Chap 4 - CVP Analysis

7/29/2019 Chap 4 - CVP Analysis

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Chapter 4 Marginal costing and CVP analysis

MULTIPLE CHOICE

Basic concepts1. Cost-volume-profit analysis assumes that over the relevant range

A. Variable costs are nonlinear. C. Selling prices are unchanged.B. Fixed costs are nonlinear. D. Total costs are unchanged. (aicpa)

1. C? A basic assumption within the relevant range. Relevant range is a band (or stretch) of activity where the behavior of sales and costs

is predictable. The basic assumptions used in management accounting within therelevant range are:a. Costs behavior - costs are segregated as to fixed or variable in behavior.b. Linearity - the behavior of total fixed cost, total variable cost, total costs, and

total sales is linear (i.e., straight line).

c. Fixed costs - total fixed cost does not change, while unit fixed cost changes;that is, UFC increases as production decreases and it decreases as productionincreases.

d. Variable costs - total variable cost changes in direct relation to change in thevolume of production and sales, while unit variable cost is constant. Also, totalvariable costs are not affected by the change in unit sales price.

e. Unit sales price - unit sales price is constant.f. Sales mix - the company produces only one product, or in multi-product

operations, the sales mix is constant.g. WIP - there is no work-in-process inventory.h. Production equals sales - there is no change in the number of units in finished

goods inventory; meaning, production equals sales.

Choice-letter c is correct, sales price is assumed to be constant within therelevant range. Choice-letters a and b are incorrect because variable costs andfixed costs are assumed to be linear. Choice-letter d is incorrect because total costschange on account of the total variable costs.

2. Cost-volume-profit analysis assumes that over the relevant range total.A. Revenues are linear. C. Variable costs are nonlinear.B. Costs are unchanged. D. Fixed costs are nonlinear. (aicpa)

2. A? Basic assumptions within the relevant range. Choice-letter a is correct because the linearity of revenues and costs is one of the

basic assumptions in the CVP analysis. Choice-letter b is incorrect because totalcosts would change because of the change in variable costs. Choice-letters c andd are incorrect because variable costs and fixed costs are assumed to be linear.

3. Breakeven analysis assumes linearity over the relevant range with respect toTotal costs Total revenue Total costs Total revenueA. Yes No C. No Yes

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B. Yes Yes D. No No(aicpa)

3. B

? Breakeven linearity assumptions over the relevant range. Relevant range is a band or width of activity (e.g., in terms of levels of output or the

unit of measurement used) where the sales and costs could be predicted withreasonable certainty. Within this range, sales and total costs are assumed to behavelinearly. Unit sales price is constant and total sales increase in direct relation withchanges in production levels. Total cost is composed of fixed cost and variable costwhere total fixed cost is constant regardless of changes in the levels of productionand sales and unit variable cost is constant. Total variable costs change in directrelation with the changes in the unit of production levels.

Choice-letter b is correct because total costs and total revenue are assumed tobe linear within the relevant range.

4. Break-even analysis assumes that over the relevant range.A. Selling prices are unchanged. C. Total costs are unchanged.B. Variable costs are nonlinear. D. Fixed costs are nonlinear. (rpcpa)

4. A? An assumption about breakeven analysis over the relevant range. Within the relevant range, the following are the assumptions on cost-volume-profit

analysis and breakeven analysis: the behavior of sales and costs is linear, total fixedcosts is constant but unit fixed costs changes, total variable costs change but unitvariable cost is constant; units sales price is constant; there is no change in the

finished goods inventory (i.e., production equals sales); there is no work-in-processinventory; and the sales mix is constant.

Within the relevant range, variable cost and fixed costs are linear and total costschange due to the change in variable costs. (Choice-letter a is correct).

5. The amount of variable cost per unit and total fixed cost within a relevant rangebehave this way in relation to production level:

Production increases, unit variable cost increases, total fixed cost increases.Production decreases, unit variable cost decreases, total fixed cost decreases.Production increases, unit variable cost remains constant, total fixed cost remains

the same.

Production increases, unit variable cost decreases, total fixed cost remains thesame. (rpcpa)

5. C? The behavior of variable cost per unit and total fixed costs within the relevant range. Total fixed costs remain constant within the relevant range. However, unit fixed cost

decreases as production increases, and it increases as production decreases.Total variable cost changes in direct relation to the change in the level of

production and sales within the relevant range. However, unit variable cost isconstant within the relevant range.

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Therefore, regardless of the change in the level of production, the total fixedcosts and unit variable will be constant within the relevant range. Choice-letter c isthe correct answer.

6. Assuming that a flexible budget is in use, production levels are expected to increasewithin a relevant ranged, the expected effect on fixed cost per unit (FCU) andvariable costs per unit (VCU) would beA. 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 no change and VCU to decrease. (rpcpa)

6. B? Using the flexible budget and assuming production increases within a relevant range,

determine the expected effect on fixed costs per unit (FCU) and variable cost per unit

(VCU) by an increase in production levels. Within the relevant range, total fixed cost remains constant but FCU changes (that is,

FCU decreases as production increases and FCU increases as productiondecreases). Also within the relevant range, total variable costs changes but VCU isconstant. Choice-letter b is correct, FCU decreases, VCU does not change.Choice-letter b is correct.

7. One of the major assumptions limiting to reliability of break-even analysis is thatA. The cost of productivity will continually increase.B. The cost of production factors varies with changes in technology.C. Total variable cost will remain unchanged over the relevant range.

D. Total fixed cost will remain unchanged over the relevant range. (rpcpa)

7. D? A major assumption limiting the reliability of breakeven analysis. The breakeven analysis is based on the following assumptions within the relevant

range:a. The behavior of sales and costs is linear within the relevant range.b. Total fixed costs are constant but unit fixed cost changes.c. Total variable costs change but unit variable cost is constant.d. Unit sales price is constant.e. Sales equal production; there is no change in the finished goods inventory.

f. There is no work-in-process inventory.g. The sales mix ratio is constant.

Choice-letter d is correct (refer to assumption letter b), Choice-letter a isincorrect because efficiency and productivity have no direct relations with the BEPanalysis; choice-letter b is incorrect because it is not an assumption in the BEPanalysis, although the statement is true; choice-letter c is incorrect because totalvariable costs change (not unchanged) within the relevant range

8. At the breakeven point, the contribution margin equals totalA. Variable costs. C. Selling and administrative costs.

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B. Sales revenues. D. Fixed costs.(aicpa)

8. D

? The amount of contribution margin at breakeven point. At breakeven point, there is no profit or loss, meaning, total sales equal total costs.

Alternatively, profit is contribution margin less fixed costs and expenses. Therefore,at breakeven point contribution margin equals total fixed costs. Choice-letter d iscorrect.

9. At breakeven point, fixed cost is alwaysA. Less than contribution margin. C. More than variable cost.B. Equal to contribution margin. D. More than the contribution margin. (rpcpa)

9. B

? Fixed cost at breakeven point. At breakeven point, total fixed cost equals contribution margin. This is so because, if

fixed cost and contribution are of the same amount, there is no profit or loss.

10. An assembly plant accumulates its variable and fixed manufacturing overhead costsin a single cost pool, which is then applied to work-in-process using a singleapplication base. The assembly plant management wants to estimate the magnitudeof the total manufacturing overhead costs for different volume levels of theapplication activity base using a flexible budget formula. If there is an increase in theapplication activity base that is within the relevant range of activity for the assemblyplant, which one of the following relationship regarding variable and fixed costs is

correct?A. The variable cost per unit is constant, and the total fixed costs decrease.B. The variable cost per unit is constant, and the total fixed costs increase.C. The variable cost per unit and the total fixed costs remain constant.D. The variable cost per unit increases, and the total fixed costs remain constant.

(cia)

10. C? Relationship regarding variable and fixed costs within the relevant range. Within the relevant range, unit variable cost and total fixed costs are constant.

Choice-letter c is correct.

11. Contribution margin is the excess of revenues overA. Direct cost. C. Cost of good sold.B. Manufacturing cost. D. All variable costs. (rpcpa)

11. D

? A procedure in computing contribution margin. The traditional way to compute contribution margin is by getting the difference

between net sales and variable costs and expenses. Other procedures to determinecontribution margin (CM) are as follows:

CM = Quantity sold x Unit contribution margin

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CM = Net sales x Contribution margin ratioCM = Fixed costs + Income before income tax

Choice-letter a is incorrect because the difference between net sales and directcost is direct margin or segment margin. Choice-letter b is also incorrect because

the difference between revenues and manufacturing cost is manufacturing margin ormanufacturing income. Choice-letter c is also incorrect because the differencebetween net sales and cost of goods sold is gross profit.

12. Cost-volume-profit analysis is a key factor in many decisions, including choice ofproduct lines, pricing of products, marketing strategy, and use of productive facilities.A calculation used in a CVP analysis is the breakeven point. Once the breakevenpoint has been reached, operating income will increase by the

A. Gross margin per unit for each additional unit sold.B. Contribution margin per unit for each additional unit sold.C. Variable cost per unit for each additional unit sold.

D. Sales price unit for each additional unit sold.(cma)

12. B? Effect to operating income, once the breakeven point has been reached. Beyond the breakeven point, total sales are greater than total costs. Also,

contribution margin is greater than fixed cost. The excess of contribution over fixedcosts is profit. After breakeven point, income increases by every peso increase incontribution margin, which is the unit contribution margin. Choice-letter b is the rightchoice.

