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Palma 1

CHAPTER 3
THE BREAK-EVEN POINT ANALYSIS
AND PROFIT GOAL SETTING

Learning Objectives:

At the end of this chapter, you should be able to:

a. define fixed cost, variable cost, semi-variable cost, relevant range, CVP analysis,
contribution margin, breakeven point, margin of safety, variable costing and other
terms given in the chapter;

b. split semi-variable costs into fixed and variable;

c. estimate total costs and expenses based on different levels production/ sales within
a given relevant range;

d. enumerate the assumptions under CVP analysis;

e. construct CVP and P/V graphs; and,

f. compute for breakeven point, sales with the desired profit before and after income tax,
sales resulting in a loss and net income based on margin of safety.

Behavioral Patterns of Cost and Expenses

Management determines beforehand at what level should operations be maintained to maximize rate of
return on investment. In so doing, management must be familiar with the behavioral pattern of costs and
profit in relation to changes in production and sales volume. For decision making purposes, the emphasis
by management should be on contribution margin per unit rather than on gross profit per unit.

Elements of Break-even Point

To compute for the break-even point, it is necessary that all costs and expenses in the income statement
be classified according to its behavioral patterns.

Cost and expenses when classified according to its behavioral patter are as follows:

1. Variable costs and expenses

Variable costs and expenses are those costs and expenses that change directly in proportion to the
volume of production or volume of sales. Examples are direct materials and direct labor with
regards to production volume and salesmen commission and fuel of delivery vehicles with
regards to sales volume.

2. Fixed costs and expenses

Fixed costs and expenses are costs and expenses that do not change regardless of volume of
production or volume of sales, within a relevant range. Relevant range refers to the range of
volumes or activity within which the expected behavior of cost is valid. Examples of fixed costs
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related to production are the depreciation expenses of factory building and machineries using the
straight line method, salary of security guard in the factory, and real state tax of the factory, and
insurance expense of the factory building and equipment. Examples of fixed costs related to sales
are the store rent expense, insurance expense of head office building, and depreciation expense of
office equipment.

3. Semi-variable costs, otherwise called mixed costs, are costs that includes the element of both
variable cost and fixed cost. In other words, a cost is a semi-variable cost when it is partly fixed
and partly variable. Since it is partly variable, then it changes in amount but not in direct
proportion to the level of activity. Before computing for break-even point it is necessary to
separate the fixed cost portion and the variable cost portion of a semi-variable cost.

Variable Cost, Fixed Cost and Relevant Range.

A company, with its current facilities and personnel is capable of producing at maximum capacity of
80,000 units a month and incurs total fixed costs and expenses of P100,000. The relevant range for this
amount of fixed costs and expenses is from 1 to 100,000 units a month. Beyond that volume, the company
must increase its production capacity by acquiring additional fixed assets and hire additional employees
and these will give rise to additional fixed costs.

Budgeted Total Cost at Various Activity Levels

Assuming that the company’s fixed costs a month is P80,000 while its variable cost and expenses per unit
of finished product is P3. The relevant range or maximum capacity is 100,000 units.

Determine the budgeted total cost at various levels of production: 1) at 20,000 units, 2) at 40,000 units,
3) at 75,000 units and 4) at 90,000 units.

Solution: The format for computation of budgeted total cost

Production Units Fixed costs + (quantity x variable cost per unit) = Budgeted Total Cost
1. 20,000 P 80,000 + ( 20,000 x P3) = P140,000
2. 40,000 80,000 + ( 40,000 x P3) = P200,000
3. 75,000 80,000 + ( 75,000 x P3) = P305,000
4. 90,000 80,000 + ( 90,000 x P3) = P350,000

