Mindanao State University

College of Business Administration and Accountancy

COST-VOLUME-PROFIT ANALYSIS
Accounting 142

COST-VOLUME-PROFIT ANALYSIS AND ITS ELEMENTS To ta l Re ve nue Line

and profits and the various changes in the respective values dependent To ta l Co st Line
on the level of activity or volume of sales is referred to as cost-volume-
profit (CVP) analysis. Used as a tool for both planning and control,
CVP analysis involves the following elements: Va ria ble Co st Line
A. Sales (both the selling price and sales volume).
B. Total fixed costs. BEP
C. Variable costs per unit.
D. Sales mix.
Contribution Margin Income Statement Fixe d Co st Line
An important element in the discussion of CVP analysis is the concept
of contribution margin. Contribution margin, also known as marginal
income or profit volume, is used to recover fixed expenses and any Units
excess are treated as profits. 0

Sales – Variable Costs = Contribution Margin The break-even chart clearly shows the relationship of cost, revenues
Traditional Income Statement and corresponding profits on corresponding levels of volume or
production.
Sales P xxx
Cost of goods sold (xxx) Profit Volume Graph
Gross profit P xxx
Operating expenses (xxx)
Net income P xxx P
r
Contribution Margin Income Statement o
Pro fit Line
Amount Per Unit Ratio f
Sales P xxx P xxx 100% i
Variable cost (xxx) (xxx) (VC/Sales) t
Contribution margin P xxx P xxx (CM/Sales) a 0
BEP
Re ve nue Line
Fixed cost (xxx)
L
Net income P xxx
o
s
INHERENT ASSUMPTIONS OF CVP ANALYSIS s
CVP analysis can only be used under certain conditions and when
Fixe d Co st
certain assumptions hold true. These assumptions are:
A. All costs are classifiable as either variable or fixed, thus, total Vo lum e Line
costs can be separated into fixed costs and variable costs.
B. Cost and revenue relationships are predictable and linear over The profit and loss at each of various levels is plotted and these points
a relevant range of activity and a specified period of time. are then connected to form a profit line. The breakeven point is
C. Total variable costs change directly with the cost driver but represented by the intersection of the profit line with the revenue line.
variable costs per unit are constant over the relevant range. The slope of the profit line is the contribution margin per unit if the
D. Total fixed costs are constant over the relevant range but fixed horizontal line is volume or contribution margin ratio if the horizontal
costs per unit vary inversely with the cost driver or volume. line is sales revenue.
E. Selling prices per unit and market conditions remain The profit-volume graph may be preferred to the breakeven chart
unchanged. because profit or loss at any point is shown specifically in the y-axis.
F. Sales volume equals production volume, that is, inventory However, this chart does not show how cost varies with volume or
levels remain constant. activity.
G. Sales mix remains constant over the range of sales volume
being considered. Formula Method
H. Technology, as well as productive efficiency, is constant. To compute for the break-even point involving a single type of product,
I. The time value of money is not considered or is ignored. the following formulas are used:
BREAKEVEN POINT ANALYSIS Total fixed costs
BEP in units =
The breakeven point is a situation wherein there is no loss or profit. Contribution margin per unit
Thus, it is the point where: Total fixed costs
BEP in pesos = Contribution margin ratio
Total Sales = Total Costs
Total Sales = Total Variable Costs + Total Fixed Costs = Break-even units x Sales price

Total Contribution Margin = Total Fixed Costs If the analysis involves multi-products, the following formulas are used:
Unit selling price = Average cost per unit A. Independent products
METHODS OF DETERMINING BREAK-EVEN POINT Total fixed costs
BEP in units =
Generally, in determining the breakeven point, two methods can be used Weighted contribution margin per unit
– the graphical method and the formula approach or the contribution Total fixed costs
margin method. Weighted contribution margin ratio
BEP in pesos =
Graphical Method
B. Package products
The breakeven point is represented by the intersection between the total
revenue line and the total cost line. Area below the breakeven point Total fixed costs
BEP in units =
represents the loss area while the area beyond the break-even point Composite contribution margin per unit
represents the profit area. Total fixed costs
BEP in pesos =
Break-even Chart Composite contribution margin ratio
Weighted (composite) average contribution margin per unit is computed
using the quantity mix while the weighted (composite) average
contribution margin ratio is computed using the revenue mix.

