MODULE 3

Problems
A. Jimmy Balmediano manufacture and sells cellular phone earphones. The company’s
contribution format income statement is given below:
Sales (20,000 units) 1,200,000
Variable expenses 900,000
Contribution margin 300,000
Fixed costs 240,000
Net operating income 60,000
In an effort to maximize profit, management have asked you to do and analyze the following:
1. Compute the company’s contribution margin ratio and variable expense ratio.
Amount Unit Ratio
Sales 1,200,000.00 20,000 60 (1,200,000/1,200,000) or(60/60) 100%
Variable Costs 900,000.00 20,000 45 (900,000/1,200,000) or(45/60) 75%
Contribution Margin 300,000.00 20,000 15 (300,000/1,200,000) or(15/60) 25%
Fixed Costs 240,000.00
Operating Income 60,000.00
2. Compute the company’s break-even point in units and in pesos by using the equation
method.
Contribution Margin Method

Fixed Costs = 240,000.00 = 16,000 Units

Contribution Margin Per Unit (CMU) 15.00

Fixed Costs = 240,000.00 = 960,000.00 Pesos

Contribution Margin Ratio (CMR) 25%

BEP Units X Selling Price Per Unit =16,000Units X= P60

960,000.00 Pesos

3. Assume that sales increase by P400,000 next year. If cost behavior patterns remain
unchanged, by how much will the company’s, net operating income increase? Use the
contribution margin ratio to compute the answer.
Problem I 3
Contribution Margin Method

Sales Increase 400,000

X Contribution Margin Ratio (CMR) 25%
Incraese in Net Operating Inciome 100,000

Additional
Current Next Year Sales
Sales 1,200,000 +400,000 1,600,000 400,000.00
Variable Costs 900,000 (75%x1,600,000) 1,200,000 300,000.00
Contribution Margin 300,000 (25%X1,600,000) 400,000 100,000
Fixed Costs 240,000 240,000 No additional FC
Operating Income 60,000 160,000 100,000 100,000

4. Refer to the original data. Assume that next year management wants to earn a profit of
P90,000, how many units will have to be sold to meet this target profit?
 Amount Ratio
Sales (60X?) 100%
Variable Costs (45X?) 75%
Contribution Margin (15X22,000) 330,000 25%
Fixed Costs 240,000
Operating Income 90,000

Fixed Costs + Desired Profit 240,000+90,000 22,000

CMU 15

Amount Ratio
Sales (60X?) 1,320,000 100%
Variable Costs (45X?) 75%
Contribution Margin (15X22,000) 330,000 25%
Fixed Costs 240,000
Operating Income 90,000

Fixed Costs + Desired Profit 240,000+90,000 1,320,000

CMR 25%
5. Refer to the original data. Compute the company, margin of safety in both peso and
percentage form.
Problem I 5
Margin Of Safety Pesos =Actual Or Planned Sales - Breakeven Sales
Margin Of Safety = 1,200,000 - 960,000
Margin Of Safety = 240,000 -

Margin Of Safety Percentage = 240,000/1,200,000 or 4,000/20,000

Margin Of Safety = 20% -
20% = 100% - 80%

Margin Of Safety Units = 20,000 - 16,000

Margin Of Safety = 4,000

6. Compute the company’s degree of operating leverage at the present level of sales.
6. 7. 8.
6. 8% x5 = 40%
18,400 -8%;1,600 20,000 +8%;1,600 21,600 21,600
Sales 60 1,104,000 1,200,000 1,296,000 1,296,000
Variable Costs 45 828,000 900,000 972,000 972,000
Contribution Margin 15 276,000 300,000 324,000 324,000
Fixed Costs 240,000 240,000 240,000 259,200 Assuming VC
Operating Income 36,000 60,000 84,000 64,800

Degree Of Operating Leverage (DOL)

-40% = 36,000-60,000 CM 300,000 84,000-60,000 = 40%
60,000 OI 60,000 60,000
-40%/-8% 5 5 40%/8% 5
Change In Operating Income/Change in Sales