13. Cost-volume-profit relationships that are curvilinear may be analyzed linearly byconsidering only

A. Fixed and semi-variable costs. C. Relevant variable costs.B. Relevant fixed costs. D. A relevant range of volume. (aicpa)

13. D? The factor to be considered in analyzing curvilinear relationships. Choice-letter d is correct. Curvilinear relationships exist over the long run. In the

short-term, however, the relationship between two variables in a graph is linear. This

short-term range is otherwise known as relevant range and the linearity assumptionis valid within the relevant range. It is a range of production activity where thebehavior of costs and sales is linear; meaning, unit sales, unit variable cost, and totalfixed cost are constant.

Choice-letter a is incorrect because semi-variable costs are normally curvilinearin its representation. Choice-letters b and c are incorrect because other relevantcosts are also included in the CVP analysis.

14. When an organization is operating above the breakeven point, the degree or amountthat revenues may decline before losses are incurred is the

A. Residual income rate. C. Margin of safety.

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B. Marginal rate of return. D. Target (hurdle) rate of return.(cma)

14. C

? The amount of decline in sales before losses occur. If operations are in excess of breakeven point, there is profit. The amount of decline

in sales before losses occur is margin of safety. Mathematically, margin of safetyequals actual (or budgeted) sales less breakeven sales.

15.The rate or amount that sales may decline before losses are incurred is called:A. Sensitive level of income. C. Margin safety .B. Variable sales ratio. D. Residual income rates. (rpcpa)

15. C? The rate or amount in sales before losses are incurred.

Margin of safety is the excess of sales over the breakeven point. Therefore, it is themaximum amount of reduction in sales before losses are incurred. Choice-letter c iscorrect.

16. Total unit costs areA. Relevant for cost-volume-profit analysis.B. Independent of the cost system used to generate them.C. Irrelevant in marginal analysis.D. Needed for determining product contribution.

(rpcpa)

16. C? A choice that describes total unit costs. Choice-letter c is correct, total unit costs are irrelevant in marginal analysis. To be

relevant in marginal costing analysis, total costs should be separated as to eitherfixed or variable. Total unit cost per se is not relevant in marginal costing analysis.Choice-letter a is incorrect. Total unit costs are dependent of the cost system usedto generate them. Choice-letter b is incorrect. And total unit cost is not needed indetermining the contribution margin, what is important is the variable cost. Choice-letter d is incorrect.

Breakeven point

17. Given the following notations, what is the breakeven sales level in units?SP = selling price per unitFC = total fixed costsVC = variable cost per unit

A. SP (FC VC). C. VC (SP FC).

B. FC [1 (VC SP)]. D. FC (SP VC).(aicpa)

17. B? Computation of breakeven point in units.

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Choice-letter b is correct. Unit contribution margin equals unit sales price (USP)less unit variable costs (UVC). Therefore, breakeven point (BEP) in units and inpesos are computed as follows:

BEP (units) = Fixed costs / Unit contribution margin

or FC / (USP UVC)BEP (pesos) = Fixed costs / Contribution margin ratio

or FC (100% - VCR)

In the marginal costing analysis, sales ratio is always equal to 100%. Variablecost ratio (VCR) is basically variable cost over sales.

18. A companys breakeven point (BEP) in pesos of revenue may be affected by equalpercentage increase in both selling price and variable cost per unit (assume all otherfactors are constant within the relevant range). The equal percentage changes inselling price and variable cost per unit will cause the breakeven point in pesos to

A. Decrease by less than the percentage increase in selling price.B. Decrease by more than the percentage increase in the selling price.C. Increase by the percentage change in variable cost per unit.D. Remain unchanged.

(cia)

18. D? Effect to breakeven point of equal percentage increase in both sales price and unit

variable cost.

The equal percentage increase in both sales price and unit variable cost does notchange the contribution margin ratio. Therefore, the breakeven point will not change,

assuming all other factors are constant. Choice-letter d is correct.

Questions 19 and 20 are based on the following selected budgeted data of Russel GilCompany for the coming year:

Selling price per unit P 12.00Budgeted sales 600,000Fixed expenses 150,000Variable cost per unit 8.00

19. What is the breakeven in sales in units?A. 35,000 C. 40,000B. 37,500 D. 45,000

19. B? Breakeven sales in units.

Breakeven sales in units equals total fixed costs over unit contribution margin. Theunit contribution margin is P4.00 (i.e., P12 P8). Therefore, breakeven sales in unitsis 37,500, computed as follows:

BEP (units) = P150,000 / P4 = 37,500 units

20. What is the margin of safety ratio in percent?A. 15% C. 30%

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B. 20% D, 25%(rpcpa)

20. D

? Margin of safety ratio. Margin of safety ratio (MSR) is margin of safety divided by actual (or budgeted) sales.

Considering the given data, we have:Budgeted sales P 600,000Less: Breakeven sales (37,500 units x P12) 450,000Margin of safety P 150,000Therefore, MSR is 25% (i.e., P150,000 / P600,000).

21. A company is concerned about its operating performance, as summarized below:Revenues (P12.50 per unit) P300,000Variable costs 180,000

Operating loss (40,000)

How many additional units should have been sold in order for the company to breakeven in 2004?

A. 32,000 C. 16.000B. 24,000 D. 8.000

(cia)

21. D? The number of additional units to sell to breakeven. The company is operating at a loss. It has to increase its actual units sold to

breakeven. The additional units to sell to breakeven is the difference betweenbreakeven point and the present actual units sold.The variable cost ratio is 60% (e.g., P180,000/P300,000). Therefore, the CMR is

automatically 40%, and the UCM is P5 (e.g., P12.50 x 40%).Total fixed cost equals CM plus operating loss. CM is P120,000 (e.g., P300,000

P180,000). Therefore, total fixed cost is P160,000 (e.g., P120,000 + P40,000).The additional units to sell is calculated as follows:

Breakeven sales (P160,000 / P5) 32,000 units- Actual units sold (P300,000 / P12.50) 24,000Needed increase in units sold to breakeven 8,000 units

Alternatively, the increase in units needed to breakeven is 8000 units determined by

dividing the loss by the unit contribution margin (i.e., P40,000 / P5 = 8,000 units)

22. Kent Co.'s operating percentages were as follows:Revenues 100%Cost of good sold

Variable 50%Fixed 10 60

Gross profit 40%Other operating expenses

Variable 20Fixed 15 35

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Operating income 5%Kents sales totaled P2 million. At what revenue level would Kent break even?

A. P1,900.000 C. P1,250.000B. P1,666.667 D. P 883,333

(aicpa)

22. B? Breakeven sales. BEP is fixed costs divided by CMR. Total fixed cost is P500,000 (i.e., P2,000,000 x

25%). The total variable cost ratio is 70% (i.e., 50% + 20%). Therefore, CMR is 30%.The breakeven point in pesos is:

BEP (pesos) = P500,000 / 30% = P1,666,667

23. For the period just ended Chanda, Inc., generated the following operating results inpercentages

Sales 100%Cost of sales

Variable 50%Fixed 10% 60%

Gross profit 40%Operating expense

Variable 20%Fixed 15% 35%

Operating income 5%Total sales amounted to P3.0 million. at what level is break-even sales?

A. P3,750,000 C. P1,875,000B. P1,850,000 D. P2,500,000 (rpcpa)

23. B? The breakeven sales in peso. BEP in pesos equals fixed costs divided by CMR. The fixed cost rate on sales totals

25% (fixed overhead of 10% plus fixed expenses of 15%). Therefore, total fixed costsand expenses equal P750,000 (P3 million x 25%). The CMR is 30% (that is, 100%sales ratio less 70% total variable costs and expenses ratio). Finally, BEP in pesos isP2,500,000 (P750,000 / 30%).

24. A company produced 500 units of a product and incurred the following costs. Directmaterials, P8,000; direct labor, P10,000 overhead (20% fixed), P45,000. If thesales value of 500 units is P102,000, what is the contribution margin percentage?

A. 44% C. 53%B. 47% D. 74%

(rpcpa)

24. B? The contribution margin percentage.

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Contribution margin percentage (CMR) is the quotient of contribution margin and netsales. Given the data on the problem, the contribution margin is determined asfollows:

Sales P102,000

Direct materials ( 8,000)Direct labor ( 10,000)Variable overhead (P45,000 x 80%) ( 36,000)Contribution margin P 48,000

The CMR is 47% (i.e., P48,000/P102,000).

25. Given the selling price at P120 per unit; contribution margin ratio at 25% and fixedcost at P250,000, the total variable expenses at the break even point would be:

A. P350,000 C. P450,000B. P750,000 D. P250,000

(rpcpa)

25. B? The amount of variable expenses at breakeven point. Based on the data given, the variable expenses at the BEP may be computed by

multiplying breakeven sales and VCRatio. BEP is determined as fixed cost divided byCMRatio.