Prepared by: Mohammad Muariff S. Balang, CPA, First Semester, AY 2013-2014 Page|1 of 6
Graphical Approach versus Formula Approach An economist would depict a breakeven chart differently as follows:
Though the formula approach (also known as algebraic or contribution
margin approach) is not difficult to apply, most analysts resort to the
graphical approach in making breakeven and cost volume profit
analysis because of these advantages:
A. It is easier for most managers to understand and visualize
financial information presented graphically than those
presented in computational or scheduler formats.
B. With the use of charts, a wider range of activity can be
presented with much more information without necessarily
experiencing information overload.
C. Complex analyses or cases are made easier or simpler to solve
and understand with the use of graphs.
SALES WITH A DESIRED PROFIT
The break-even formula may be expanded to compute for the required
sales (in units or in pesos) to earn a desired amount of profit.
In an economist’s breakeven chart:
A. Single product A. The total cost line is not a straight line that climbs at a
Total fixed costs + Target profit constant rate as in the accountant’s breakeven chart. Instead,
RS in units = its slope increases moving from left to right because marginal
Contribution margin per unit
costs are likely to increase with output – given short term
Total fixed costs + Target profit
RS in pesos = capacity constraints.
Contribution margin ratio
B. The revenue line is not a straight line as in the accountant’s
B. Multi-products chart. The line becomes less steep to depict the need to reduce
Total fixed costs + Target profit unit selling prices in order to achieve higher sales volumes.
RS in units = C. Within the middle range of the economist’s chart, it would be
Weighted contribution margin per unit
very similar to the accountant’s breakeven chart. This area is
Total fixed costs + Target profit
RS in pesos = the relevant range.
Weighted contribution margin ratio
D. The constant cost and price assumptions are likely to be
Desired Profit Expressed in as a Percentage of Sales unreliable at very high or very low levels of activity.
When the desired profit is expressed not as an amount in pesos but as a Thus, it is unreliable to assume that the CVP relationships depicted in
certain percentage of sales or on a per unit basis, the formulas are breakeven analysis are relevant across a wide range of activity.
revised as follows: Managers should ensure that they work within the relevant range for the
Total fixed costs available data, that is, within the range over which the depicted cost and
RS in units = Contribution margin per unit – Target profit per revenue relationships are more reliable.
unit
MARGIN OF SAFETY
Total fixed costs Margin of safety refers to the amount of peso sales or the number of
RS in pesos =
Contribution margin ratio – Target profit ratio units by which actual or budgeted sales may be decreased without
Effect of Income Tax resulting into a loss. The larger the margin of safety, the more likely it is
At break-even point, income taxes are irrelevant or have no effect on that a profit will be made, that is, if sales start to fall there is more
the break-even sales because there are no profits at this level of sales. leeway before the organization begins to incur losses.
However, income tax will increase the desired sales volume if it is Margin of safety could also refer to the excess of sales over breakeven
included in the computation of the target profit. Thus, before using the that will bring forth profit. Thus, all contribution margin derived from
formulas above, it is necessary that the “after tax” profit be converted the margin of safety is regarded as profit.
first to “before tax” profit, that is, divide the “after tax” profit by (1 less Total budgeted or actual sales P xxx
the tax rate). Breakeven sales (xxx)
Margin of safety P xxx
SALES WITH MULTIPLE COST DRIVERS
Generally, units produced is used as the cost driver of all fixed costs. The margin of safety should be expressed as a percentage of projected
However, there are certain costs that may be variable in nature but sales to put it in perspective. Relevant formulas follow:
whose cost driver may not be based on the units produced but on other Margin of safety
MS Ratio = Actual or budgeted sales
cost drivers, thus should be treated as fixed cost taking into
consideration that units produced serves as the primary cost driver. Profit ratio
MS Ratio = Contribution margin ratio
In this instance, there is a need to compute first the total cost of the
fixed cost based on each cost driver to be able to get the total fixed cost
to be allocated to each unit produced. Breakeven sales
BS Ratio = Actual or budgeted sales
Cost driver x activity + Other fixed costs
BEP in units = Fixed cost ratio
Contribution margin per unit MS Ratio = Contribution margin ratio
Cost driver x activity + Other fixed costs
BEP in pesos =
Contribution margin ratio Complementary Ratios
BREAK-EVEN POINT UNDER ABSORPTION COSTING The relationships below are useful in CVP analysis as well as in
Under absorption costing, fixed manufacturing costs are allocated breakeven analysis:
between inventory and cost of goods sold accounts unlike in variable Variable cost ratio xx%
costing where all fixed costs, both manufacturing and operating, are Contribution margin ratio xx%
treated as expenses. Hence, the break-even point under absorption Total sales 100%
costing is a function of both sales and production. This is different with
the breakeven point determine under variable costing where sales and Margin of safety ratio xx%
production volume do not have any effect. To compute for the break- Break-even ratio xx%
even point under the absorption costing method, the following formula Total sales 100%
is used:
Profit ratio xx%
Total fixed cost + Fixed manufacturing cost per Fixed cost ratio xx%
BEP in units (X) = unit (X – Total units produced) a
Contribution margin ratio 100%
Contribution margin per unit
Total fixed cost + Fixed manufacturing cost per OPERATING LEVERAGE
BEP in pesos (X) = unit (X – Total units produced) Firms normally operate under cost structures where both variable and
Contribution margin ratio fixed costs are utilized. Adopting a cost structure that is heavily variable
a
– represents fixed costs of the inventory portion suppose that has its own advantages and disadvantages so does adopting a cost
actual sales equal breakeven sales. structure that is heavily fixed. The extent to which a company uses
fixed costs in its structure is referred to as operating leverage. Leverage
ECONOMIST’S BREAKEVEN CHART
is achieved by increasing fixed costs while lowering variable costs.

