000

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Variable marketing expense 105,000

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Fixed marketing and administrative expenses 60,000

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Required:
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1. What price does the company have to charge for the product in order to just
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breakeven if all 70,000 units are sold?
rs e

P210,000
ou urc

80,000
105,000
60,000
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P455,000 Total cost

aC s

÷70,000 Units
vi y re

P6.50

2. If management decides on a price of P8 and has a profit objective of 10%, what

amount of sales is required?
ed d

P80,000
ar stu

60,000
P140,000 Fixed cost
÷33.75% (CMR 43.75% - 10%)
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P414,815
Th

3. The company plans to expand capacity next year to 100,000 units. The increased
capacity will increase fixed manufacturing costs to P100,000. If the sales price of
each of unit of product remains at P8, how many units must the company sell to
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produce a profit of 15% of sales?

P100,000
60,000
P160,000 Total Fixed cost
÷28.75% (43.75% - 15%)
P556,522

PROBLEM 9

Operating leverage. Locker Company manufactures and sells electronic door lockers for P600
each. Variable costs are P420 per unit, and fixed costs total P4,500,000 per year. The
company currently sells 40,000 units a year.
Required:
1. Compute the degree of operating leverage at the present level of sales.
P7,200,000 Contribution Margin
(4,500,000) Fixed cost
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 P2,700,000 Net Income

Operating Leverage
P7,200,000/P2,700,000= 2.667

2. If 48,000 units are sold next year, what is the:

a. Expected increase in net income next year
P2,700,000 Net Income
x53.34% Change %
P1,440,180

b. Percentage change in net income

8,000 Units (additional)
÷40,000 Original Units
20%
X 2.667 Operating Leverage
53.34%

PROBLEM 10

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BEP, Indifference point. Kimbrell Company has decided to introduce a new product. The new

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product can be manufactured by either a capital-intensive method or a labor-intensive method.

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The manufacturing method will not affect the quality of the product. The estimated unit
manufacturing costs by the tow methods follow:
o.
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Capital Intensive Labor Intensive

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Materials P 5.00 P 5.60

Direct Labor 6.00 7.20
Variable Factory Overhead 3.00 4.80
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Directly traceable incremental fixed factory overhead is expected to be P2,440,000 if the

aC s

capital-intensive method is chosen and P1,320,000 if the labor-intensive method is chosen.

vi y re

Kimbrell’s Market Research Department has recommended an introductory unit sales price
of P30. Regardless of the manufacturing method chosen, the incremental marketing
expenses are estimated to be P500,000 per year plus P2 for each unit sold.
Required:
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1. Calculate the estimated breakeven point for the new product in annual units of sales
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if Kimbrell Company uses the:

a. Capital-intensive manufacturing method
P2,440,000
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500,000
P2,940,000 Total Fixed cost
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÷P14 CM Peso (30 – 16)

210,000 Units
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b. Labor-intensive manufacturing method

P1,320,000
500,000
P1,820,000 Total Fixed cost
÷P10.40 CM peso (30-19.60)
175,000 Units

2. Determine the annual unit sales volume at which the choice between the two
manufacturing methods would not make a difference.

P14X – 2,940,000 = P10.40X – 1,820,000

P14X-P10.40X = 2,940,000 – 1,820,000
3.6X/3.6 = 1,120,000/3.6
X (Annual Units) = 311,111

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 SOURCE: MANAGEMENT ADVISORY SERVICES BY FRANKLIN AGAMATA 2007 EDITION

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