BEP (P250,000/25%) P1,000,000x VCRatio (100%- 25%) 75%Variable expenses P 750,000

Or variable expenses (P250,000 / 25% x 75%) P 750,000

26. Which of the following formulas is used to determine the break-even point whenusing the contribution margin method?A. Revenues less operating income equals variable costs plus fixed costs.B. Unit contribution margin times the break-even number of units equals fixed costs.C. Selling price less unit fixed costs equals contribution marginD. Total fixed costs equal total revenues. (rpcpa)

26. B? The formula used in determining the breakeven point (BEP).

Choice-letter b is correct. At BEP, total fixed costs equal to contribution marginwhere fixed costs equal unit contribution margin times the number of breakevenunits. Choice-letter a is incorrect because it does not have relevance in the planningand control of costs and profit. Choice-letter c is incorrect because sales less fixedcosts is the sum of variable costs and profit (it also has no relevance). Choice-letterd is definitely incorrect.

27. Which of the following will result in raising the breakeven point?A. A decrease in the variable cost per unit.B. An increase in the semi-variable cost per unit.C. An increase in the contribution margin per unit.

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D. A decrease in income tax rates. (cia)

27. B? The one that will raise breakeven point.

BEP is fixed costs over UCM. To increase BEP, fixed cost should increase and unitcontribution margin should decrease. Choice-letter b is correct, an increase insemi-variable cost would decrease unit contribution margin, and increase in BEP. Asemi-variable cost per unit is more of a variable cost than that of fixed costs.

Choice-letters a and c increase unit contribution margin resulting to decreasedBEP. Choice letter d will not affect BEP.

28. To reduce the break-even point, the company mayA. Decrease both the fixed costs and contribution margin.B. Increase both the fixed costs and the contribution margin.C. Decrease the fixed costs and increase the contribution margin.

D. Increase the fixed costs and decrease the contribution margin. (rpcpa)

28. C? The technique in reducing the breakeven point (BEP). Breakeven point is fixed costs over unit contribution margin (UCM). Therefore, to

reduce the BEP, fixed costs must be decreased or UCM must be increased (choice-letter c: is correct).

29. NTQ Incs net sales in 2006 were 15% below the 2005 level. NTQs semi-variablecosts wouldA. Increase in total and increase as a percentage of net sales.

B. Decrease in total and decrease as a percentage of net sales.C. Increase in total, but decrease as a percentage of net sales.D. Decrease in total, but increase as a percentage of net sales. (rpcpa)

29. D? Effect to semi-variable cost if net sales decrease by 15%. Total semi-variable costs change, but not in direct relation to the change amount of

sales (say, if net sales increase by 10%, semi-variable costs may increase but not by10%). Therefore, if net sales decrease by 15%, the total semi-variable costs will alsodecrease but its percentage relationship to net sales will increase because thepercentage decrease in net sales is greater than the percentage decrease in semi-

variable costs.

30. Cost-volume-profit analysis is a key factor in many decisions, including choice ofproduct-lines, pricing of products, marketing strategy, and utilization of productivefacilities. A calculation used in CVP analysis is the break-even point. Once the break-even point has been reached operating income will increase by theA. Sales price per unit for each additional unit sold.B. Contribution margin per unit for each additional unit sold.C. Fixed cost per unit for each additional unit sold.D. Gross margin per unit for each additional unit sold. (rpcpa)

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30. B? The increase in operating income once the breakeven point (BEP) is reached. Choice-letter b is correct; once the BEP is reached, the operating income will

increase by every peso of increase in the amount of contribution margin. Total

contribution margin is equal to unit contribution margin (UCM) multiplied by the unitssold. At BEP, total fixed cost is equal to total contribution margin. Fixed costs areassumed to be constant even beyond the BEP. Therefore, after the BEP, ascontribution margin increases (due to the continuing increase in the number of unitssold) with fixed costs as constant, any increase in the contribution margin is anincrease in profit.

Choice-letter a is incorrect because sales price is only an increase in revenueand not yet in profit. Choice-letter c is incorrect because fixed cost per unit does notaffect the overall profit of the business, though it has great impact in theestablishment of a competitive unit sales price. Choice-letter d is incorrect becauseunit gross margin does not reflect yet the net profit as variable selling and

administrative expenses are still to be deducted.

31. Marston Enterprises sells three chemicals: petrol, septine and tridol. Petrol is thecompanys most profitable product; tridol is the least profitable. Which one of thefollowing events will definitely decrease the firms overall breakeven point for theupcoming accounting period?A. The installation of new computer-controlled machinery and subsequent layoff of

assembly-line workers.B. A decrease in tridols selling price.C. An increase in anticipated sales of petrol relative to sales of septine and tridol.D. An increase in petrols raw material cost. (cma)

31. C? The event that will decrease BEP. Choice-letter c is correct because an increase in the anticipated sales of petrol

relative to sales of septine and tridol will increase the weighted average unitcontribution margin, which will decrease BEP.

Choice-letter a would increase fixed cost and breakeven point. Choice-lettersb and d reduce unit contribution margin and increase BEP.

32. Cook Company sells three chemicals; Simpol, Plutex and Coplex. Simpol is the mostprofitable product while Coplex is the least compatible. Which of the following events

will definitely decrease the firms overall BEP for the upcoming account period.A. An increase in the overall market of PlutexB. An decrease in Coplexs selling priceC. An increase in anticipated sales of Simpol relative to the sales of Plutex and

CoplexD. An increase in Simpol raw materials (rpcpa)

32. C? The event that will decrease the overall breakeven point (BEP).

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Composite (or overall) BEP is equal to fixed costs divided by the average UCM. Todecrease the composite BEP, the fixed costs must decrease or the average UCMmust increase. The company produces and sells three products. Simpol is the mostprofitable, Coplex is the least profitable, and Phines is at the middle.

Choice-letter c is correct because an increase in the anticipated sales of Simpolrelative to the sales of Plutex and Coplex would trigger an increase in the averageUCM, and thereby would decrease composite BEP.

Choice-letter a is incorrect because an increase in overall market for Phines,the product at the middle of the sales mix profitability, would hardly change theaverage UCM and that of breakeven point. Choice-letter b is incorrect because adecrease in Coplexs selling price would aggravate a decrease in the average UCMand will increase the composite BEP. Choice-letter d is also incorrect because anincrease in Simpols raw materials cost would mean a decrease in UCM and anincrease in the composite BEP.

33. A company manufactures a single product. Estimated cost data regarding thisproduct and other information for the product and the companies are as follows:

Sales price per unit P40Total variable production cost per unit P22Sales commission (on sales) 5%Fixed costs and expenses:

Manufacturing overhead P5,598,720General and administrative P3,732,480

Effective income tax rate 40%

The number of units the company must sell in the coming year in order to reach itsbreakeven point isA. 388,800 units. C. 583,200 units.B. 518,400 units. D. 972,000 units. (cia)

33. C? The number of units to breakeven. The sales commission is P2 per unit (5% x P40). The total unit variable cost is P24

(i.e., P22 + P2), and the unit contribution margin is P16 (i.e., P40 P24).Total fixed costs is P9,331,200 (i.e., P5,598,720 + P3,732,480). Therefore, the

BEP in units is:BEP (units) = P9,331,200 / P16 = 583,200 units

34. Fely Company reported the following for the year just ended:Budgeted sales P 3,000,000Break-even sales 2,100,000Budgeted contribution margin 1,800,000Cashflow break-even 600,000

The companys margin of safety isA. P 900,000 C. P1,200,000B. P2,400,000 D. P1,500,000

(rpcpa)

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34. A? The amount of margin of safety. Margin of safety is the difference between actual of budgeted sales and breakeven

sales, as follows:

Budgeted sales P3,000,000- Breakeven sales 2,100,000Margin of safety P 900,000

35. The contribution margin ratio always increases when theA. Breakeven point increases.B. Breakeven point decreases.C. Variable costs as a percentage of net salesdecrease.D. Variable costs as a percentage of net salesincrease. (aicpa)

35. C? The event that makes the contribution margin ratio (CMR) to increase. CMR increases when unit sales price increases or unit variable cost decreases, or, in

effect, when unit contribution margin increases. Choice-letter c is correct, asvariable cost ratio decreases, automatically CMR increases.

CMR affects breakeven point and not the BEP affecting the CMR. Besides, thechange in BEP is not automatically due to the change in the CMR. Choice-letters aand b are incorrect.

36. The following information pertains to Nova Companys cost-volume-profit

relationships:Breakeven point in units sold 1,000Variable costs per unit P 500Total fixed costs P150,000

How much will be contributed to profit before income taxes by the 1,001st unit sold?A. P650 C. P150B. P500 D. P 0

(aicpa)

36. C

? The contribution to profit by the 1,001

st

unit sold. The 1,001st unit sold is the very first unit after the breakeven point. Beyond thebreakeven point, profit increases by every peso of increase in contribution margin.The profit contributed by the first unit after the BEP is the unit contribution margin.

At breakeven point, contribution margin equals fixed costs. And unit contributionmargin is total fixed costs divided by breakeven units. The unit contribution margin isdetermined as follows:

UCM = Fixed costs / BEP unitsUCM = P150,000 / 1,000 units = P150

37. The following data refers to cost volume profit relationships of Trilogy Co:

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Breakeven point in units 1,000Variable costs per unit P 250Total fixed costs P75,000

How much will be contributed to operating income by the 1,001st unit sold?

A. P250 C. P75B. P325 D. Zero (rpcpa)

37. C? The contribution to operating income by the 1,001st unit sold. The 1,001st unit sold is the first unit sold after the breakeven point. After the breakeven

point, each unit sold increases profit by the amount of the unit contribution margin(UCM). The UCM is equal to contribution margin over the number units sold. At theBEP, the CM is equal to fixed cost. The fixed cost is given at P75,000. The UCM isP75 and this is also the amount of profit on the 1,001st unit sold.