7. Assume that sales increase by 8% next year, by what percentage would you expect
operating income to increase? Use the degree of operating leverage to obtain your
answer.
 6. 7. 8.
6. 8% x5 = 40%
18,400 -8%;1,600 20,000 +8%;1,600 21,600 21,600
Sales 60 1,104,000 1,200,000 1,296,000 1,296,000
Variable Costs 45 828,000 900,000 972,000 972,000
Contribution Margin 15 276,000 300,000 324,000 324,000
Fixed Costs 240,000 240,000 240,000 259,200 Assuming VC
Operating Income 36,000 60,000 84,000 64,800

Degree Of Operating Leverage (DOL)

-40% = 36,000-60,000 CM 300,000 84,000-60,000 = 40%
60,000 OI 60,000 60,000
-40%/-8% 5 5 40%/8% 5
Change In Operating Income/Change in Sales

8. Prepare a contribution format income statement to showing an 8% increase in sales to

check your answer in number 7.
6. 7. 8.
6. 8% x5 = 40%
18,400 -8%;1,600 20,000 +8%;1,600 21,600 21,600
Sales 60 1,104,000 1,200,000 1,296,000 1,296,000
Variable Costs 45 828,000 900,000 972,000 972,000
Contribution Margin 15 276,000 300,000 324,000 324,000
Fixed Costs 240,000 240,000 240,000 259,200 Assuming VC
Operating Income 36,000 60,000 84,000 64,800

Degree Of Operating Leverage (DOL)

-40% = 36,000-60,000 CM 300,000 84,000-60,000 = 40%
60,000 OI 60,000 60,000
-40%/-8% 5 5 40%/8% 5
Change In Operating Income/Change in Sales

9. In an effort to increase sales, management is considering the use of a higher quality

speaker. This would increase variable costs by P3 per unit, but would eliminate one
quality inspector who is paid a salary of P30,000 per year. The estimate is that annual
sales will increase by 20%. Prepare a contribution format income statement to showing
the changes.
 Problem I 9, 10, 11
New Variable costs 45+3=48
New Fixed Costs 240,000-30,000=210,000
New Sales 20,000X1.20=24,000

20,000 20% 24,000

Sales 60 1,200,000 60 1,440,000 100%
Variable Costs 45 900,000 48 1,152,000 80%
Contribution Margin 15 300,000 12 288,000 20%
Fixed Costs 240,000 210,000
Operating Income 60,000 78,000
PROFIT INCREASE BY 18,000
10.
BEP=FC/CMU=210,000/12= 17,500 Increase from 16,000
BEP=FC/CMU=210,000/20%= 1,050,000.00 Increase from 960,000

MOS = 1,440,000 -1,050,000

= 390,000.00 Increase from 240,000

11.YES

10. Refer to number 9, compute the company’s break-even point in units and in pesos by
using the contribution margin method.
Problem I 9, 10, 11
New Variable costs 45+3=48
New Fixed Costs 240,000-30,000=210,000
New Sales 20,000X1.20=24,000

20,000 20% 24,000

Sales 60 1,200,000 60 1,440,000 100%
Variable Costs 45 900,000 48 1,152,000 80%
Contribution Margin 15 300,000 12 288,000 20%
Fixed Costs 240,000 210,000
Operating Income 60,000 78,000
PROFIT INCREASE BY 18,000
10.
BEP=FC/CMU=210,000/12= 17,500 Increase from 16,000
BEP=FC/CMU=210,000/20%= 1,050,000.00 Increase from 960,000

MOS = 1,440,000 -1,050,000

= 390,000.00 Increase from 240,000

11.YES

11. Refer to number 9, should the change be made?

 Problem I 9, 10, 11
New Variable costs 45+3=48
New Fixed Costs 240,000-30,000=210,000
New Sales 20,000X1.20=24,000

