UNIVERSITY OF NUEVA CACERES
College of Business and Accountancy
Second Semester
Academic Year 2024-2025
COST, VOLUME, PROFIT analysis Ian Francis L. Delos Santos, CPA
CVP ANALYSIS - Profit planning tool that deals DEGREE OF OPERATING LEVERAGE(DOL)
with the relationship of profit with cost and - A measure, at a given level of sales, of
sales volume. how a percentage change in sales volume will
affect profits.
CONTRIBUTION INCOME STATEMENT
DOL = Total Contribution margin/ Net income.
SALES XXX %Increase in Net Income =
VARIABLE COST (% Increase in sales x
DOL)
(XXX) CONTRIBUTION MARGIN
XXX SALES MIX - having a composition of more
FIXED COST than one products in a sale.
(XXX) OPERATING INCOME XXX STRAIGHT PROBLEMS
BASIC ASSUMPTIONS IN CVP EXERCISE NO.1
❖ The behavior of sales and costs are The following data are available for Luffy
assumed to be linear. Company’s
❖ Inventory and unsold goods are one product.
disregarded.
Unit selling price 800
CONTRIBUTION MARGIN - The measure of the Unit variable cost
company’s ability to cover variable costs with Manufacturing 400
sales. Selling and admin. 240
Fixed costs
BREAK-EVEN POINT - “Total cost = Total sales” Manufacturing
BEPu = Fixed Cost / Contribution margin unit
BEPpeso = FC/CMratio 1,640,000 Selling and admin.
MARGIN OF SAFETY - Maximum amount 920,000
of decrease in sales until breakeven point. Unit volume 24,000
MSu = Sales volume - BEPunits Requirements:
MSp = Sales - BEPsales 1. Unit contribution margin and contribution
margin ratio
INDIFFERENCE POINT - State on which all 2. Total contribution margin
alternatives are equal. 3. Break-even volume in units and peso.
Cost based = FC + (VCu x Quantity) 4. Margin of safety in units and margin of
Profit based =(CMu x Quantity)- FC safety ratio.
5. Degree of Operating Leverage.
6. The selling price that Luffy must charge
to double the operating profit based on
the given cost structure with the same
activity level.
probability of increasing sales by 3,000 units.
EXERCISE NO. 2 How much could it pay for such a campaign
SASUKE Inc. sells a single product. The without reducing its planned profits?
company’s most recent income statement is
given below.
Sales (5,000 units) P750,000
Less: Var. expenses 300,000
Contribution Margin
450,000
Less: Fixed expenses
270,000 Operating income
P180,000
Requirements:
1. If 1,500 more units are sold, how much
increase in profit is expected?
2. If sales volume increases 15% compute
the new profit.
3. If the firm were able to increase its
sales volume by 15% without a change in its
selling price, variable costs, or fixed costs
would this change the break-even point?
4. If the firm could increase its selling
price and variable cost by 20% would the
breakeven point in units or peso change?
EXERCISE NO. 3
After its cost structure (Variable costs P11.25 per
unit and monthly fixed costs of P90,000) and
potential market, Bunny company established
what it considered to be a reasonable selling
price. The company expected to sell 50,000
units per month and planned its monthly
results as follows:
Sales P750,000
Variable costs 562,500
Contribution Margin
187,500
Fixed costs 90,000
Income before taxes
97,500
Income taxes
39,000
Net income P58,500
Requirements:
1. Suppose the company determined that
a particular advertising campaign had a high
2. If the company wants a P90,000 true regarding the contribution margin
before-tax profit, how many units per unit?
must it sell?
3. If the company wants a 10% before-
tax return on sales, what level of
sales, in pesos does it need?
4. If the company wants a P90,000 after-
tax profit, how many units must it
sell?
5. If the company wants an after-tax
return on sales of 9% how many units
must it sell?
6. The company is considering offering
its salespeople a 5% commission on
sales. What would the total sales, in
pesos, have to be to implement the
commission plan and still earn the
planned before-tax income of
P97,500?
EXERCISE NO. 4
The CHO Company manufactures and sells
two products. The selling prices and
variable costs of the products are as
follows:
CHOlit SCHOpid
Selling price P20 P40
Variable costs 8 24
The sales for the year were in the ratio of 3
CHOlit and 1 SCHOpid. Sales volume for
the year was P1 million. Fixed costs
amounted to P390,000.
Requirements:
1. Compute the number of units
sold for each product.
2. Compute the breakeven sales in
pesos and in units
3. Compute the composite
breakeven for the company in
units and in pesos.