UCM = P75,000 / 1,000 units = P75

38. A retail company determines its selling price by marking up variable costs by 60%. Inaddition, the company uses frequent selling price markdown to stimulate sales. If themarkdown average 10%, what is the company contribution margin ratio?

A. 27.5% C. 37.5%B. 30.6% D. 41.7%

(cia)

38. B? The contribution margin ratio. The sales price is based on variable cost, which is the 100%. Variable cost ratio is

variable cost over net sales price. Net sales price is 160% of variable cost less 10%markdown. The variable cost ratio (VCR) and contribution margin ratio (CMR) arecalculated as follows:

VCR = 100% / (160% x 90%) = 69.4%.And, CMR = 100% - 69.44% = 30.6%

39. Which of the following would decrease unit contribution margin the most?A. A 15% decrease in selling price. C. A 15% decrease in variablecosts.B. A 15% increase in variable costs. D. A 15% decrease in fixed costs.

(cma)

39. A? The one that decreases contribution margin the most.

Contribution margin is the difference between sales and variable cost. Contributionmargin is decreased by a decrease in sales price, an increase in variable cost or adecrease in unit sales price and unit variable cost by the same amount.

Choice-letters a and b would decrease contribution margin. Inasmuch as thesales price is assumed to be greater than the variable cost, a 15% decrease in salesprice (choice-letter a) would decrease contribution margin more than the decreaseeffected by a 15% increase in variable cost (choice-letter b). Choice-letter a is thecorrect choice.

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Choice-letter c would increase contribution margin, while choice-letter d doesnot affect contribution margin.

Questions 40 and 41 are based on the following information. Lan Pala Tropical Stuff

Toys manufactures and sells dolls. The following information relates to the operatingresults for the last quarter:

Stuff toys sold 19,375Breakeven point in number of toys 15,500Breakeven point in peso sales P65,875Total fixed costs P47,275

40. What was Lans variable cost per doll?A. P 4.25 C. P 1.20B. P 3.05 D. P 0.96

(rpcpa)

40. C? The amount of variable cost per doll. Unit variable cost is the difference between unit sales price and unit contribution

margin. At breakeven point, fixed costs equal the contribution margin. Therefore, theunit variable cost is computed as follows:

Unit sales price (P65,875 / 15,500) P4.25- Unit contribution margin (P47,275 / 15,500) 3.05Unit variable cost P1.20

41. What was the margin of safety percentage for the last quarter of Lan? (rounded to

the nearest percent)A. 20% C. 28%B. 25% D. 72%

(rpcpa)

41. A? The margin of safety ratio (MSR). Margin of safety ratio is margin of safety over sales. First, let us get the margin of

safety, then the margin of safety ratio.Amount Units

Actual sales (19,375 x P4.25) P82,343.75 19,375- Breakeven sales 65,875.00 15,500Margin of safety P16,468.75 3,875

The margin of safety ratio is 20% (i.e., P16,468.75 / P82,343.75). Alternately,the MSR may be determined using the data in units and still arrive at 20% (i.e.,3,875/19,375).

42. For a profitable company, the amount by which sale can decline before losses occuris known as the

A. Variable sales ratio. C. Sales volume variance.

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B. Margin of safety. D. Marginal income rate.(rpcpa)

42. B

? The amount of decrease in sales before losses occur. Losses occur when sales fall below the breakeven point (BEP). At BEP, there is still

no loss. Therefore, the amount of decline in sales before losses occur is thedifference between the actual (or budgeted) sales and the breakeven sales. This iscalled the margin of safety (choice-letter b is correct). Analyzing it in a differentperspective, margin of safety is the amount of sales in excess of BEP. It suggeststhat this excess sales carries a corresponding contribution margin, and eventually,profit (e.g., Profit = Margin of Safety x CMR).

Choice-letter a is incorrect because variable sales ratio (or variable ratio) is therelationship of variable costs over sales. Choice-letter c is incorrect because salesvolume variance refers to the net effect on profit of the difference in actual sales and

budgeted sales. Choice-letter d is incorrect because marginal income rate is a loosedescription that relates to the relationship of margin over sales and not on the amountof a reduction in sales.

43. Bulacan Gold, Inc. manufactures and sells key rings embossed with college namesand slogans. Last year, the key rings sold for P75 each, and the variable costs tomanufacture them were P22.50 per unit. The company needed to sell 20,000 keyrings to break-even. The net income last year was P50,400. The company expectsthe following for the coming year:

The selling price of the key rings will be P90.

Variable manufacturing costs per unit will increase by one-third.

Fixed cost will increase by 10%. The income tax rate will remain unchanged.

For the company to break-even the coming year, the company should sellA. 21,600 C. 21,250B. 2,600 D. 19,250

(rpcpa)

43. D? The breakeven point in the coming year. Breakeven point is fixed costs divided by unit contribution margin. Using the before-

after analysis, the data are treated as follows:Before After

Unit sales price P 75.00 P 90.00Unit variable costs 22.50 30.00 (P22.50 x 1.33)Unit contribution margin P 52.50 P 60.00Total fixed costs (20,000 x P52.50) P1,050,000 P1,155,000 (P1,050,000 x 110%)

The new breakeven point in the coming year shall be 19,250 units (P1,155,000 /P60).

44. A company has revenues of P500, 000, variable costs of P300, 000, and pretax profitof P150, 000. If the company increased the sales price per unit by 10%, reduced

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fixed costs by 20%, and left variable cost per unit unchanged, what would be the newbreakeven point in pesos?

A. P 88,000 C. P110,000B. P100,000 D. P125,000

(cia)

44. A? The new breakeven point in pesos. Inasmuch as there are changes in the variables of profit, the before-after analysis

would be used as follows:Before After

Sales P500,000 P550,000 (P500,000 x 110%)-Variable cost 300,000 300,000 (same)Contribution margin P200,000 P250,000CMR 45.45% (P250,000 / P550,000)

Fixed costs P 50,000 P 40,000 (P50,000 x 80%)New BEP (pesos) P 88,000 (P40,000 / 45.45%)

45. Mela Corporation has a contribution margin ratio of 0.26. It aims to have a net incomeof P320,000 with a sales volume of P2 million. Its total fixed costs amount to

A. P200,000 C. P230,777B. P 83,200 D. P520,000

(rpcpa)

45. A? The amount of fixed costs.

Fixed costs and expenses may be determined by getting the difference ofcontribution margin and income before income tax, as follows:

Contribution margin (P2 million x .26) P 520,000- Income before income tax 320,000Total fixed costs and expenses P 200,000

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

Materials P 4.00Labor 1.75Variable overhead 1.75

Total P 7.50

What is the expected contribution margin per unit on the new order?A. P 0.40 C. P 0.50B. P 0.60 D. P 0.55

(rpcpa)

46. B

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? The expected unit contribution margin on the new order. There are two unit contribution margin here. One for the 10% capacity and the other

for the 5% capacity, as follows:10% capacity 5% capacity

(Regular) (Sub-contract)Unit contribution margin P8.20 P8.20- Unit variable costs 7.50 7.80Unit contribution margin P0.70 P0.40

The individual UCM shall be multiplied by the production mix of 10% and 5% forregular production and sub-contract, respectively. The average unit contributionmargin may now be determined as:

Regular sales (P0.70 x 10/15) P0.47Sub-contract (P0.40 x 5/15) 0.13Average unit contribution margin P0.60

47. Last year, the contribution margin ratio of Lamesa Company was 30%. This year,fixed costs are expected to be P120, 000, the same as last year, and revenues areforecasted at P550, 000, a 10% increase over last year. For the company to increaseoperating income by P15,000 in the coming year, the contribution margin ratio mustbe

A. 20% C. 40%B. 30% D. 70%

(aicpa)

47. B? The contribution margin ratio to increase operating income by P15,000.

The new contribution margin ratio is determined by dividing the new contributionmargin with the new sales. The new contribution margin is calculated as follows:

Sales last year (P550,000/110%) P500,000x CMR last year 30%CM last year 150,000Add: Increase in contribution margin 15,000CM this year 165,000Divide by sales this year 550,000CMR this year 30%

48. A company increased the selling price of its product from P1.00 to P1.10 a unit whentotal fixed costs increased from P400,000 to P480,000 and variable cost per unitremained unchanged. How will these changes affect the breakeven point?

A. The breakeven point in units will be increased.B. The breakeven point in units will be decreased.C. The breakeven point in units will remain unchanged.D. The effect cannot be determined from the information given.