20,000 20% 24,000

Sales 60 1,200,000 60 1,440,000 100%
Variable Costs 45 900,000 48 1,152,000 80%
Contribution Margin 15 300,000 12 288,000 20%
Fixed Costs 240,000 210,000
Operating Income 60,000 78,000
PROFIT INCREASE BY 18,000
10.
BEP=FC/CMU=210,000/12= 17,500 Increase from 16,000
BEP=FC/CMU=210,000/20%= 1,050,000.00 Increase from 960,000

MOS = 1,440,000 -1,050,000

= 390,000.00 Increase from 240,000

11.YES

B. Albert Rivera sells 's product sells for P16 and has a variable cost per unit of P12. Fixed costs
are P120,000.
1. Compute the break-even point in pesos.

Sales 17.20 X 30,000 516,000 100%

Variable Costs 12 X 30,000 360,000 69.77%
Contribution Margin 5.2 X 30,000 156,000 30.23%
Fixed Costs 120,000
Operating Income 36,000

2. Compute the number of units Albert must sell to earn a P30,000 profit.
4
Amount Ratio
Amount Ratio
Sales 16 X ? 100%
Variable Costs 12 X ? 75%
Contribution Margin 4 X ? 25%
Fixed Costs 120,000
Operating Income 10%

Amount Ratio
Amount Ratio
Sales 16 X 50,000 800,000 100%
Variable Costs 12 X ? 75%
Contribution Margin 4 X ? 25%
Fixed Costs 120,000 15% (25% -10% )
Operating Income 10%

3. Albert has a target profit of P36,000 and expects to sell 30,000 units. Compute the selling
price Albert must charge to earn the target profit.
 Amount Ratio
Amount Ratio
Sales 16 X 50,000 800,000 100% (120,000/15% )
Variable Costs 12 X ? 75%
Contribution Margin 4 X ? 25%
Fixed Costs 120,000 15% (25% -10%)
Operating Income 10%

Sales 16 X 50,000 800,000

Variable Costs 12 X 50,000
Contribution Margin 4 X 50,000 200,000
Fixed Costs 120,000
Operating Income 80,000 10%

4. Albert wants to keep its selling price at P16 per unit and earn a 10% return on sales.
Calculate the number of units Foris must sell to meet the target.
Amount Ratio
Amount Ratio
Sales 16 X 50,000 800,000 100% (120,000/15%)
Variable Costs 12 X ? 75%
Contribution Margin 4 X ? 25%
Fixed Costs 120,000 15% (25% -10%)
Operating Income 10%

Sales 16 X 50,000 800,000

Variable Costs 12 X 50,000
Contribution Margin 4 X 50,000 200,000
Fixed Costs 120,000
Operating Income 80,000 10%

C. Jeser Javier Company sells a product for P20, variable costs are P8 per unit, and fixed costs
are P32,000.
1. Compute the break-even point in units.
Problem III
1
32,000/(20- 8) 2666.66667 2,667

2
Amount Ratio
Sales ? X 1,600 100%
Variable Costs 8 X 1,600 12,800 ?
Contribution Margin ? X 1,600 ?
Fixed Costs 32,000
Operating Income 8,000

Sales 33 X 1,600 52,800 100%

Variable Costs 8 X 1,600 12,800 24.24%
Contribution Margin 25 X 1,600 40,000 75.76%
Fixed Costs 32,000
Operating Income 8,000
2. Find the selling price that Jeser must charge to earn an P8,000 profit selling 1,600 units.
Problem III
1
32,000/(20- 8) 2666.66667 2,667

2
Amount Ratio
Sales ? X 1,600 100%
Variable Costs 8 X 1,600 12,800 ?
Contribution Margin ? X 1,600 ?
Fixed Costs 32,000
Operating Income 8,000

Sales 33 X 1,600 52,800 100%

Variable Costs 8 X 1,600 12,800 24.24%
Contribution Margin 25 X 1,600 40,000 75.76%
Fixed Costs 32,000
Operating Income 8,000

