MAS 5 - CVPA Exercises

TARLAC STATE UNIVERSITY
College of Business and Accountancy

MAS 5: Sample problems in Cost Volume Profit Analysis
1. The contribution margin ratio always increases when:

a. break-even point decreases
b. break-even point increases
c. variable cost as a percentage of net sales increases
d. variable cost as a percentage of net sales decreases
2. Merchants, Inc. sells Product X to retailers for P200. The unit variable cost is P40 with a selling
commission of 10%. Fixed manufacturing cost totals P1,000,000 per month, while fixed selling and
administrative cost equal P420,000. The income tax rate is 30%. The target sales if after tax income
is P123,200 would be:
a. 19,950 units
b. 15,640 units
c. 18,750 units
d. 11,400 units
3. Sari-sari Corporation is a multiple-product firm. In their review of operations, they decided to

shift the sales mix from less profitable products to more profitable products, accounting for 35% of
gross sales. This will cause the company's break-even point to:
a. Decrease
b. Chane by 15%
c. Increase
d. Not change
4. Assuming that the flexible budget is in use, when production level is expected to increase within
a relevant range, the expected effect on fixed cost per unit (FCU) and variable cost per unit (VCU)
would be:
a. FCU, to decrease and VCU, to decrease
b. FCU, to decrease and VCU, no change
c. FCU, no change and VCU, no change
d. FCU, not change and VCU, to decrease
5. Neth and Company has sales of P400,000 with variable cost of P300,000, fixed cost of P120,000
and an operating loss of P20,000. By how much would Neth need to increase its sales in order to
achieve a target operating income of 10% of sales?
a. 400,000
b. 462,000
c. 500,000
d. 800,000
6. When using the graph method, if unit output exceeds 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 exceeds total cost
d. there is profit since the total cost line exceeds the total revenue line
7. The most important use of the cost-volume-graph is to show

a. the break-even point
b. the cost/margin ratio at various levels of sale activity
c. the relationships among volume, costs, revenues over wide ranges of activity
d. the determination of cross-over point
8. Which of the following formulas is used to determine the break-even point when using the
contribution margin method?
a. Revenues less operating income equal variable cost plus fixed cost
b. Unit contribution margin times the break-even number of units equals fixed cost
c. Selling price less unit fixed cost equals contribution margin
d. Total fixed cost equals total revenues
9. Ipo-ipo Corporation would like to market a new product at a selling price of P15 per unit. Fixed
cost for this product is P1,000,000 for less than 50,000 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
b. 833,334
c. 825,530
d. 785,320
10. The following data refer to cost-volume-profit relationship of K Co.

Breakeven point in units 1,000
Variable cost per unit P250
Total fixed cost P75,000
How much will be contributed to operating income by the 1,001st unit sold?
a. 250
b. 325
c. 75
d. 0
11. Which of the following statement is true?

a. A shift in sales mix toward less profitable products will cause the over-all break-even point to
fall
b. One way to compute break-even point is to divide total sales by the cost margin ratio
c. Once the break-even point has been reached, net income will increase by the unit
contribution margin for each additional unit sold
d. As sales exceed the break-even point, a high contribution margin ration will result in lower
profit, rather than a low contribution margin ratio
12. Sats and Co. sell three products: Sim, Plu and Corp. Sim is the most profitable product while
Cop is the least profitable. Which one of the following events will definitely decrease the firm's over-
all break-even point for the upcoming accounting period?
a. An increase in the over-all market for Plu
b. A decrease in Cop's selling price
c. An increase in anticipated sales of Sim relative to the sales of Plu and Cop
d. An increase in Sim's raw material cost
13. Chuchay Manufacturing Company produces two products for which the following data have
been tabulated. Fixed manufacturing cost is applied at a rate of P1.00 per machine hour.
Per Unit Chu Chay
Selling Price 4.00 3.00
Variable manufacturing cost 2.00 1.50
Fixed manufacturing cost 0.75 0.20
Variable selling cost 1.00 1.00
The sales manager had a P160,000 increase in the budget allotment for advertising and wants
to apply the money to the most profitable product. The products are not substitutes for one another
in the eyest of the company's customers.
Suppose the sales manager chooses to devote the entire P160,000 to increased advertising for Chu.
The minimum increase in sales units of Chu required to offset the increased advertising is
a. 640,000 units
b. 160,000 units
c. 128,000 units
d. 80,000 units
14. (refer to the previous problem) Suppose the sales manager chooses to devote the entire
P160,000 to increased advertising for Chay. The minimum increase in revenues for Chay required
to offset the increased advertising would be
a. P160,000
b. P320,000
c. P960,000
d. P1,600,000
15. (refer to the previous problem) Suppose Chuchay has only 100,000 machine hours that can be
made available to produce additional units of Chu and Chay. If the potential increase in sales units
for either product resulting from advertising is far in excess of this production capacity, which
product should be advertised and what is the estimated increase in contribution margin earned?
a. Product Chu should be produced, yielding a contribution margin of P75,000
b. Product Chu should be produced, yielding a contribution margin of P133,333
c. Product Chay should be produced, yielding a contribution margin of P187,500
d. Product Chay should be produced, yielding a contribution margin of P250,000
16. Brunswick Industries has annual sales of $2,500,000 with variable expenses of 60 percent of
sales and fixed expenses per month of $40,000. By how much will annual sales have to increase for
Brunswick Industries to have pretax income equal to 30 percent of sales?
17-18. Scooter Company earned $150,000 on sales of $1,000,000. It earned $330,000 on sales of
$1,400,000.
Required:
a. Find the contribution margin ratio.
b. Find the total fixed costs.
19-20. Karen Hefner, a florist, operates retail stores in several shopping malls. The average selling
price of an arrangement is $30 and the average cost of each sale is $18. A new mall is opening
where Karen wants to locate a store, but the location manager is not sure about the rent method to
accept. The mall operator offers the following three options for its retail store rentals:
1. paying a fixed rent of $15,000 a month,
2. paying a base rent of $9,000 plus 10% of revenue received, or
3. paying a base rent of $4,800 plus 20% of revenue received up to a maximum rent of $25,000.
Required:
a. For each option, compute the breakeven sales and the monthly rent paid at break-even.
b. Beginning at zero sales, show the sales levels at which each option is preferable up to 5,000
units.
21-24. The president of Milliard industries has developed the following income statement showing
expected percentage results at sales of $800,000.
Sales 100%
Cost of Sales 60%
Gross Margin 40%
Other expenses 30%
Income 10%
The president tells you that cost of sales is all variable and that the only other variable cost is
commissions, which are 10% of sales, and are included in the “other expenses” category.
Required:
21. Determine the profit that the company expects to earn.
22. Determine fixed costs, the break-even point, and the margin of safety.
23. If sales are $700,000, what will profit be?
24. The presidents wants a $120,000 profit. Expected unit volume is the same as for the previous
statement. By what percentage must the company increase its selling price to achieve the goal?
Assume the per-unit cost of sales remains constant.

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TARLAC STATE UNIVERSITY

College of Business and Accountancy

1. The contribution margin ratio always increases when:

3. Sari-sari Corporation is a multiple-product firm. In their review of operations, they decided to

7. The most important use of the cost-volume-graph is to show

10. The following data refer to cost-volume-profit relationship of K Co.

11. Which of the following statement is true?

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