(aicpa)

48. D? Effects to BEP of a change in unit sales price (USP) and fixed costs (FC).

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An increase in USP increases unit contribution margin (UCM) and decreases BEP,while an increase in FC increases BEP. The unit variable cost remains constantand there is no exact variable cost data given to precisely determine the quantitativeeffects of the given change in USP and FC to BEP. The effect cannot be determined

from the information given because the amount of unit variable cost also affects thechange in the BEP. To illustrate, let us use the following data:a.) Say, a unit variable cost of P 0.70:

Original Data New DataUnit sales price P1.00 P1.10Unit variable cost 0.70 0.70Unit contribution margin P0.30 P0.40Fixed costs P 400,000 P 480,000Breakeven units 1,333,333 1,200,000 (BEP decreases)

b.) Say, a unit variable cost of P0.40:Original Data New Data

Unit sales price P1.00 P1.10Unit variable cost 0.40 0.40Unit contribution margin P0.60 P0.70Fixed costs P 400,000 P 480,000Breakeven units 666,667 685,715 (BEP increases)

49. Two companies produce and sell the same product in a competitive industry. Thus,the selling price of the product of each company is the same. Company 1 has acontribution margin ratio of 40% and fixed costs of P25 million. Company 2 is moreautomated, making its fixed costs 40% higher than those of Company 1. Company 2also has a contribution margin ratio that is 30% greater than that of Company 1. Bycomparison, Company 1 will have the breakeven point in terms of pesossales volume and will have the peso profit potential once the indifferencepoint in peso sales volume is exceeded.

List A List B List A List BA. Lower Lesser C. Higher LesserB. Lower Greater D. Higher Greater

(cia)

49. A? Comparing Company 1 to Company 2, their BEP and effects to operating profit

beyond the BEP.

Company 1 has a higher CMR and lower fixed costs which yield to lower BEPcompared that of Company After the BEP, the company having higher CMR isexpected to register higher profit (i.e., Profit = Margin of safety x CMR). SinceCompany 2 has a higher profit (e.g., 40%) than that of Company 1 (e.g., 30%), itsincrease in profit will tend to be greater after the BEP.

Sales with profit50. In using cost-volume-profit analysis to calculate expected unit sales, which of the

following should be deducted to fixed cost in the numerator?A. Predicted operating loss. C. Unit contribution margin.

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B. Predicted operating income. D. Variable costs.(aicpa)

50. A

? The one added to fixed costs in the numerator in CVP analysis. Choice-letter a is correct, the predicted operating loss is deducted from the fixed

costs in the numerator in computing sales with profit. Choice-letter b is incorrectbecause operating income is added from fixed costs in the numerator in calculatingsales with profit. Choice-letter c is incorrect because unit contribution marginserves as the denominator in the computation of sales in units. Choice-letter d isincorrect because variable cost is not related to fixed cost.

51. Ipil-ipil Company would like to market a new product at a selling price of P15 per unit.Fixed costs for his product are P1,000,000 for less than 500,000 units of output andP1,500,000 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 operatingincome of P1 million?

A. 754,900 C. 825,530B. 833,334 D. 785,320

(rpcpa)

51. B? The number of units to be sold to earn an income of P1 million. There are two fixed costs given, P1 million at less than 500,000 units of production

and P1.5 million at 500,000 units or more. The UCM is P3.00 (P15 x 20%). If thecompany produces and sells 500,000 units, the operating income shall be P500,000.

That is, CM of P1,500,000 (500,000 units x P3) less fixed costs of P1,000.000.Therefore, to generate an earnings of P1,000,000, the company must product andsell more than 500,000 units and the fixed cost to be incurred shall be P1,500,000.The sales in units to product a profit of P1,000,000 is 833,334 units computed asfollows:

Sales = FC + IBIT / UCM= (P1,500,000 + P1,000,000) / P3 = 833,334 units

52. Merchandiser, Inc. sells Product O to retailers for P200. The unit variable cost is P40with a selling commission of 10%. Fixed manufacturing costs total P1,000,000 permonth while fixed selling and administrative costs total P420,000. The income tax

rate is 30%. The target sales if after tax income is P123,200 would beA. 10,950 units. C. 13,750 units.B. 15,640 units. D.11,400 units. (rpcpa)

52. D? The target sales if the after tax income is P123,200. The total unit variable cost is 60 [i.e., P40 + (10% x P200)]. And the UCM is P140

(i.e., P200 60). The total of fixed costs and expenses is P1,420,000 (i.e.,P1,000,000 + P420,000). And IBIT is P176,000 (i.e., P123,200 / 70%). Therefore, thetargeted sales in units is 11,400 units computed as follows:

Sales = (FC + IBIT) / UCM

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Sales = (P1,420,000 + P176,000) / P140 = 11,400 units

53. Nette & Company has sales of P400,00 with variable costs of P300,000, fixed costsof P120,000 and an operating loss of P20,000. By how much would Nette need to

increase its sales in order to achieve a target operating income of 10% of sales?A. P400,000 C. P500,000B. P462,000 D. P800,000

(rpcpa)

53. A? The amount of increase in sales to achieve a target profit of 10% of sales. The present sales amount to P400,000, the VCR is 75% (i.e., P300,000/P400,000),

and, therefore, the CMR is 25%. Since the profit ratio is given, the computation ofthe sales with profit shall be:

Sales = Fixed costs / (CMR NPR)

= P120,000 / (25% - 10%) = P800,000

The increase in sales shall therefore be P400,000 (i.e., P800,000 P400,000).

Questions 54 and 55 are based on the following information. Laguna MarketingCompany is expected an increase of fixed costs by P78,750 upon moving their place ofbusiness to the downtown area. Likewise, it is anticipating that the selling price per unitand the variable expenses will not change. At the present, the sales volume necessary tobreakeven is P750,000 but with the expected increase in final sales, the sales volumenecessary to breakeven would go up to P975,000. Based on these projections,

54. What is the profit-volume ratio of Laguna Marketing?

A. 35% C. 45%B. 40% D. 65%

(rpcpa)

54. A? The profit-volume ratio. The profit-volume ratio is the same as the contribution margin ratio. And CMR is

contribution margin divided by sales. Note that sales given in the question are atbreakeven point. This means that at these sales there is no profit or loss and thechange in profit is also zero. Therefore, any change in fixed cost is also the changein contribution margin. The CMR of 35% is determined as follows:

CMR = FC / Sales (i.e., the sales are at BEP)= P78,750 / (P975,000-P750,000) = 35%

55. What would be the total fixed costs of Laguna Marketing after the increase ofP78,750?

A. P341,250 C. P2,183,750B. P262,500 D. P 300,000

(rpcpa)

55. A? The fixed cost after the increase of P78,750.

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The given sales are at breakeven point. At BEP, fixed cost equals contributionmargin. The fixed costs after its increase shall be the contribution margin in thesecond year with breakeven sales of P975,000. The fixed costs P341,250 (i.e.,P975,000 x 35%).

56. Variable cost per unit is P3.50. Contribution margin is 30%. Breakeven sales is P1million. To sell an additional 50,000 units at the same price and contribution margin,how much will fixed costs increase to have a gross margin equal to 10% of the salesvalue of the additional cost of 50,000 units to be sold?

A. P 67,500 C. P 57,500B. P 50,000 D. P 125,000

(rpcpa)

56. B? The amount of increase in fixed cost.

Increase in contribution margin less increase in operating income is increase in fixedcost. The unit sales price is P5 (i.e., P3.50 / 70%) and the UCM is P1.50 (P5 P3.50). The gross margin (e.g., operating income) is 10% of sales. The increase infixed cost is P50,000, calculated as follows:

Increase in CM (50,000 units x P1.50) P75,000- Increase in operating income [50,000 units x (10% x P5)] 25,000Increase in fixed cost P50,000

57. Birney Company is planning its advertising campaign for 2006 and has prepared thefollowing budget data based on a zero advertising expenditures:

Normal plant capacity 200,000 units

Sales 150,000 unitsSelling price P25 per unitVariable manufacturing costs P15 per unitFixed costs:

Manufacturing P 800,000Selling and administration P 700,000

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

A. P100,000 C. P300,000

B. P200,000 D. P550,000(aicpa)

57. A? The maximum amount of advertising expense to obtain a profit of P200,000. Increase in fixed cost is new fixed cost less old fixed cost. The old fixed cost is

P1,500,000 (i.e., P800,000 + P700,000). The new fixed cost is not readily given andmust be computed.

The UCM is P10 (i.e., P15 P10). And sales are expected to increase by 20%.

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The increase in fixed cost shall be computed as follows:New contribution margin (50,000 units x 120% x P15) P1,800,000- New operating income 200,000New fixed costs 1,600,000

- Old fixed costs 1,500,000Increase in fixed costs P 100,000

Questions 58 through 60 are based on the following information. Bruell ElectronicsCo. is developing a new product, surge protectors for high-voltage electric flows. Thecost information below relates to the product.

Unit CostsDirect materials P 3.25Direct labor 4.00Distribution .75

The company will also be absorbing P120,000 of additional fixed costs associatedwith this new product. A corporate fixed charge of P20,000 currently absorbed byother products will be allocated to this new product.

58. If the selling price is P14 per unit, the breakeven point in units (rounded to thenearest hundred) for surge protectors is

A. 8,600 units. C. 15,000 units.B. 10,000 units. D. 20,000 units.

(cma)

58. D

? Breakeven point in units. The unit variable cost is P8 (i.e., P3.25 + P4.00 + P0.75), and the unit contribution

margin is P6 (i.e., P14 P8). Therefore, the BEP in units is 20,000 units (i.e.,P120,000/P8).

Allocated fixed costs are not included in the determination of the productsbreakeven point. Allocated fixed costs, however, shall be included in the total fixedcosts in the computation of overall companys breakeven point.

59. How many surge protectors (rounded to the nearest hundred) must Bruell Electronicssell at a selling price of P14 per unit to gain P30,000 additional operating incomebefore taxes?