Prepared by: Mohammad Muariff S. Balang, CPA, First Semester, AY 2013-2014 Page|2 of 6
The degree of operating leverage is used to measure how sensitive point. On the other hand, the product with the lower fixed cost is
profit before tax is to percentage change in sales. It serves as a favorable if the demand is less than the indifference point.
multiplier effect as it measures, at a given level of sales, how a
percentage change in sales will affect profit. COST-VOLUME PROFIT SENSITIVITY ANALYSIS
Sensitivity analysis when incorporated in CVP analysis concerns about
Degree of OL =
Total contribution margin predicting the outcome of profit given the changes in the variables of
Profit before tax profit. A change in any of the following factors may cause profit to
Percentage change in profit change:
Degree of OL = Percentage change in sales A. Selling price – an increase in selling price, assuming all other
The degree of operating leverage will never be less than 1 because factors remaining the same, results into:
contribution margin will always be equal or greater than the profit  An increase in total sales. The percentage change in
before tax. Further, it is not constant as the level of sales changes. It total sales is equal to the percentage change in
should be recomputed for each level of starting sales. selling price.
 An increase in peso contribution margin per unit
LOW OPERATING LEVERAGE – Merchandising Firms and in total. When there is no change in variable
cost, the change in peso sales (in total and in units)
is equal to the change in contribution margin (total
and per unit) but the percentage changes are not
necessarily equal.
 An increase in profit and profit percentage. When
there is no change in fixed cost, the change in total
contribution margin in pesos due to the change in
sales is equal to the change in profit but the
percentage change is not necessarily equal.
 A decrease in breakeven point in units and in pesos.
 Unchanged variable cost per unit, total variable cost
and total fixed cost.
B. Variable cost per unit – an increase in variable cost per unit,
MEDIUM OPERATING LEVERAGE – Manufacturing Firms all other factors remaining the same, results into:
 An increase in total variable cost. The percentage
change in variable cost per unit is equal to the
percentage change in total variable cost.
 A decrease in peso contribution margin per unit and
in total. When there is no change in sales, the
change in variable cost (in total and per unit) is
equal to the change in contribution margin (in total
and per unit), though in opposite directions
(increase in variable costs results into a decrease in
contribution margin) but the percentage changes are
not necessarily equal.
 A decrease in profit and profit percentage. When
there is no change in fixed costs, the change in total
HIGH OPERATING LEVERAGE – E-Commerce Firms contribution margin due to the change in variable
cost is equal to the change in profit but the
percentage changes are not necessarily equal.
However, the change in profit percentage is equal to
the change in contribution margin ratio.
 An increase in breakeven point in units and in
pesos.
 Unchanged selling price per unit, total sales and
total fixed cost.
C. Volume – an increase in sales volume or number of units sold
results into:
 An increase in total sales, total variable cost and
total peso contribution margin. The percentage
change in volume is the same with the percentage
Operating Leverage and Margin of Safety change in total sales, total variable cost and total
The degree of operating leverage and the margin of safety ratio are contribution margin but the total peso changes are
inversely proportional to each other. not necessarily the same.
1
 An increase in profit. Assuming the fixed cost is
Degree of OL = constant, the amount of change in peso contribution
Margin of safety ratio
margin is equal to the peso change in total profit but
INDIFFERENCE POINT IN CVP ANALYSIS the percentage changes are not necessarily equal.
CVP analysis can be used in comparing alternative cost structures or  Unchanged unit selling price, unit variable cost, unit
selling prices such as: contribution margin contribution margin ratio, total
A. High salary with low commission versus lower salary with fixed cost and breakeven point in pesos and in units.
higher commission for sales persons. D. Total fixed costs – an increase in total fixed costs, with all
B. Highly automated production process with low variable cost other factors remaining the same, results into:
per unit versus lower technology with higher variable costs  Decrease in total profit. The amount of change in
per unit and lower fixed costs. fixed cost is equal to the amount of change in profit
C. Broad advertising campaign with higher selling prices versus though in opposite directions but the percentage
minimal advertising and lower selling prices. changes are not necessarily equal.
Indifference point between alternatives is the level of sales in units or  Increase in breakeven point in units and in pesos.
sales pesos where the profits of the alternatives are equal. The percentage change in fixed cost is equal to the
Profita = Profitb percentage change in breakeven point.
 Unchanged sales (in units and in pesos), variable
Fixed costs a – Fixed costs b
IP in pesos =
CM ratioa – CM ratiob cost (per unit, in total and as a ratio of sales) and
contribution margin (per unit, in total and as a ratio
Fixed costs a – Fixed costs b of sales).
IP in units =
CM per unita – CM per unitb
E. Sales mix – if the sales mix ratio is changed, profit would
For decision making purposes, the product with the higher contribution also change. A shift into a sales mix with more of the product
margin ratio is favorable if the demand is greater than the indifference with a higher contribution margin, with all other factors