Break-even Point Graph

Y axis represents the peso amount while the x axis represents the production/sales quantity.
Line ma is assigned to fixed costs and line mb is assigned to variable costs. Since the graph showed that
variable cost line is on top of the fixed cost line, the total of the variable cost plus fixed cost line is equal
to total cost. Graph A shows the fixed cost line (ma) parallel to the x axis (or production/sales volume)
within the relevant range. Per Graph B, the variable cost line (mb) rise at the constant rate in relation to
the production/sales volume. The variable cost line (mb) is on top of the fixed cost line. In Graph C, the
semi-variable cost line (ma + mb) is tangent to the Y axis.
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y y b variable
cost

m a fixed m
cost
o x x

Line, ma is the fixed cost Line mb is the variable cost on top of the fixed cost

Graph A: Fixed Cost Graph B: Variable Cost

y y
r revenue
b

b variable
profit cost
area
TC
total
cost
d break-even point

m a m a fixed cost
loss area
o o x
x
Line mb is equal to variable cost + fixed Point d, where line mb and line or meet is the
or total cost break-even point.
Line or is the revenue line.
Angle mdo is the loss area while angle rdb is
the profit area.

Graph C: Semi-variable Cost Graph D: Break-even point

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Splitting Semi-Variable Costs

To estimate the total costs and expenses based on the given level of production/sales, it is imperative to
know by how much it varies in relation to changes in volume and the fixed portion thereof. However, this
cannot be done without analyzing semi-variable items into fixed and variable. The different methods of
splitting semi-variable cost so are (a) high and low point method, (b) least square method and (c) use of
scattergraph. The high and low method will be taken up in this book because of its simplicity.

High and Low Point Method

To illustrate the high and low point method, the following data about the semi-variable cost of factory
cleaning supplies:

Production Semi-variable
volume (units) cost
-------------------- -----------------
High 60,000 P220,000
Low 10,000 70,000

Required: 1. Compute the variable cost rate per unit

2. Compute the total variable cost at 60,000 units
3. Compute the total variable cost at 10,000 units
4. Compute the total fixed costs at 60,000 or 10,000 units.

1. Compute for variable cost rate per unit

Variable Rate
Quantity Amount per unit
High 60,000 P220,000
Low 10,000 70,000
Difference 50,000 P150,000 P3.00

Steps: 1. Fill in the data from the problem.

2. Deduct the low quantity and amount from the high quantity and amount to get the difference.
3. Divide the difference in amount (P150,000) by difference in quantity (50,000 units) and the
answer is the variable rate per unit (P3.00)

2. Compute the total variable cost at 60,000 units = 60,000 x P3 = P180,000.

3. Compute the total variable cost at 10,000 units = 10,000 x P3 = P 30,000

4. Compute the fixed cost @ 60,000 units @ 10,000 units

Total cost P220,000 P 70,000
Less: Total variable 180,000 30,000
Total fixed cost P 40,000 40,000

Take note: the fixed cost of P40,000 is the same for both 60,000 unit level and 10,000 unit level.
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Cost-Volume-Profit (CVP) Analysis

Cost-volume-profit analysis refers to the determination of the changes in sales, costs and expenses in
relation to changes in volume.

Assumptions in CVP Analysis

The following are the assumptions in CVP analysis:

a. All costs and expenses can be analyzed and classified into fixed, variable, and semi-variable.
b. Semi-variable costs and expenses can be split into fixed and variable cost.
c. The total amount of fixed costs and expenses remains constant within the relevant range.
Total fixed costs do not change within the relevant range. Fixed cost rate changes in relation to
volume of production/sales.
d. Variable cost rate is constant within the relevant range. Variable cost rate do not change within
the relevant range.
e. The efficiency of personnel and machinery is constant.

Breakeven Point Computation

Illustration:

The Maqui Fut Corporation started operation in January, 2012. The president of Maqui Fut Corporation,
Mrs. Dinah Virgin, is analyzing the comparative income statement for the last three months as shown
below:
Comparative Monthly Income Statement
Traditional Costing or Full Costing
For the first Three Months of 2012
(Traditional)
(Full costing method)

January February March

Quantity sold (units) 10,000 60,000 80,000

Sales revenue (@ P4) 40,000 P240,000 320,000

Less: Cost of Sales 36,000 166,000 218,000
Gross Profit 4,000 P 74,000 102,000
Less: Operating Expenses 34,000 54,000 62,000
Operating income (loss) (30,000) P 20,000 40,000