3. Jeser is considering new equipment that would increase fixed costs by P2,000 while
reducing unit variable costs by P1.60 per unit. Find the sales level where Jeser is indifferent
between the two cost structures.
3
Current Costs = Proposed Costs
Fixed Costs+ Variable Costs = Fixed Costs+ Variable Costs
32,000 + 8U = (32,000 + 2,000) + ( 8U - 1.60U)
32,000 + 8U = 34,000 + 6.40U
8U-6.40U= 34,000-32,000
1.60U = 2,000
U = 2000/1.60
U = 1,250 10008
8006.4
Fixed Costs+ Variable Costs = Fixed Costs+ Variable Costs
32,000 + 8U = 34,000 + 6.40U
32,000 + 8 ( 1,250U) = 34,000 + 6.40 ( 1,250U)
32,000 + 10,000 = 34,000 + 8,000
42,000 = 42,000

1 - 1,249 1,250 1,251 - Upwards

Current Costs Indifferent Proposed Costs UNITS DIFFERENCE
32,008.00 34,006.40 1 1,998.40
42,000.00 42,000.00 1,250 0.00
42,008.00 42,006.40 1,251 -1.60

D. Bee Jay DeLeon's product sells for P32 and has a variable cost per unit of P20. Fixed costs
are P120,000. The effective tax rate is 40%.
1. Compute the break-even point in units.
Sales 32 X 100%
Variable Costs 20 X 62.5%
Contribution Margin 12 X 37.5%
Fixed Costs 120,000
Operating Income 100% 50,000 (30,000/60% )
Tax 40%
After Tax Profit 60% 30,000

Sales 32 X 100% (250,000/43% )

Variable Costs 20 X 62.5%
Contribution Margin 12 X 14,166.67 170,000 37.5% (170,000/120
Fixed Costs 120,000
Operating Income 100% 50,000 (30,000/60% )
Tax 40%
After Tax Profit 60% 30,000

FC + ATP/1-TR 120,000+30,000/1-.40 120,000+30,000/.60

CMU 12 12

170,000 = 14,166.67 14,167

12
2. Compute the number of units Oak Grove must sell to earn a P30,000 after-tax profit.

Sales 32 X 100%
Variable Costs 20 X 62.5%
Contribution Margin 12 X 37.5%
Fixed Costs 120,000
Operating Income 100% 50,000 (30,000/60% )
Tax 40%
After Tax Profit 60% 30,000

Sales 32 X 100% (250,000/43% )

Variable Costs 20 X 62.5%
Contribution Margin 12 X 14,166.67 170,000 37.5% (170,000/120
Fixed Costs 120,000
Operating Income 100% 50,000 (30,000/60% )
Tax 40%
After Tax Profit 60% 30,000

FC + ATP/1-TR 120,000+30,000/1-.40 120,000+30,000/.60

CMU 12 12

170,000 = 14,166.67 14,167

12
3. Bee Jay has an after-tax target profit of P36,000 and expects to sell 20,000 units.
Compute the selling price Oak Grove must charge to earn the target profit.
Sales 32 X 100%
Variable Costs 20 X 62.5%
Contribution Margin 12 X 37.5%
Fixed Costs 120,000
Operating Income 100% 50,000 (30,000/60% )
Tax 40%
After Tax Profit 60% 30,000

Sales 32 X 100% (250,000/43% )

Variable Costs 20 X 62.5%
Contribution Margin 12 X 14,166.67 170,000 37.5% (170,000/120
Fixed Costs 120,000
Operating Income 100% 50,000 (30,000/60% )
Tax 40%
After Tax Profit 60% 30,000

FC + ATP/1-TR 120,000+30,000/1-.40 120,000+30,000/.60

CMU 12 12

170,000 = 14,166.67 14,167

12

E. Francis Villamin Company has sales of P350,000,variable costs of P200,000, and fixed costs
of P125,000. Eleva has an effective tax rate of 40%.
a. Compute the break-even point in pesos.
Problem V
1
Sales X 350,000 100%
Variable Costs X 200,000 ?
Contribution Margin X 150,000 ?
Fixed Costs 125,000
Operating Income 25,000

Sales X 350,000 100%

Variable Costs X 200,000 57%
Contribution Margin X 150,000 43%
Fixed Costs 125,000
Operating Income 25,000

Fixed Costs = 125,000.00 290,697.67

Contribution Margin Ratio 43%

b. Compute Francis's sales needed to earn a P75,000 after-tax profit.