Prepared by: Mohammad Muariff S. Balang, CPA, First Semester, AY 2013-2014 Page|3 of 6
 remaining the same, would result into a decreased breakeven be more of the product that gives a higher contribution
point in pesos and in units, increased contribution margin and margin.
increased profit. B. Pricing policy to follow.
The effects of decreases in the profit factors mentioned would result Prices should be set at an amount that is enough to recover
into the opposite of those observations discussed except those where the both the fixed costs and variable costs and provide an
increases have no effect on the variables stated. acceptable amount of profit.
APPLICATIONS OF CVP ANALYSIS C. Marketing strategy to use and type of productive facilities
CVP analysis is very useful for planning and decision making, which to acquire.
may involve choosing the: Firms can use CVP analysis concepts in choosing the type of
A. Type of product to produce and sell. marketing strategy to use and the type of productive facilities
Products that give a higher contribution margin are preferred to acquire, that is, those that incur primarily variable costs or
over those that give a lower contribution margin. In the case those that incur primarily fixed costs.
of multi-products, the sales mix, as far as applicable, should
ILLUSTRATIVE PROBLEMS

PROBLEM 1: Below are three independent situations regarding cost Number in units sold ? 12,000 4,000
volume profit relationships. In each case, provide for the missing
amounts. Contribution margin ratio ? 100% 25%