(cma)

59. C? Total sales in units if operating profit is P30,000. Sales in units are fixed costs plus operating profit divided by unit contribution margin.

Therefore, sales is unit is 25,000 units, computed as follows:Sales = (FC + IBIT) / UCMSales = (P120,000 + P30,000) / P6 = 25,000 units

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60. How many surge protectors (rounded to the nearest hundred) must Bruell Electronicssell at a selling price of P14 per unit to increase after-tax income by P30,000? BruellElectronics effective income tax rate is 40%.

A. 10,700 units. C. 25,000 units.

B. 20,000 units. D. 28,300 units.(cma)

60. D? Sales in units if the after-tax income is P30,000. If the after-tax income is P30,000, the income before income tax is P50,000 (i.e.,

P30,000 / 60%). Therefore, the sales in units is 28,334 units, as follows:Sales in units = (P120,000 + P50,000) / P6 = 28,334 units

61. Austin Manufacturing, which is subject to a 40% income tax rate, had the followingoperating data for the period just ended:

Selling price per unit P 60Variable cost per unit 22Fixed costs 504,000

Management plans to improve the quality of its sole product by (1) replacing acomponent that costs P3.50 with a higher-grade unit that costs P5.50 and (2)acquiring a P180, 000 packing machine. Austin will depreciate the machine over a10-year life with no estimated salvage value by the straight-line method ofdepreciation. If the company wants to earn after tax income of P172, 800 in theupcoming period, it must sell

A. 19,300 units. C. 22,500 units.


61. C? Sales in units if the after-tax income is P172,800.

The income before income tax is P288,000 (i.e., P172,800 / 60%). There is anincrease in unit variable cost of P2 (i.e., P5.50 P3.50), and the new unit variablecost is P24 (i.e., P22 + P2). The sales price remains the same, therefore, the newunit contribution margin is P36 (P60 P24).

Total fixed cost is increased by P18,000 (i.e., P180,000/10 years). Hence, thenew fixed cost is P522,000 (i.e., P504,000 + P18,000). The sales to achieve an after-

tax income of P172,800 is 22,500 units, calculated as follows:Sales (units) = (P522,000 + P288,000) / P36 = 22,500 units

Questions 62 and 63 are based on the following information. An organization sells asingle product for P40 per unit that it purchased for P20. The salespeople receive asalary plus a commission of 5% of sales. Last year the organizations net income(after taxes) was P100,800. The organization is subject to an income tax rate of 30%.The fixed costs of the organization are

Advertising P 124,000Rent 60,000Salaries 180,000

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Other fixed costs 32,000Total P396,000

62. The breakeven point in unit sales for the organization is


(cia)

62. D? Breakeven point in units. The unit variable cost is P22 composed of unit purchase cost of P20 and commission

of P2 (i.e., 5% x P40). The unit contribution margin is P18 (I.e., P40 P22). And theBEP in units is 30,000 units (i.e., P396,000 P18).

63. The organization is considering changing the compensation plan for sales personnel.

If the organization increases the commission to 10% of revenues and reducessalaries by P80,000, what revenues must the organization have to earn to have thesame net income as last year?

A. P1,042,000 C. P1,150,000B. P1,350,000 D. P1,630,000

(cia)

63. C? Amount of sales to earn the same net income last year. Sales in pesos is FC plus profit divided by CMR. The fixed cost is reduced to

P316,000 (i.e., P396,000 P80,000). The income before income tax (IBIT) is the

same as last year at P144,000 (i.e., P100,800 / 70%). The new unit variable cost isP24 [i.e., P20 + (10% x P40)], resulting to a new unit contribution margin of P16 (i.e.,P40 - P24) or a CMR of 40% ([16 / P40). The sales in pesos shall be determined as:

Sales (pesos) = (FC+ IBIT) / CMR= (P316,000 + P144,000) / 40% = P1,150,000

64. Video King Company sells video tapes. The projected after tax net income for theyear is P480,000 based on a sales volume of 200,000 units. It sells the tapes at P64each. The variable cost consists of P40 unit purchase price (bulk orders) and ahandling cost of P8 per unit. Annual fixed cost are P2,400,000 and the companysincome tax rate is 35%. An increase of 10 percent in projected unit sales volume for

the year would result in an increased after tax income for the year ofA. P120,000 C. P208,000B. P 48,000 D. P 40,000 (rpcpa)

64. C? The amount of increase in net income given a 10% increase in unit sales. First, let us get the incremental contribution margin, then deduct the corresponding

tax thereof. The unit contribution margin is P16 (i.e., P64 P48). With a 10%increase in volume the net income after tax shall increase by P208,000 computed asfollows:

Incremental CM (200,000 x 10% x P16) P320,000

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- Incremental tax (35%) 112,000Incremental profit after tax P208,000

Multi-product sales

Questions 65 and 66 are based on the following information. The data below pertainto two types of products manufactured by Korn Corporation:

Unit sales price Unit variable costsProduct Y P 120 P 70Product Z 500 200

Fixed costs total P300,000 annually. The expected mix in units is 60% for product Yand 40% for product Z.

65. How much is Korns breakeven sales in units?A. 857 C. 2,000B. 1,111 D. 2,459 (aicpa /

rpcpa)65. C? Composite BEP in units. Composite breakeven point (CBEP) in units is total fixed costs over average UCM.

The average UCM is determined as follows:Sales Average

UCM Mix Ratio UCMProduct Y P 50 60% P 30Product Z 300 40% 120Total P150

And the CBEP is 2,000 units computed as follows:CBEP (units) = FC / Ave. UCM -= P300,000 / P150 = 2,000 units

66. How much is Korns breakeven sales in pesos?A. P300,000 C. P475,000B. P420,000 D. P544,000

(aicpa)

66. D? Composite BEP in pesos.

CBEP in pesos is fixed costs over average CMR, and average CMR is average UCM

divided average USP. Average USP is P272, determined as follows:Product Y (P120 x 60%) P 72Product Z (P500 x 40%) 200Average USP P272

Average CMR is average UCM divided by average USP and is computed at55.15% (i.e.., P150 / P272). The CBEP in pesos shall be:

CBEP (pesos) = FC / Average CMR = P300,000 / 55.15% = P544,000

Alternatively, the composite breakeven point in pesos may also be determined bygetting the sum of individual product sales. First, given that the CBEP in units is2,000 units, the allocated BEP in units shall be 1,200 units for product Y (i.e., 2,000

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units x 60%) and 800 units for product Z (i.e., 2,000 units x 40%). The CBEP inpesos shall be:

Product Y (1,200 units x P120) P144,000Product Z ( 800 units x P 500) 400,000

Composite BEP P544,00067. Tomas Company sells products X, Y, and Z. Tomas sells three units of X for each

unit of Z, and two units of Y for each unit of X. The contribution margins are P1.00per unit of X, P1.50 per unit of Y, and P3.00 per unit of Z. Fixed costs are P600,000.How many units of X would Tomas sell at the breakeven point?

A. 40,000 C. 360,000B. 120,000 D. 400,000

(aicpa)

67. B? The number of units of X to sell at the composite BEP.

First, compute the CBEP in units, then, allocate it among the products. CBEP is fixedcosts over average UCM. The average UCM is determined as follows:Sales mix UCM Sales mix ratio Ave. UCM

X 3 P1.00 3/10 P0.30Y (3 x 2) 6 1.50 6/10 0.90Z 1 3.00 1/10 0.30

10 P1.50

Therefore, the CBEP in units shall be 400,000 units (i.e., P600,000 / P1.50) andthe share of product X is 120,000 units (i.e., 400,000 units x 3/10).

68. Maribel is selling three products: Red, White, and Blue. The company sells three

units of Red for every unit of Blue, and two units of White for every unit of Red. Fixedcosts are P720,000. Contribution margin are:

P 1.90 per unit of Red2.00 per unit of White2.30 per unit of Blue

How many units of White would the company sell at breakeven point?A. 360,000 C. 72,000B. 108,000 D. 216,000

(rpcpa)

68. D? The number of units of White to sell at breakeven point. First, let us determine the composite breakeven point by dividing the fixed costs by

the average unit contribution margin (UCM). The average unit contribution margin iscalculated by multiplying the individual UCM of the products with their respectivesales mix ratio. Now, the sales mix ratio is not readily given, but is to be obtained asfollows:

If: 3 Reds = 1 Blue Therefore:2 Whites = 1 Red 6 Whites = 1 Blue

And, the sales mix is:Red = 3

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White = 6Blue = 1

10The average UCM is determined as:

Red P1.90 x 3/10 = P .57White 2.00 x 6/10 = 1.20Blue 2.30 x 1/10 = 0.23Average UCM P2.00

The composite breakeven point (CBEP) is 360,000 units (i.e., P720,000 / P2.00).With the CBEP already determined, the share of each product on the CBEP shall becalculated based on sales mix ratio. The share of product White in the compositebreakeven point is 216,000 units (i.e., 360,000 units x 6/10).