Assuming you are the operations manager of Maqui Fut Corporation. Your name is Mr. Matt Ygus. The
president, Mrs. Virgin, called you and told you, she could not understand the result of operation for the
months of January, February, and March. How come that at 10,000 units, the company incurred a loss of
P30,000; at 60,000 units, the company earned a profit of P20,000 and at 80,000 units, the company
earned a profit of P40,000. Also, she wanted to know the answers to the following questions:

1. How much is the break-even peso sales and break-even volume of the company?
2. Assuming there will be no change in all major costs within the year, how much should the peso
sales be if we want to earn an operating income of P200,000?
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3. Assuming there will be no change in all major costs within the year, how much should the peso
sales be if we want to earn a net income of P350,000 after deducting income tax? The income tax
rate is 30%.
4. How many units must the company sell in order to incur an operating loss of P20,000?
5. How much is the margin of safety in February and March, 2012?

As soon as you leave the office of President Virgin, you went to the office of the Chief Accountant. You
showed the Chief Accountant, Mr. Torong Dafa , the three months comparative income statement. You
asked him to split the cost of sales and operating expenses into variable costs and fixed costs because you
are going to use it in the preparation of a Variable Income Statement.

Variable and Fixed Costs

After 2 days, Mr. Dafa gave you the following information:

In the cost of sales, the total fixed cost is the fixed factory overhead, P10,000 and the variable rate
per unit is P2.50.
In the operating expenses, the total fixed cost is P30,000 (administrative and distribution
expenses) and the variable rate, representing the salesmen commission, is P0.50 per unit.

FORMULA:

As former student of one of the most prestigious university in the Philippines, you can still remember the
following formula in order to prepare the Variable Income Statement and answer all the questions of the
company president:

Fixed Costs
1. Break-even Sales (BES) = -------------------------------------
Contribution Margin Rate (CM rate)

Fixed Costs
2. Break-even Volume (BEV) = a) -------------------------------------
(two formula that can Contribution Margin per unit
be used depending on
the available data)
Break-even Sales
b) ------------------------------------
Unit Selling Price

3. Contribution Margin = Sales – Variable Cost

4. Contribution Margin per unit = Unit selling price – Variable cost per unit

Contribution Margin Contribution Margin per unit

5. Contribution Margin Rate = ---------------------------- or ---------------------------------
Sales Unit selling price
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Fixed costs + desired profit

6. Peso Sales with Desired Profit = -------------------------------------
(before income tax) CM rate

Fixed costs + desired profit

7. Sales Volume with Desired Profit = -------------------------------------
(before income tax) CM per unit

Desired profit after tax

Fixed cost + ----------------------------------
(1 – income tax rate)
8. Peso Sales with Desired Profit = -----------------------------------------------------
after income tax CM rate

Desired profit after tax

Fixed cost + ----------------------------------
(1 – income tax rate)
9. Sales Volume with Desired Profit = -----------------------------------------------------
after income tax CM per unit

10. Margin of Safety = Sales - BES

Fixed cost – possible loss

11. Sale that will Incur an = ----------------------------
Operating Loss CM rate

Variable Income Statement

Based from the above information, you prepared the Variable Income Statement as follows:

Comparative Variable Income Statement

January February March

Quantity sold (units) 1 unit 10,000 60,000 80,000

Sales revenue (@ P4) P 4.00 40,000 P240,000 320,000

Less: Variable cost and exp.
Production cost P2.50 25,000 150,000 200,000

Operating expenses 0.50 5,000 30,000 40,000

Total variable cost and expenses 3.00 30,000 180,000 240,000
Contribution margin 1.00 10,000 P 60,000 80,000
Less: Fixed cost and expenses 40,000 40,000 40,000 40,000
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Operating income (loss) (P 39,999) (30,000) P 20,000 40,000

Fixed Cost = P10,000 + P30,000 = P40,000

Total Variable Costs = quantity x variable cost rate
10,000 x P3 = P 30,000
60,000 x P3 = P180,000
80,000 x P3 = P240,000

You prepared the solutions to the various questions of the President as follows:

Fixed Costs P40,000

1. Break-even Sales (BES) = ----------------- = --------------------- = P160,000
(CM rate) 25%

Fixed Costs P40,000

2. Break-even Volume (BEV) = a) ----------------- = ------------- = 40,000 units
CM per unit P1.00

Break-even Sales P160,000

c) ------------------------ = --------------- = 40,000 units
Unit Selling Price P4.00