Case Selling Price Units Sold Total Sales VC Ratio PROBLEM 5: Mount Carmel Company sells only two products –
A P 40.00 ? ? 60% Product A and Product B. Relevant information regarding these
products are as follows:
B P 80.00 4,000 ? ?
Product A Product B
C P 25.00 15,000 ? ? Selling prices P 40.00 P 50.00
Variable cost per unit 24.00 40.00
Case CM Ratio Total CM Fixed Costs Net Income Mount Carmel’s total fixed costs is P840,000. In addition, Mount
A ? ? P 60,000 P 18,000 Carmel sells two units of Product A for each unit it sells of Product B
and it faces a tax rate of 30%.
B ? P 80,000 ? P (10,000)
Requirements:
C 30% ? ? P 50,000 1. What is the breakeven point in units and in pesos for each
product assuming the sales mix is two units of Product A for
PROBLEM 2: Luna Medic Company’s accountants have prepared the each unit of Product B?
following contribution margin income statement for the company for 2. What is the breakeven point in units and in pesos for each
the year 2013 for use by the management in planning its operations for product if Mount Carmel’s tax rate is reduced to 25%, assuming
2014: the sales mix is two units of Product A for each unit of Product
B?
Luna Medic Company 3. How many units of each product would be sold if Mount Carmel
Income Statement desired an after tax net income of P73,500 facing a tax rate of
For the Year Ended December 31, 2013 30%?
Sales (6,000 units) P 480,000 PROBLEM 6: Based on the scanty information given in each
Variable costs 180,000 independent case below, determine the amount of each item required:
Contribution margin P 300,000 Case A: Breakeven ratio 64%
Fixed costs 60,000 Net profit ratio 12%
Income before tax P 240,000 Fixed costs P 128,000
Income tax (40%) 96,000 Actual sales ?
Net income P 144,000
Case B: Net profit ratio 12%
Requirements: PV ratio 30%
1. Compute for the breakeven point in units and in pesos. Sales P 200,000
2. Without computing, how much contribution margin is generated Breakeven sales volume ?
at breakeven point? Case C: Net profit ratio 7 ½%
3. How much would be the increase in before tax profit assuming Variable cost ratio 70%
sales are P600,000? Breakeven sales volume P 150,000
4. Compute for the margin of safety in pesos and the margin safety Actual sales ?
ratio? Case D: Net profit ratio 7%
5. Compute for the number of sales units and the amount of peso Breakeven ratio 80%
sales to earn a before tax profit of P200,000. Total variable costs P 260,000
6. Compute for the amount of sales required to earn an after tax Margin of safety in pesos ?
profit of P60,000. Total fixed costs ?
7. How much peso sales are required to earn a before tax return on Case E: Variable cost ratio 65%
sales of 22.5%? Breakeven ratio 60%
8. Compute for the degree of operating leverage. Net profit P 56,000
PROBLEM 4: Three independent situations involving cost volume Margin of safety in pesos ?
profit situations follow. In each case, determine the missing amounts. Total fixed costs ?
PROBLEM 7: Sun Company has, for the coming year, budgeted sales
Case A Case B Case C of P1,200,000 with contribution margin of 40% and fixed costs of
Selling price per unit P ? P 2.00 P 8.00 P240,000. The company’s only product line sells for P60. The company
is subject to 40% tax bracket.
Variable cost per unit 2.10 ? ?
Requirements:
Fixed cost per unit 0.60 ? 3.00
1. If the company determined that a particular advertising
Contribution margin per unit 0.90 ? ? campaign had a high probability of increasing sales by P80,000,
how much could it pay for such a campaign without reducing its
Total fixed costs 180,000 ? ?
planned annual profits?
Net income (loss) 90,000 16,000 ? 2. A plan of Sun Company includes an increase in advertising cost
of P48,000. What is the minimum increase in peso sales to
Breakeven points in sales 600,000 ? ?
compensate for the increase in advertising cost?
Breakeven point in units 200,000 ? ? 3. If the company wants an after tax profit of P300,000 on its
expected sales volume of 20,000 units, what price should Sun
Margin of safety in units ? 8,000 ?
charge?