MULTIPLE CHOICE QUESTIONS
1. Assuming a company has net income,
which of the following statements is
a. It will decrease as the number of 6. The contribution margin ratio
units sold increases. always decreases when the
b. It will decrease as the number of a. Variable costs as a percentage
units sold decreases of net sales increases
c. It indicates the amount that net b. Variable costs as a percentage
income will increase with the sale of net sales decreases
of each additional unit. c. Break-even point decreases
d. It indicates the amount that d. Break-even point increases
variable costs will decrease with
the sale of each additional unit. 7. After the level of volume
exceeds the breakeven point
2. If a company raises its target peso profit, a. The contribution margin ratio increases
its
b. The total contribution margin
a.Break-even point rises
exceeds the total fixed costs
b.Fixed cost increase
c. Total fixed costs per unit will
c.Required total contribution
remain constant
margin increases
d. The total contribution margin
d. Selling price rises
will turn from negative to
positive.
3. CVP analysis assumes all of the
following except:
8. Leverage company changed its cost
a. All costs are variable or fixed
structure by decreasing fixed costs and
b. Units manufactured equal units sold
increasing its
c. Total variable costs remain the
per-unit variable costs. The change
same over the relevant range.
a. Increase risk and increase potential
d. Total fixed costs remain the same profit
over the relevant range. b. Increase risk and decrease
4. The contribution income statement: potential profit
a. Reports gross margin c. Decreases risk and decreases
b. Is allowed for external potential profit
reporting to shareholders d. Decreases risk and increases
c. Categories costs as either potential profit
direct or indirect
d. It can be used to predict future 9. The margin of safety would be
profits at different levels of negative if a company
activity. a. Was presently operating at a
volume that is below the break-
5. Which of the following would increase even point.
the contribution margin per unit the most, b. Present fixed costs were less
if the entity has a P5 CM per unit? than its contribution margin
a. A 15% decrease in selling price c. Variable costs exceeded its fixed costs
b. A 15% increase in variable expense d. Degree of operating leverage is
c. A 15% increase in selling price greater than 100
d. A 15% decrease in variable
expenses
10.If the sales mix shifts toward lower
contribution margin products, the
break-even point
a. Increases
b. Decreases new cream will exceed the 40,000 units that
c. Remains constant the company can produce. Additional
d. None of the above manufacturing space can be rented from
another
11. Which of the following best
describes the impact of selling more
units?
a. The increase in sales volume
increases the total variable cost
b. The increase in sales volume
means an increase in total fixed
costs
c. The increase in sales increases the
contribution margin, causing net
income to stay constant
d. The increase in sales increases
the contribution margin per unit
causing the break-even point to
increase.
12. The degree of operating leverage for
Balloon Company is 7 and the degree of
operating leverage for Dirigible company
is 4. The two companies have identical
sales levels and net incomes. Which of the
following statements is incorrect?
a. The break-even quantity for
Balloon will be more than that for
Dirigible
b. The margin of safety or Ballon
will be less than that for
Dirigible.
c. The contribution margin for
Balloon will be more than that for
Dirigible
d. A 10% reduction in sales will cause
net income for Dirigible to be lower
than that for Balloon.
13. Blooming Corporation produces
skincare products. Enough Capacity exists
in the company’s plant to produce 40,000
units of the cream each month. Variable
costs to manufacture and sell one unit
would be P3.50, and fixed costs associated
with the cream would total P340,000 per
month. The company’s marketing
department predicts that demand for the
company at a fixed cost of 14,000 per b. P650 d. P 0
month. Variable costs in the rented
facility would total P4.00 per unit, due 17. Matias Corporation wishes to market a
to somewhat less efficient operations new product for P12.00 a unit. Fixed costs
than in the main plant. The new cream to manufacture this product are P800,000
will sell for P12.00 per unit. The for less than 500,000 units and
monthly break-even point for the new P1,200,000 for 500,000 or more units.
cream in units is: Contribution margin is 20%. How
a. 41,750 c. 43,111
b. 41,647 d. 44,250
14. The BLEEMING, the diehard
followers of BONA, is planning its
annual fans day. The operating
committee has assembled the
following expected costs for the event:
Dinner per person 70
Programs and Souvenir per person 30
Orchestra 15,000
Tickets and advertising 7,000
Auditorium rental
48,000 Floor show and
entertainment
10,000
The committee members would like to
charge P300 per person for the
evening’s activities. Assuming that
only 250 persons are expected to
attend the extravaganza, what ticket
price must be charged to break even?
a. P420 c. P320
b. P350 d. P390
16. The following information pertains
to Black Company
Cost-volume-profit relationship
Break-even point in units sold
1,000 Variable costs per unit
Total fixed costs
P150,000 How much will be
contributed to profit before income
taxes by the 1001st unit sold?
a. P500 c. P150
many units must be sold to realize a net What unit price would the company have to
income from this product of P500,000? charge to make P2,250 on a sale of
a. 433,333 1,500
b. 500,000
c. 541,667
d. 708,334
18. Clark Corporation’s goal is for
operating income to equal 6% of sales.