3. Contribution Margin = Sales – Variable Cost = CM

@ 80,000 units, P320,000 – P240,000 = P80,000
@ 60,000 units, P240,000 – P180,000 = P60,000

4. Contribution Margin per unit = Unit selling price – Variable cost per unit = CM per unit
P4.00 - P3.00 = P1.00

Contribution Margin Contribution Margin per unit

5. Contribution Margin Rate = ---------------------------- or ---------------------------------
Sales Unit selling price

P 80,000 P1.00
------------ = 25% -------------- = 25%
P320,000 P4.00

Note: the CM rate based on total basis and based on a per unit basis is always the same.

6. Peso Sales with Fixed costs + desired profit P40,000 + P200,000

Desired Profit = ---------------------------------- = ----------------------------- = P 960,000
CM rate 25%
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7. Sales Volume with Fixed costs + desired profit P40,000 + P200,000

Desired Profit = --------------------------------- = ------------------------- = 240,000 units
CM per unit P1.00

Desired profit after tax 350,000

Fixed cost + --------------------------- 40,000 + ------------
(1 – income tax rate) 1 – 30%
8. Peso Sales with = -------------------------------------------------- = -------------------- = P2,160,000
Desired Profit = CM rate 25%
after income tax

Desired profit after tax 350,000

Fixed cost + --------------------------- 40,000 + ------------
(1 – income tax rate) 1 – 30%
9. Peso Sales with = -------------------------------------------------- = -------------------- = 540,000
Desired Profit = CM per unit P1.00 units
after income tax

10. Margin of Safety = Sales - BES = Margin of Safety

@ 60,000 units P240,000 - P160,000 = P 80,000
@ 80,000 units P320,000 - P160,000 = P160,000

11. Margin of Safety, Contribution Margin Rate and Net Income

Margin of safety is the amount by which sales may decline and still enable a business firm to avoid a loss.
Thus, it is the difference between a specified sales figures (actual or budgeted ) and breakeven peso sales.
When the margin of safety is multiplied by the contribution margin rate, the answer will be the net
income before income tax. As proof please see the computation below:

Margin of safety: @ 60,000 units @ 80,000 units

Sales P240,000 P320,000

Less – BEP sales 160,000 160,000
Margin of Safety P 80,000 P160,000
======= =======
Margin of safety P 80,000 P160,000
Multiply of CM % 25% 25%__
Net income P 20,000 P 40,000
======= =======
It may be noted that the net income arrived at, above, is equal to net income as shown in the traditional
and variable income statement.

Fixed cost – possible loss 40,000 – 20,000

12. Sale that will Incur an = ---------------------------- = -------------------- = P100,000
Operating Loss CM rate 25%
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After reporting to the president, she asked you to prove your answers that:

1. the break-even sales will result in zero profit and loss;

2. the sale of P960,000 and quantity of 240,000 units will result in a profit of P200,000 before tax.
3. the sale of P2,160,000 and quantity of 540,000 units will result in a profit of P350,000 after
deducting the 30% income tax; and
4. the sale of P100,000 and quantity of 25,000 units will result to a net loss of P20,000.

Proof:

You showed her the proof as shown below:

With
BES With Desired profit Incurring
Desired profit after tax a Loss
Qty. sold (units) 1 unit 40,000 240,000 540,000 20,000

Sales revenue 4 160,000 P960,000 2,160,000 80,000

Variable cost and exp. _3 120,000 720,000 1,620,000 60,000
Contribution margin 1 40,000 P 240,000 540,000 20,000
Fixed cost and expenses 40,000 40,000 40,000 40,000
Operating income (loss) 0 200,000 P500,000 (20,000)
Income tax (30%) 150,000
Net income after tax P 350,000

Various Illustrations:

Effect of Changes in Unit Selling Price, Unit Variable Cost, and Fixed Expenses

Titiwatiwarik Corporation produces and sells a single product, “Kuliling” in 2008. The income tax rate at
that time was 32%. The selling price is P25 and the variable cost per unit is P15. The corporation’s fixed
cost is P100,000 a month. The average monthly sales is 11,000 units.
Please write your computations before looking for the correct answer. The answers are those with x.