2
Sales X 581,395 100% (250,000/43% )
Variable Costs X 57%
Contribution Margin X 250,000 43%
Fixed Costs 125,000
Operating Income 100% 125,000 (75,000/60% )
Tax 40%
After Tax Profit 60% 75,000

FC + ATP/1-TR 125,000+75,000/1-.40 125,000+75,000/.60

CMR 43% 43%

250,000 = 581395.349
43%
c. Compute the sales Francis would need to earn a 15% after-tax return on sales.
3
Sales X 694,444 100% (125,000/18% )
Variable Costs X 57%
Contribution Margin X 43%
Fixed Costs 125,000 18% (43% -25% )
Operating Income 100% 25% (15% /60% )
Tax 40%
After Tax Profit 60% 15%

F. Mike Gatchalian Company has a before-tax return on sales of 9% and a 25% margin of safety.
Current sales are P800,000.
a. Compute the break-even point in pesos.

b. Find Mound's variable cost percentage.

G. Ferelli Company sells two products, A and B, with contribution margin ratios of 40 and 30
percent and selling prices of P5 and P2.50 a unit. Fixed costs amount to P72,000 a month.
Monthly sales average 30,000 units of product A and 40,000 units of product B.
a. Assuming that three units of product A are sold for every four units of product B,
calculate the peso sales volume necessary to break even.
1
A B Total
Sales 5.00 2.50 7.50
Variable Costs 3.00 1.75 4.75
Contribution Margin 40% 2.00 30% 0.75 2.75

Multiply:Sales Mix 3 4

Weighted
A B Total
Sales 15 10 25
Variable Costs 9 7 16
Contribution Margin 6 3 9

Weighted Average Contribution Margin Ratio 9 / 25 = 36%

Fixed Costs 72,000

Divide: WACMR 36%
BEP P 200,000
b. As part of its cost accounting routine, Ferelli Company assigns P36,000 in fixed costs to
each product each month. Calculate the break-even peso sales volume for each product.
2
Fixed Costs 36,000 36,000 72,000
Divide: CMR 40% 30%
BEP P 90,000 120,000 210,000

3
A B Total
Sales 5.00 2.50 7.50
Variable Costs 3.00 1.75 4.75
Contribution Margin 40% 2.00 30% 0.75 2.75

Multiply:Sales Mix 5 4

Weighted
A B Total
Sales 25 10 35
Variable Costs 15 7 22
Contribution Margin 10 3 13

Contribution Margin Ratio 13 / 35 = 37.14%

Fixed Costs (72,000 + 9,700) 81,700

Divide: WACMR 37.14%
BEP P 219,962

c. Ferelli Company is considering spending an additional P9,700 a month on advertising, giving

more emphasis to product A and less emphasis to product B. If its analysis is correct, sales of
product A will increase to 40,000 units a month, but sales of product B will fall to 32,000 units a
month. Recalculate the break-even sales volume, in Pesos, at this new product mix. Should the
proposal to spend the additional P9,700 a month be
2
Fixed Costs 36,000 36,000 72,000
Divide: CMR 40% 30%
BEP P 90,000 120,000 210,000

3
A B Total
Sales 5.00 2.50 7.50
Variable Costs 3.00 1.75 4.75
Contribution Margin 40% 2.00 30% 0.75 2.75

Multiply:Sales Mix 5 4

Weighted
A B Total
Sales 25 10 35
Variable Costs 15 7 22
Contribution Margin 10 3 13