Clark estimates that the highest sleeping
price the market will bear is P115 per unit.
Clark expects to sell 100,000 units
expects to incur fixed costs of P3,500,000
and has an effective income tax rate of
40%. To achieve these plans, the target
variable cost per unit must be
a. P108.10 c. P68.50
b. P73.10 d. P62.75
19. The marketing department of Jerry Co.
proposed a price cut on its leading brand,
a product called “Tom”. From the
accounting records, these are available:
Price per unit P92
Discount to customers
10%
Direct cost per unit
P52.60 Var. operating expense per unit
P5.60
Proposed price cut per unit
P10 Estimated sales volume before
1,220 units the price cut
How much contribution margin will be lost
due to a price cut?
a. P13,000 c. 18,000
b. P10,980 d. 17,990
20.The cost to produce 24,000 units at
70% capacity is:
Direct materials P
Direct labor 5
Factory overhead, all fixed 2
Selling expense (35% variable; 2
65% fixed)
additional units that would be shipped out of
the normal market area?
a. P5.10 c.P4.10
b. P5.60 d. P5.00
21. Bauan Company had a 25%
margin of safety. Its after-tax return
on sale is 3.6%, and a tax rate of 40%.
What is Bauan’s contribution margin
ratio?
a. 9% c. 24%
b. 14.4% d. 62.5%
22. The Bonifacio Marketing Company
is expecting an increase of fixed costs
by P78,7590 upon moving their place
of business to the downtown area.
Likewise, it is anticipating that the
selling price per unit and the variable
expenses will not change. At present,
the sales necessary to break even is
P750,000 but with the expected
increase in fixed costs, the sales
necessary to break even would go up
to P975,000. Based on these
projections, what would be the total
fixed costs after the increase of
P78,750?
a. P341,250 c. P262,500
b. P183,750 d. P300,000
23. Gardiner Furniture Company
produces two kinds of chairs: an oak
model and a chestnut wood model.
The oak model sells for P60 and the
chestnut wood model sells for 100.
The variable expenses are as follows:
OAK CHESTNUT
Variable production P30 P35
per unit
Variable selling & 6 5
admin.
Expenses per
unit
Expected sales in units next year are: 26. Saber has a potential foreign customer
5,000 oak chairs and 1,000 chestnut who has offered to buy 1,500 tons at P450
chairs. Fixed expenses are budgeted at per ton. Assume that Saber’s costs would
P135,000 per year. be at the same levels and rates as last
The company’s overall contribution margin year. What net income after taxes would
ratio for the expected sales mix is: Saber make if it takes this order and
a. 40% c. 50% rejects some business from regular
b. 45% d. 60% customers so as not to exceed capacity?
a. P297,500 c. P283,500
Use the following information for the next five b. P252,000 d. P184,500
questions.
Saber Company's income statement 27. Without prejudice to your answers to
represents the operating results for the previous questions, assume that Saber
current calendar year ending December plans to market its product in a new
31. Saber had sales of 1,800 tons of territory. Saber estimates that an
product during the current year. advertising and promotion program
The manufacturing capacity of Saber costing P61,500 annually would need to
facilities is 3,000 tons of product. be undertaken for the next two or three
Consider each question’s situation years. In addition, a P25 per ton sales
separately. commission over and above the current
Sales P900,000 commission to the sales force in the new
Variable Costs territory would be required. How many
Manufacturing P315,000 tons would have to be sold in the new
Selling Costs territory to maintain Saber’s current after-
180,000 Total tax income of P94,500?
variable costs P495,000 a. 307.5 c. 273.33
Contribution margin b. 1,095 d. 1,545
P405,000
Fixed costs 28. Without prejudice to the preceding
Manufacturing P 90,000 questions, assume that Saber estimates
Selling 112,500 that the per ton selling price will decline
Admin 45,000 10% next year. Variable costs will increase
Total fixed costs P247,500 P40 per ton and the fixed costs will not
Net income before tax P157,500 change. What sales volume in pesos will
Income tax (63,000) be required to earn an after-tax net
Net Income after tax P 94,500 income of P94,500 next year?
24 The breakeven volume in tons of product for
the year is a. P1,140,000 c.
P1,50
0,000
a. 420 c. 495 b. P 825,000 d.
P1,35
0,000
b. 1,100 d. 550
25.If the sales volume is estimated to be prices and costs stay at the same levels
2,100 tons in the next year, and if the and amounts next year, the after-tax net
income that Saber can expect for next <Wash me wep wash me ney
year is ney>
a. P135,000 c. P283,500
b. 110,250 d. P184,500
<Eat well, live well>