1. The corporation’s contribution margin per unit, and contribution margin rate is

a. P10 per unit; 40% x c. P10 per unit; 20% e. P15 per unit; 30%
b. P20 per unit; 40% d. P20 per unit; 25% f. None of these

2. The corporation’s break-even volume and break-even sales is

a. 10,000 units; P250,000 x c. 5,000 units; P125,000 e. 8,000 units; P200,000

b. 20,000 units; P500,000 d. 15,000 units :P375,000 f. None of these

3. The corporation desires to earn a profit of P20,000 before tax, it must generate sales of
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a. 12,000 units x c. 10,000 units e. 13,000 units; P325,000

b. P200,000 d. P250,000 f. None of these

4. If the corporation pays income tax at the rate of 32%, and it desires to earn after-tax profit of P20,400,
it must generate sales of

a. P325,000 x c. 16,375 units e. P 250,000

b. P301,000 d. 12,000 units f. None of these

5. With an average monthly sales of 11,000 units, the corporation’s margin of safety is

a. 1,000 units or P25,000 x c. 10,000 units or P250,000 e. 500 units

b. 2,000 units or P50,000 d. 1,500 units f. None of these

6. Assuming the fixed cost increased by P20,000, the break-even units will increase (decrease) by

a. 2,000 units x c. 1,500 units e. 2,500 units

b. 1,000 units d. 2,250 units f. None of these

7. Assuming the variable cost per unit will increase by P5, the peso break-even sales will increase
(decrease) to

a. P500,000 x c. P250,000 e. P525,000

b. P400,000 d. P400,000 f. None of these

8. If the selling price increase to P30, the break-even point units will

a. decrease to 6,666.67 units x c. remain unchanged e. increase to 1,666.67 units

b. decrease by 6,666.67 units d. increase by 600 units f. None of these
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Assignment Material

Questions:
1. Differentiate the behavioral patterns of fixed, variable and semi-variable costs.
2. How are semi-variable costs analyzed into fixed and variable portions using the high-and low point
method?
3.CVP analysis has its limitations. Explain.
4. Fixed costs and expenses amount to P50,000, Contribution margin per unit is P5 which is 25% of unit
selling price so that using the contribution margin approach, sales volume at BEP must be 10,000 units.
Prove this algebraically.

EXERCISES
Exercise 1: Splitting semi-variable cost
The following estimates of costs and expenses have been made for Isuzuco, Inc.:

Product/Sales Costs and Expenses

P30,000 P90,000
10,000 units 50,000

Required:
a. Rate per unit of variable costs and expenses
b. Fixed portion of costs and expenses
c. How much is the budgeted total costs and expenses based on production/sales volumes of
18,000 and 25,000 units.

Note: Assume that the relevant range is 0 – 50,000 units.

Exercises 2: CVP analysis / Break-even Analysis

Using selling price ……………………………………. P 80
Variable costs and expenses per unit …………………. 64
Fixed costs and expenses per annum …………………. 80,000

Relevant range …………. 0 – 50,000 units

Required: In a 1/4 yellow pad answer the following:

ANSWERS
a. Contribution margin per unit ___________
b. Contribution margin rate. ___________
c. Breakeven point sales volume ___________
d. Breakeven point peso sales ___________
e. Peso sales with desired profit of P100,000 ___________
f. Peso sales with desired profit of P350,000 after 30% income tax. ___________
g. Peso sales resulting in a loss of P10,000 ___________

Exercise 3: Effects of changes in selling price, variable cost rate and fixed costs on breakeven point.
The following data are given to you on the operations of Jubo Corporation:

Fixed costs and expenses ……………………….P64,000

Variable costs and expenses/unit ………………. 48
Unit selling price ………………………………. 80
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Instructions:
a. Compute for breakeven point sales volume and breakeven point peso sales.
b. Determine the breakeven sales volume under each of the following independent assumptions:
1. Unit selling price increases by P5, other factors remain the same.
2. Unit variable costs increases by P3, other factors remain the same
3. Fixed costs and expenses increase by P8,000, other factors remain the same.