Contribution Margin Ratio 13 / 35 = 37.14%

Fixed Costs (72,000 + 9,700) 81,700

Divide: WACMR 37.14%
BEP P 219,962
PRESENT
Contribution Margin A 2.00 x 30,000 60,000
Contribution Margin B 0.75 x 40,000 30,000
Contribution Margin 90,000
Fixed Costs 72,000
Operating Income 18,000

PROPOSAL - INCREASE IN ADVERTISING

Contribution Margin A 2.00 x 40,000 80,000
Contribution Margin B 0.75 x 32,000 24,000
Contribution Margin 104,000
Fixed Costs 81,700
Operating Income 22,300

ADVANTAGE IN INCREASING ADVERTISING 4,300

H. Andrew Manacop Company produces and sells two products: A and B in the ratio of 3A to 5B.
Selling prices for A and B are, respectively, P1,200 and P240; respective variable costs are P480
and P160. The company's fixed costs are P1,800,000 per year. Compute the volume of sales in
units of each product needed to:
a. Break-even.
A SP P1,200 B SP P240
- VC (480) - VC (160)
CM P 720 CM P 80

Weighted CM = (3  P720) + (5  P80) = P2,560

1. A = 704  3 = 2,112
P1,800,000 = 703.125
units
P2,560 B = 704  5 = 3,520

2. P1,800,000 + P800,000
P2,560 A = 1,016  3 =
=1,015.625 3,048 units
B = 1,016  5 =
5,080

3. P800,000/1 - .3 = P1,142,857

P1,800,000 + P1,142,857
P2,500 A = 1,150  3 =
=1,149.55 3,450 units
B = 1,150  5 =
5,750

b. Earn a P800,000 profit before taxes.

 1. A = 704  3 = 2,112
P1,800,000 = 703.125
units
P2,560 B = 704  5 = 3,520

2. P1,800,000 + P800,000
P2,560 A = 1,016  3 =
=1,015.625 3,048 units
B = 1,016  5 =
5,080

3. P800,000/1 - .3 = P1,142,857

P1,800,000 + P1,142,857
P2,500 A = 1,150  3 =
=1,149.55 3,450 units
B = 1,150  5 =
5,750

c. Earn a P800,000 profit after taxes, assuming a 30% tax rate.

1. A = 704  3 = 2,112
P1,800,000 = 703.125
units
P2,560 B = 704  5 = 3,520

2. P1,800,000 + P800,000
P2,560 A = 1,016  3 =
=1,015.625 3,048 units
B = 1,016  5 =
5,080

3. P800,000/1 - .3 = P1,142,857

P1,800,000 + P1,142,857
P2,500 A = 1,150  3 =
=1,149.55 3,450 units
B = 1,150  5 =
5,750

d. Earn 12% on sales before taxes.

4. SP = (3  P1,200) + (5  P240) = P4,800

X = P1,800,000 + P.12X = P4,354,839

P2,560/P4,800

A = (P4,354,839  .75)/P1200 = 2,722 units

B = (P4,354,839  .25/P240 = 4,537

5. X = P1,800,000 + P.12X
1 - .3 = P4,973,684
P2,560/P4,800

A = (P4,973,684  .75)/P1,200 = 3,109 units

B = (P4,973,684  .25/P240 = 5,181
e. Earn 12% on sales after taxes , assuming a 30% tax rate.
4. SP = (3  P1,200) + (5  P240) = P4,800