69. Laboratorio Unico, Inc. formulates and sells three major chemicals: C1, C2 and C3. Itsells to industrial users who use and buy these chemicals in the following ratio: three

(3) measures of C1 per one (1) measure of C3, two (2) measures of C2 per one (1)measure of C1. The company makes the following contribution margin per measure:

C1 P30C2 P45C3 P90

Fixed costs amounted to P1.8 million. At break-even point, the volume of C3 to besold would be

A. 12,000 C. 24,000B. 36,000 D. 4,000

(rpcpa )

69. D? The volume of C3 to be sold at breakeven point. Composite BEP is fixed cost divide by average UCM. The fixed costs are given. The

average UCM is determined by multiplying the individual UCM with their sales mixratio, as follows:

3 C1 = 1 C32 C2 = 1 C1

Therefore: 6 C2 = 1 C3The sales mix ratio is:

C1 3 = 3/10

C2 6 = 6/10C3 1 = 1/10

10The average UCM is

C1 = P30 x 3/10 = P 9C2 = 45 x 6/10 = 27C3 = 90 x 1/10 = 9Average UCM P45

The composite BEP is 40,000 units (i.e., P1.8 million/P45). The composite BEPshould be distributed among the products by their sales mix ratio.

Therefore, C3s share in the composite BEP is 4,000 units (i.e., 40,000 x 1/10).

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Questions 70 and 71 are based on the based on the following information. Acompany sells two products X and Y. The sales mix consists of a composite unit oftwo units of X for every five units of Y (2:5). Fixed costs are P49,500. The unit

contribution margins for X and Y are P2.50 and P1.20, respectively.

70. Considering the company as a whole, the number of composite units to break even isA. 31,500 C. 8,250B. 4,500 D. 9,900

(cia)

70. A? Composite BEP in units. Composite BEP in units is fixed costs divided by average UCM. The average UCM is

determined as follows:

Product X (P2.50 x 2/7) P0.71429Product Y (P1.20 x 5/7) 0.85714Average UCM P1.57143

Composite BEP (pesos) = FC / Average UCM= P49,500 / P1.57143 = 31,500 units

71. If the company had an operating income of P22,000,. the unit sales must have beenProduct X Product Y Product X Product YA. 5,000 12,500 C. 23,800

59,500B. 13,000 32,500 D. 28,600

71,500 (cia)

71. B? Units sold if operating income is P22,000. Using the average UCM in question 70 as P1.57143, the composite BEP in units

shall be:Composite BEP (pesos) = (FC + IBIT) / Average UCM

= (P49,500 + P22,000) / P1.57143 = 45,500 units

The CBEP shall be allocated based on their sales mix as follows:Product X (45,500 units x 2/7) = 13,000 units

Product Y (45,500 units x 5/7) = 32,500 units

Questions 72 through 74 are based on the following information. MargaritaManufacturing Company produces two products for which the following data havebeen tabulated. Fixed manufacturing cost is applied at a rate of P1.00 per machinehour.

Per Unit XY-7 BD-4Selling price P4.00 P3.00Variable manufacturing costs P2.00 P1.50Fixed manufacturing cost P .75 P 20Variable selling costs P1.00 P1.00

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The sales manager has a P160,000 increase in the money to the most profitableproduct. The products are not substitutes for one another in the eyes of thecompanys customers.

72. Suppose the sales manager chooses to devote the entire P160,000 to increasedadvertising for XY-7. The minimum increase in sales units of XY-7 to offset theincreased advertising is


(cma)

72. B? The increase in unit sales to offset the increase in advertising.

The unit variable cost of XY-7 is P3.00 (i.e., P2 + P1), and its UCM is P1.00 (i.e., P4

P3). The increased in unit sales to offset the increased in advertising is:Increase in unit sales = Increase in fixed cost / UCM

= P160,000 / P1 = 160,000 units

73. Suppose the sales manager chooses to devote the entire P160, 000 to increaseadvertising for BD-4, the minimum increase in revenues of BD-4 to offset theincreased advertising would be

A. P160,000 C. P 960, 000B. P320,000 D. P1,600,000

(cma)

73. C? The increase in peso sales of produce BD-4 to offset the increase in advertising

expense.

The unit variable cost of BD-4 is P2.50 (i.e., P1.50 + P1.00), and its UCM is P0.50(i.e., P3.00 P2.50). Its CMR is 16-2/3 %. The increase in peso sales to offset theincrease in fixed advertising cost is:

Increase in peso sales = Increase in fixed cost / CMR= P160,000 / 16-2/3% = P960,000

74. Suppose Margarita has only 100,000 machine hours that can be made available toproduce additional units of XY-7 and BD-4. 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 incontribution margin earned?

A. Product XY-7 should be produced, yielding a contribution margin ofP75,000.B. Product Xy-7 should be produced, yielding a contribution margin of P133,333.C. Product BD-4 should be produced, yielding a contribution margin ofP187,500.D. Product BD-4 should be produced, yielding a contribution margin ofP250, 000.

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(cma)

74. D? The product to be sold and its estimated increase in contribution margin. The unit contribution margin of each product must be converted into contribution

margin per hour to determine which is more profitable. It is given that the fixedoverhead is applied at P1.00 per hour. The contribution margin per hour shall becomputed as follows:

XY-7 BD-4UCM (as computed in the preceding number) P1.00 P0.50 No, of hours per unit

(P.75 per unit / P1 per hour) 0.75 hr.(P.20 per unit / P1 per hour) 0.20 hr.

Contribution margin per hour P1.33 P2.50

Product BD-4 gives a higher CM per hour and should be prioritized for productionand sales. The total CM in producing BD-4 is P250,000 (i.e., 100,000 hours x P2.50

per hour).

75. In a multi-product company, as the mix of the products being sold changes, theoverall contribution margin ratio will also change. If the shift in mix is toward the lessprofitable products, then the contribution margin ratio willA. Fall C. Not changeB. Rise D. Change in direct proportion to break-even point

(rpcpa)75. A? The effect to contribution margin ratio (CMR) if the sales mix is shifted towards the

less profitable product.

A shift in mix towards the less profitable product will make the average unitcontribution margin to decline. This will result to a lower CMR (choice-letter a iscorrect).

Choice-letter b is incorrect because it contradicts the correct analysis. Choice-letter c is also incorrect because CMR is affected by the change in sales mix.Choice-letter d is incorrect because the change in BEP is not directly proportional tothe change in CMR.

76. Sari- sari Corporation is a multiple-product firm. In their review of operations, theydecided to shift the sales mix from less profitable products to more profitableproducts, accounting for 30% of gross sales. This will cause the companysbreakeven profit toA. Decrease C. IncreaseB. Change by 15%. D. Not change (rpcpa)

76. A? The effect on the breakeven point (BEP) if the sales mix is shifted from less profitable

products to more profitable products.

The shift in sales mix from the less profitable to the more profitable product wouldincrease the average contribution margin. This means a decrease in the composite

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BEP (choice-letter a is correct). Choice-letter b is not determinable and isincorrect. Choice-letter c is incorrect because it contradicts the results of the correctanalysis. Choice-letter d is incorrect because there is a change in the breakevenpoint due to the change in sales mix.

77. Phil. Frames Inc. has the following revenue and cost budgets for the two product it sellsPlastic Frames Glass Frames

Sales price P50.00 P75.00Direct materials (10.00) (15.00)Direct labor (15.00) (25.00)Fixed overhead (15.00) (20.00)Net income per unit P10.00 P15.00Budgeted units sales 100,000 300,000

The budgeted unit sales equal the current unit demand, and total fixed overhead for

the year in budgeted at P4,875,000. Assume that the company plans to maintain theproportional mix. In numerical calculations, the company rounds to the nearestcentavo and unit. The total number of units the company needs to produce and sell tobreak-even isA. 300,000 units C. 150,000 unitsB. 354,545 units D. 75,000 units (rpcpa)

77. C? The composite breakeven point. Composite BEP refers to the point where the total sales of all the products made by

the company is equal to the total costs. These products made by the company is

equal to the total process, and costs structure.The composite BEP is equal to fixed costs divide by average unit contribution

margin (UCM). The fixed costs is given at P4,875,000. The average UCM shall becomputed using the sales mix ratio of 1:3 for plastic and glass, respectively, based onthe given budgeted unit sales.

Plastic Glass Average UCMUnit sales price P 50.00 P 75.00Unit direct materials cost ( 10,.00) ( 15.00)Unit direct labor cost ( 15.00) ( 25.00)Unit contribution margin P 25.00 P 35.00X Sales mix ratio (1:3)

Adjusted UCM P 6.25 P 26.25 P32.50

Composite BEP (units) = Fixed costs / Average UCM

= P4,875,000 / P32.50 = 150,000 units

78. The following revenues and cost budget for two products Things Inc. sells are madeavailable:

Plastic Things Glass ThingsSales price P50.000 P75.00Direct materials (10.00) (15.00)Direct labor (15.00) (25.00)

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Fixed overhead (15.00) (20.00)Net income per unit P10.00 P15.00Budgeted units sales 150,000 300,000

The budgeted unit sales equal the current unit demand, and total fixed overhead for

the year is budgeted at P4,875,000. Assume that the company plans to maintain thesame proportional mix. In numerical calculations, the company rounds to the nearestcentavos and unit. The total number of units Thing Inc. needs to produce and sell tobreak-even isA. 102,632 units. C. 171,958 units.B. 153,947 units. D. 418,455 units. (rpcpa)

78. B? The composite breakeven point. Composite breakeven point is the total or combined sales in units of all products

produced and processed in the same plant in order to breakeven (e.g., total salesequal total costs.) The composite BEP is computed by dividing the total fixed costsand expenses by the average unit contribution margin (UCM). The average UCM isdetermined below:

Plastic Glass Average UCMUnit sales priceUnit variable costsUnit contribution marginX Sales mix ratio (15:30)Adjusted UCM

P50.00(25.00)25.0015/45

P 8.33

P75.00(40.00)35.0030/45

P23.33 P31.66

Composite BEP (units) = P4,875,000 / P 31.66 = 153,947 units

The sales mix ratio (i.e., 15:30) is taken from the relationship of the budgeted units of150,000 units and 300,000 units for plastic and glass products, respectively.

