Module 3 CVP Answers
Module 3 CVP Answers
Module 3 CVP Answers
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
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
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
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
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
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
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
11.YES
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.
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%
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%
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
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
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
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%
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
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
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.
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
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
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
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
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
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
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
5. X = P1,800,000 + P.12X
1 - .3 = P4,973,684
P2,560/P4,800
5. X = P1,800,000 + P.12X
1 - .3 = P4,973,684
P2,560/P4,800
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?
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:
$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
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