X = P1,800,000 + P.12X = P4,354,839

P2,560/P4,800

A = (P4,354,839  .75)/P1200 = 2,722 units

B = (P4,354,839  .25/P240 = 4,537

5. X = P1,800,000 + P.12X
1 - .3 = P4,973,684
P2,560/P4,800

A = (P4,973,684  .75)/P1,200 = 3,109 units

B = (P4,973,684  .25/P240 = 5,181

I. The Junior Philippine Institute of Accountants of Ateneo de Naga University is planning for its
annual dinner-general assembly. The following costs were projected by the dinner- general
assembly committee.
Dinner per person P18
Favors and programs per person P2
Band P2,800
Rental of ballroom P900
Professional entertainment during intermission P1,000
Tickets and advertising P1,300
The dinner- general assembly committee wants to charge P35 per person for the activity:
a. Compute the break-even point in number of students who must attend the dinner-
general assembly.
1. The contribution margin per person would be:
Price per ticket ....................................... P35
Less variable expenses:
Dinner .................................................. P18
Favors and program ............................. 2 20
Contribution margin per person ............. P15
The fixed expenses of the dinner-dance total P6,000
(P2,800+P900+P1,000+P1,300). The break-even
point would be:
Variable expenses + Fixed expenses +
Sales =Profits
P35Q =P20Q + P6,000 + P0
P15Q =P6,000
Q =P6,000 ÷ P15 per person
400 persons; or, at P35 per person,
Q = P14,000
 Alternative solution:
Break-even point = Fixed expenses
in unit sales Unit contribution margin

$6,000
= = 400 persons
$15 per person
b. The dinner- general assembly committee made a conservative estimate that only 300
students will attend out of the 600 accounting students in the University. What price per
ticket must be charged in order to break-even.
c. Prepare a CVP graph from a zero level of activity up to 600 tickets sold assuming that P35
ticket price per person.

J. The Shirts Company sells a large variety of tee shirts. Chubby Lito, the owner is thinking of
increasing sales by hiring college students, on a commission basis, to sell shirts bearing the
mascot of their school.
The shirts have to be ordered from the manufacturer six weeks advance and could not be
returned because of the unique printing required. The shirt would cost P8 each with a minimum
order of 75 shirts. Any additional orders should be in increments of 75 shirts. The selling price of
each shirt is P13.50 and Mr. Lito will pay commission of P1.50 for each shirt sold. For this
business, Mr. Lito would not require any additional facilities
a. To make the project worthwhile, Mr. Lito would require a P1,200 profit for the first three
months of the venture. What sales in units and pesos would be required to reach this
target operating income?

1. The contribution margin per sweatshirt would be:

Selling price .....................................................................................................

P13.50
Variable expenses:
Purchase cost of the sweatshirts....................................................................
P8.00
Commission to the student salespersons ........................................................
1.50 9.50
Contribution margin .........................................................................................
P 4.00

Since there are no fixed costs, the number of unit sales needed to yield the desired P1,200 in
profits can be obtained by dividing the target P1,200 profit by the unit contribution margin:

Target profit $1,200

= =300 sweatshirts
Unit contribution margin $4.00 per sweatshirt
300 sweatshirts × $13.50 per sweatshirt = $4,050 in total sales.
b. Assume that the venture is undertaken and an order is placed for 75 shirts. What would be the
break-even point in units and in peso sales?
2. Since an order has been placed, there is now a “fixed” cost associated
with the purchase price of the sweatshirts (i.e., the sweatshirts can’t be
returned). For example, an order of 75 sweatshirts requires a “fixed” cost
(investment) of P600 (75 sweatshirts × P8.00 per sweatshirt = P600).
The variable cost drops to only P1.50 per sweatshirt, and the new
contribution margin per sweatshirt becomes:
Selling price ..........................................................................
P13.50
Variable expenses (commissions only) ................................. 1.50
Contribution margin ..............................................................
P12.00
Since the “fixed” cost of P600 must be recovered before Mr. Hooper
shows any profit, the break-even computation would be:

Break-even point = Fixed expenses

in unit sales Unit contribution margin

$600
= =50 sweatshirts
$12.00 per sweatshirt
50 sweatshirts × $13.50 per sweatshirt = $675 in total sales
If a quantity other than 75 sweatshirts were ordered, the answer would
change accordingly.