Breakeven and CVP graphs79. In a profit-volume graph, the cost/volume/profit relationships are represented. The

vertical axis is the profit in pesos and the horizontal axis is the volume in units. Thediagonal line is the contribution margin line. The point at which the contributionmargin line intersects the zero profit line is the point:

At which the volume level is zero.At which the total costs equal the total sales.At which sale increases.At which total variable costs equal total sales. (rpcpa)

79. B? The point at which the contribution margin line intersects the zero profit line in the

profit-volume graph.

If the contribution margin line intersects the zero profit point, then there is no profitand the business operates at the breakeven point. At this point, total costs equal thetotal sales. Choice-letter b is correct.

Choice-letter a is incorrect because there is a sale made and therefore thevolume level is higher than zero. Choice-letter c is incorrect because a change insale would affect the amount of contribution margin and not at point zero.. Choice-

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letter d is also incorrect because if total variable costs and expenses equal totalsales, then there is no contribution margin.

80. 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 exceed total cost.D. There is profit since the total cost line exceeds the total revenue line.

(rpcpa)

80. C? Using the graph method, the event that will happen when unit output exceeds the

breakeven point.

After the breakeven point, there is already a margin of safety and profit because totalsales already exceed total costs and total contribution margin is greater than fixed

cost and expenses (choice-letter c is correct).Choice-letters a and b are incorrect because after breakeven point revenues

are already higher than expenses, and therefore, will result to profit. Choice-letter dis incorrect because if there is profit, the total cost line should be exceeded by, andnot to exceed, the total revenue line.

81. The most important use of the cost-volume-profit graph is to showA. The breakeven point.B. The cost/margin ratio at various levels of sale activity.C. The relationships among volume, cost, revenues, over wide ranges ofactivity.

D. The determination of cross over point.(rpcpa)

81. C? The most important use of the CVP graph. The CVP graph and even the BEP graph show the relationships among revenues,

costs and volume within a given relevant range. The breakeven point is not the mainfocus of presentation but its focus is the effects and relationships to profit ofrevenues, costs and volume. Hence, choice-letter a is incorrect. The contributionmargin ratio is assumed to be constant over the relevant range, choice-letter b isincorrect. Choice-letter d is an irrelevant choice.

Sensitivity analysisQuestions 82 through 84 are based on the following in formation. MultiFrameCompany has the following revenue and cost budgets for the two products it sells:

Plastic Frames Glass FramesSales price P10.00 P 15.00Direct materials (2.00) (3.00)Direct Labor (3.00) (5.00)Fixed overhead (3.00) (2.75)Net income per unit P 2.00 P 4.25Budgeted unit sales 100,000 300,000

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The budgeted unit sales equal the current unit demand, and total fixed overhead forthe year is budgeted at P975,000. Assume that the company plans to maintain thesame proportional mix. In numerical calculation, MultiFrame rounds to the nearestcent and unit

82. The total number of units MultiFrame needs to produce and sell to break even isA. 150,000 units. C. 100,000 units.B. 153,947 units. D. 300,000 units.

(cma)

82. A? The total number of units needed to produce and sell to breakeven.

The requirement refers to the composite breakeven point. It is calculated as fixedcosts over average UCM. The sales mix shall be based on budgeted sales (1:3) andthe sales mix ratios are and for Plastic and Glass, respectively. The averageUCM is determined as follows:

Sales Ave.UCM mix ratio UCM

Plastic (P10 P5) P5.00 P1.25Glass (P15 P8) 7.00 5.25Total P 6.50

The composite BEP shall be 150,000 units (P975,000 / P6.50).

83. The total number of units needed to break even If the budgeted direct labor cost wereP2 for plastic frames instead of P3 is


(cma)

83. A? The new composite BEP assuming a change in direct labor cost. The direct labor cost of plastic frames decreases to P2 from a previous balance of P3

or a decrease of P1. This decrease in unit variable cost will increase the UCM of

plastic frames to P6 (i.e., P5 + P1). With this change, the new average UCM shallbe:

Plastic frames (P6 x ) P1.50Glass frames (P7 x ) 5.25Average UCM P6.75

The composite BEP shall be 144,444 units (i.e., P975,000 / P6.75).

84. The total number of units needed to break even if sales were budgeted at 150,000units of plastic frames and 300,000 units of glass frames with all other costsremaining constant is

A. 144,444 units. C. 153,947 units.

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84. C

? New composite BEP given a change in sales mix. The UCM of plastic frames and glass remains constant at P5 for plastic frames and

P7 for glass frames. The new sales mix is changed to 15:30 for plastic frames andglass frame, respectively. The new average UCM shall be:

Plastic frames (P5 x 15/45) P1.67Glass frames (P7 x 30/45) 4.67Average UCM P6.34 or P6.33333

The new composite BEP shall be 153,947 units (i.e., P975,000 P6.333333).

85. Calculate the overall breakeven point in terms of units if the company believes thatthe current price of P40 is too high and the firm faces stiff competition. After all thesensitivity analysis is done, it was decided by the management committee to lowerthe price to P36 without sacrificing the quality of the product. What is the newbreakeven point if fixed costs are P309,750 and unit contribution margin is P6?

A. 51,625 C. 31,250B. 39,125 D. 43,750

(rpcpa)

85. A? The new breakeven point in units. The new breakeven point is equal to new fixed costs divided by the new unit

contribution margin. Applying this, we will have a new BEP in units of 51, 625 units(i.e., P309,750 / P6).

Questions 86 and 87 are based on the following information. Presented below are theresults of operations of Softtouch Products, Inc., for 2005:

Sales (150,000 units) P 600,000Cost of goods sold:

Fixed P 150,000Variable 300,000 450,000

Gross profit 150,000Selling and administrative:

Fixed 39,000Variable 45,000 84,000

Income before taxes P 66,000

The company is concerned about the expected increase in fixed manufacturingcosts by 50% if it will buy a new equipment with a higher production capacity.However, study shows that with the use of the new equipment sales volume in unitsare expected to increase by 40% while variable manufacturing costs will decreasefrom P2.00 to P1.50 per unit. The total fixed selling and administrative expenses andvariable selling and administrative expenses will remain the same. The selling priceper unit will also remain the same. The company has been operating at full capacity.If the company will buy the new equipment,

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86. What would be the breakeven point in terms of units?A. 128,000 C. 176,000B. 66,000 D. 105,000

(rpcpa)

86. A? The new breakeven point if the company buys the new equipment. The changes in the data could be analyzed as follows:

Before After Unit sales price (P600,000 / 150,000) P 4.00 P 4.00Unit variable production costs (P300,000 / 150,000) ( 2.00) ( 1.50)Unit variable expenses (P45,000 / 150,000) ( 0.30) ( 0.30)Unit contribution margin P 1.70 P 2.20Total fixed manufacturing cost P150,000 P225,000 (P150,000x150%)

Total fixed expenses 39,000 39,000Total fixed costs and expenses P189,000 P264,000The new breakeven point in units is (P264,000 / P2.20 120,000

87. What is the maximum expected income before income tax?A. P198,000 C. P306,000B. P 216,000 D. P 288,000

(rpcpa)

87. A? The maximum expected income before income tax.

Income before income tax is contribution margin less fixed costs and expenses.Therefore, the maximum income before income tax is P198,000, calculated as:

Contribution margin (150,000 units x 140% x P2.20) P462,000- Fixed costs and expenses 264,000Income before income tax P198,000

Questions 88 and 99 are based on the following information. The Kabayan Companymanufactures and sells Batik handbags to assorted prints. Data for the previous yearwere as follows:

Selling price per piece P 8.00Variable cost per piece P 2.00

No. of pieces to breakeven 25,000Net income last year P5,850

For the coming year, the company estimates that the selling price will be P9.50 perpiece, Variable cost to manufacture will increase by 25%, and fixed costs willincrease by 10%. Income tax rate of 35% will not change.

88. What is the selling price per piece that would give the same contribution margin rateas previous year?A. P10.00 C. P 8.00B. P 9.50 D. P10.50 (rpcpa)

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88. A? The selling price per unit that would give the same CMR as the previous year. The old variable cost ratio is 25% (i.e. P2 / P8) and the CMRatio is 75% (i.e., 100%

25%). If the new unit variable cost is P2.50 (i.e., P2.00 x 125%), then the new unit

sales price to maintain the same CMR of 75% and the same VCRatio of 25% shall beP10.00 (i.e., P2.50 / 25%).

89. If sales for the coming year are expected to exceed last years by 1,800 pieces, whatwould be the expected sales volume for the coming year?

A. 28,300 C. 26,800B. 27,775 D. 26,500 .

(rpcpa)

89. A? The expected sales volume in the coming year.

The sales volume in the coming year shall be the sum of the sales volume last yearplus the expected increase of 1,800 units. The sal

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Chap 4 - CVP Analysis