Exercise 4: Splitting semi-variable costs and CVP analysis

Match the following terms with the terms given bellow:

Variable cost rate Variable cost Fixed cost

CM % CM per unit BEP peso sales
Sales resulting Sales resulting BEP sales volume
in desired profit in a loss Margin of safety
Regression line P/V graph CVP graph
Total costs and expenses Net loss Net income

a. y = a + bx
b. FC / CM%
c. FC / CM per unit
d. Unit selling price – Variable costs and expenses per unit
e. Specified sales figure – BEP sales

f.
fc

g.

h. y based on high point – y based on low point

------------------------------------------------------
x at high point - x at low point

tc

i. k. Margin of safety x CM rate

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r
j.

Exercise 5: Splitting semi-variable costs and CVP analysis

True or False.

a. Fixed costs and expenses amount to P10,000 and variable rate is P2 per unit. Budgeted total
costs and expenses must be P70,000 based on 30,000 units.

b. In the regression equation, y = a + bx, a standard for the fixed portion and b, for the variable
rate and x, for quantity.

c. Based on the graph as shown below, the variable cost rate is P3 per unit.

P200,000 tc

P160,000

P120,000

P80,000 fc

P40,000

40
Product/ Sales Volume (1,000 units)

d. Fixed costs amount to P25,000. If the production/sales volume goes up from 5,000 units to
10,000 units, fixed costs per unit must go down P5 to P2.50.

e. Even if the production/sales volume goes up from 5,000 to 10,000 units, the variable cost
rate of P6 remains unchanged provided both activity levels are within the relevant range.

f. Fixed costs are constant per unit while variable costs are variable per unit.

g. The bigger is the excess of a specified sales figure over BEP sales, the bigger also the margin
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of safety and net income.

h. An increase in selling price brings about an increase in contribution margin per unit and
consequently a rise breakeven point.

i. An increase in variable cost rate reduces the contribution margin per unit and lowers the
breakeven point.

j. At breakeven point, fixed cost is equal to contribution margin.

Exercise 6: Variable Income Statement

The following data are give on the operations of Kirei Corporation. for 2013, its first year of operations.
Quality data:
Output …………………………………………………………. 25,000 units
Sold ……………………………………………………………. 12,000 units
Unit selling price …………………………………………. P 30

Cost data: Per Annum Per Unit

Direct materials cost P 6.00
Direct labor cost 5.00
Variable FOH 3.00
Fixed FOH P150,000
Variable operating expenses 2.00
Fixed operating expenses 20,000

Tasks: 1. Prepare the Variable Income Statement

2. Prepare the Traditional Income Statement (Full Cost Method)

Exercise 7: Variable costing

Determine if the following statements are true. If not, explain.

a. Operating income under variable costing exceeds that under full costing whenever sales volume
exceeds production volume.

b. When sales volume exceeds production volume, there must be a decrease in inventory so that under
full costing, more fixed factory overhead is charged against revenue.

c. An excess of production volume over brings about an increase in inventory and smaller net income
under variable costing when compared to full costing.

d. Variable costing is not in accordance with GAAP so that it is not acceptable for external reporting.

e. Because of the significance of contribution margin in decision making process, variable costing is
adopted for internal reporting.

f. Unit product cost under variable costing is always smaller than unit product cost under full costing.
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Multiple Choice

1. After two years of operations, Kapihan Corp. has developed the following formula for the annual cost
of its indirect labor:

Total cost = P12,000 + P.20 per direct labor hour

Estimated production for the coming year requires 150,000 direct labor hours. How much must be the
estimated indirect labor cost?
a) P30,000 b)P42,000 c)P14,400 d) 15,600 e) 35,000 f) None of these

Items 2 & 3:
The following estimates have been made of indirect material cost based on units of production:

Units of Production Indirect material cost

3,000 P39,000
8,000 99,000

2. Variable cost per unit is

a) P7.50 b) P20 c)P12 d). P15 e). P18 f) None of these

3. Fixed portion of indirect materials cost must be

a)P39,000 b)P3,000 c)P16,500 d) P18,000 e) P2,500 f) None of these

4. Variable cost rate is P5 per machine hour. At 25,000 machine hours, the semi-variable cost amounts to
P155,000. How much must be the fixed portion thereof?
a)P125,000 b)P30,000 c)P25,000 d) P50,000 e) P100,000 d) None of these

Items 5 & 6

5. Based on 100,000 units of production, variable cost rate is P2 per unit and fixed cost is P20,000.
How much must be the variable cost rate at 80,000 and 125,000 units of production?
a) P2.50 and P1.60, respectively c)P2.00 for both e) P3.00 and P2.50
b) P2.75 and P1.76, respectively d) P2.00 and P1.60 respectively d) None of the above

6. How much must be the fixed cost rate per unit at 80,000 and 125,000 units of production?
a) P.25 & P.16, respectively c) P.16 & P.20, respectively e). P 60 and P30 respectively
b) P.20 for both d) P25 & P 30 respectively f) None of the above

Items 7 to 8 (Refer to the graph 1 and 2 presented below.)

7. What do the areas/lines (a-e-b), (b-f-c), (f-e-g) and (c) refer to in Graph I?

(a-e-b) (b-f-c) (f-e-g) (fc)

(a) Loss area Variable cost Profit area Fixed cost
(b) Profit area Variable cost Loss area Fixed cost
(c) Loss area Fixed cost Profit area Variable cost
(d) None of the above
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8. To what may the areas (m-o-n), (n-o-x) and (t-p-o-x) refer in graph II?

(m-o-n) (n-o-x) (t-p-o-x)

(a) Total cost Variable cost Contribution margin
(b) Variable cost Total cost Contribution margin
(c) Contribution margin Variable cost Total cost
(d) None of the above

y
a

e b

f c

g d
Graph 1

y
m

n
p

o x
Graph 2
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9. Estimate of water cost are as follows:

cubic meters 6,000 10,000

Fixed P 2,000 P 2,000
Variable 18,000 30,000
P 20,000 P 32,000

How much must be the water cost based on 4,500 cubic meters?
a) P27,000 b)P29,000 c)P31,000 d) P25,000 e) P28,000 f)None of the above

10. How much must be the variable cost per unit based on the following data?
Breakeven point ……………………………………….. 700 units
Unit selling price ………………………………………. P 55
Fixed cost ……………………………………………… P21,000

a) P30 b) P20 c) P25 d) P22.50 e) P27.50 d) None of the above

Items 11 to 15

Breakeven point sales figure is P150,000 and contribution margin percentage is 20% based on
unit selling price of P50.

11. How much are the total fixed cost and the variable cost per unit?
a) P30,000 and P40, respectively. c) P120,000 and P20, respectively
b) P150,000 and P40, respectively d) None of the above

12. How much must be the margin of safety and net income based on sales of P200,000?
a) P50,000 and P40,000, respectively. c) P160,000 and P40,000, respectively.
b) P50,000 and P10,000, respectively. d) None of the above

13. A plant expansion is expected to increase fixed costs by P35,000. How much should be the
breakeven point peso sales after the plant expansion?
a) P185,000 b)P175,000 c)P325,000 d) Answer not given

14. If the unit selling price were to be raised to P60, how much should be the breakeven point sales?
a) P140,000 b)P90,000 c)P100,000 d) None of the above

Items 15 and 16
The following data are given on the year of operations (19A) of Bicol Express, Inc.

Per Annum Per Unit

Fixed factory overhead P50,000
Fixed operating expenses 30,000
Direct materials cost P15
Direct labor cost 12
Variable factory overhead 13
Variable operating expenses 8

Production volume … 20,000

Sales volume ………. 15,000
Unit selling price …...P 60
 R. Z. Palma 19

15. Product unit costs under variable and full costing methods are
a) P40.00 & P42.50, respectively c) P48.00 & P54.00, respectively
b) P42.00 & P40.00, respectively d) None of the above

16. Ending inventory of finished goods under variable and full costing methods must be
a) P200,000 & P212,500, respectively. c) P240,000 & P270,000, respectively
b) P212,500 & P200,000, respectively. d) None of the above