Multiple Choice
1. Which formula gives unit sales required to earn a target profit? (P = selling price, V = variable
cost per unit, F = total fixed costs, T = target profit)
a. F/(P - V) c. (F + T)/(P - V)
b. (F + T)/P d. (F + T)/V
2. Which formula gives the sales Pesos required to earn a target profit? (P = selling price, V =
variable cost per unit, F = total fixed costs, T = target profit)
a. F/[(P - V)/P] c. (F + T)/[(P - V)/P]
b. (F + T)/(P) d. F + T/V
3. Over the relevant range, total revenues and total costs
a. increase, but at a decreasing rate.
b. decrease.
c. remain constant.
d. can be graphed as straight lines.
4. At the break-even point, total contribution margin is
a. zero. c. equal to total costs.
b. equal to total fixed costs. d. equal to total variable costs.
5. If a company is operating at a loss,
a. fixed costs are greater than sales.
b. selling price is lower than variable cost per unit.
c. selling price is less than average total cost per unit.
d. fixed cost per unit is greater than variable cost per unit.
6. As volume increases, average cost per unit
a. increases.
b. decreases.
c. remains constant.
d. increases in proportion to the change in volume.
7. All else constant, if the selling price falls,
a. total variable costs will be lower than expected.
b. contribution margin percentage will be higher than expected.
c. total contribution margin will be higher than expected.
d. per-unit contribution margin will be lower than expected.
8. If all goes according to plan except that unit variable cost falls,
a. total contribution margin will be lower than expected.
b. the contribution margin percentage will be lower than expected.
c. profit will be higher than expected.
d. per-unit contribution margin will be lower than expected.
9. If all goes according to plan except that total fixed costs rise,
a. income will be lower than expected.
b. total contribution margin will be lower than expected.
c. total sales will be lower than expected.
d. income will be higher than expected.
10. Which of the following decreases per-unit contribution margin the most for a company
currently earning a profit?
a. A 10% decrease in selling price.
b. A 10% increase in variable cost per unit.
c. A 10% increase in fixed costs.
d. A 10% increase in fixed cost per unit.
11. Introducing income taxes into cost-volume-profit analysis
a. raises the break-even point.
b. lowers the break-even point.
c. increases unit sales needed to earn a particular target profit.
d. decreases the contribution margin percentage
12. The margin of safety is
a. the profit currently earned in excess of the target profit.
b. the difference between current sales and sales at break-even.
c. the ratio of contribution margin to variable cost.
d. the difference between contribution margin currently earned and contribution margin
at break even.
13. The indifference point is the level of volume at which a company
a. earns the same profit under different operating schemes.
b. earns no profit.
c. earns its target profit.
d. any of the above.
14. As projected net income increases the
a. degree of operating leverage declines. c. breakeven point goes down
b. margin of safety stays constant. d. contribution margin ratio goes up
15. A managerial preference for a very low degree of operating leverage might indicate that
a. an increase in sales volume is expected. c. the firm is very profitable
b. a decrease in sales volume is expected. d. the firm has very high fixed costs

16. Target Costing is

a. a substitute for CVP analysis
b. used for companies that cannot classify their costs by behavior
c. inappropriate if a company has already established a target profit
d. used in decisions to offer a new product or enter a new market.

17. If the sales mix shifts toward higher contribution margin products, what would happen to the
break-even point?
a. decreases
b. increases
c. remains constant
d. it is impossible to tell without additional information

18. Spreadsheets are used in financial modeling. Once you have set up the basic formula, it is
easy to determine the effect of changing price, costs, volume amounts, or any other variable
deemed important to the analysis. This analysis is called
a. variable analysis
b. fixed analysis
c. mixed analysis
d. “what-if” analysis

19. Operating leverage measures how sensitive the profit is to change in

a. fixed costs
b. sales volume
c. sales price per unit
d. in tax rates

20. To which function of management is CVP analysis most applicable?

a. Planning
b. Organizing
c. Directing
d. Controlling