Prepared by: Mohammad Muariff S. Balang, CPA, First Semester, AY 2013-2014 Page|4 of 6
 4. The company is considering offering its salespeople a 5% Sam’s fixed costs for 2011 are expected to be P240,000. Sam’s only
commission on sales. What would be the total peso sales other costs will be variable costs of P60 per shipment for preparing the
required in order to implement the commission plan and still invoice and delivery documents, organizing the delivery and following
earn the planned pre-tax income of P240,000? up for collecting accounts receivable. The P60 cost will be incurred
5. The operations manager believes variable cost will increase by each time Sam ships an order of sticker books, regardless of the number
P1.20 per unit. The sales manager believes the selling price can of sticker books in the order. Sam anticipates making 500 shipments
be increased. What is the new selling price that will give the and 600 shipments in 2011 and 2012 respectively.
same contribution margin ratio? Requirements:
PROBLEM 8: The Yellow Bell Company provides you with the 1. How many sticker books must Sam sell to breakeven in 2011?
following information: 2. How many sticker books must Sam sell to breakeven in 2012?
Fixed costs per annum P 400,000 PROBLEM 12: Southern Ski Company recently expanded its
Breakeven sales 1,000,000 manufacturing company. The firm will now be able to produce up to
Net income 240,000 15,000 pairs of cross city skis of either the mountaineering model or the
Annual sales in units 32,000 units touring model. The sales department assures management that it can sell
Requirements: between 9,000 and 13,000 pairs of either product this year. Because the
models are very similar, Southern Ski will produce only one of the two
1. Compute for the firm’s sales and variable costs for the year.
models. The following data were compiled:
2. What is the firm’s selling price per unit?
3. If the firm were able to change its variable cost ratio to 55%, Touring Mountaineering
would the breakeven sales change? Selling price per unit P 132.00 P 120.00
4. If the firm were able to change its sales volume by 5% without a Variable cost per unit 79.20 79.20
change in its selling price, variable costs or fixed costs, would Fixed costs will total P554,400 if the touring model is produced but will
this change the breakeven point? be only P475,200 if the mountaineering model is produced. Southern
5. If the firm were able to increase both its selling price and Ski is subject to a 40% income tax rate.
variable cost by 10%, would the breakeven point in units or in Requirements:
pesos change?
1. If Southern Ski Company desires an after tax profit of P33,120,
PROBLEM 9: Michael Cage, Inc. makes a high quality wooden how many pairs of mountaineering model skis will the company
birdhouse that sells for P20 per unit. Variable costs are P8 per unit and have to sell?
fixed costs total P180,000 per year. The operating results last year were: 2. How much total sales revenue at which Southern Ski Company
Sales P 400,000 would make the same profit or loss regardless of the ski model it
Variable costs 160,000 decided to produce?
Contribution margin P 240,000 3. How much would the variable cost per unit of the
Fixed costs 180,000 mountaineering model have to change before it had the same
Net income P 60,000 breakeven point in units as the touring model?
4. If the variable cost per unit of the mountaineering skis decreases
Requirements: by 10% and the total fixed cost of mountaineering skis increases
1. Due to an increase in demand, the company estimates that sales by 10%, what is the new breakeven point in number of pairs?
will increase by P75,000 next year. By how much should net 5. At what number of pairs would the production of either
income increase (decrease) assuming that fixed costs do not mountaineering or touring model give equal profit?
change? 6. If the Southern Ski Company sales department could guarantee
2. Compute for the degree of operating leverage at the current level the annual sale of 12,000 skis of either model, which model
of sales. should Southern Ski produce and sell?
3. The president expects sales to increase by 20% next year. By
what percentage should net income increase? PROBLEM 13: Step Company, a corporation subject to 20% tax rate,
4. Assume that the company sold 18,000 units last year. The sales produces toys and other items for use in beach and resort areas. A small,
manager is convinced that a 10% reduction in the selling price inflatable toy has come onto the market that the company is anxious to
combined with a P25,000 increase in advertising would cause produce and sell. Enough capacity exists in the company’s plant to
annual sales in units to increase by one third. Compute the produce 16,000 units of the toy each month. Variable costs to
amount of income, first before the proposed change and then manufacture and sell one unit would be P12.50, and fixed costs
after the change is implemented. associated with the toy would total P350,000 per month.
5. Assume that the company sold 18,000 units last year. The The company’s Marketing Department predicts that demand for the new
president does not want to change the selling price. Instead, he toy will exceed the 16,000 units that the company is able to produce.
wants to increase the sales commission by P1 per unit. He thinks Additional manufacturing space can be rented from another company at
that this move, combined with some increase in advertising a fixed cost of P15,000 per month. Variable costs in the rented facility
would increase annual sales by 25%. By how much could would total P15 per unit, due to somewhat less efficient operations than
advertising be increased with profits remaining unchanged? in the main plant. The new toy will sell for P30 per unit.
PROBLEM 10: The Blue Jelly Company manufactures and sells two Requirements:
products. The selling prices and variable costs of the products are as 1. Compute for the breakeven point in units and in pesos of Step
follows: Company.
Bluejets Bluepens 2. How many units should the company need to sell in order to
Selling prices P 20.00 P 40.00 earn an after-tax profit of P150,000?
Variable costs 8.00 24.00 3. If the sales manager receives a bonus of P1.00 for each unit sold
The sales for the year 2013 were in the ratio of 3 Bluejets to 1 Bluepen. in excess of the break-even point, how many units must be sold
Sales volume for 2013 was P1,000,000. Fixed costs for 2013 amounted each month to earn a return of 25% on the monthly investment
to P390,000. in fixed costs?
4. Assuming that Step Company will just rent a manufacturing
Requirements:
space for a month in order to produce special order for 8,000
1. Compute for the number of units sold in 2013 for each product. toys, what is the acceptable minimum selling price to Step
2. Compute for the breakeven sales in pesos and in units. Company for the special sale?
3. Compute for the composite breakeven for the company.
4. If the sales mix was to change to 2 units of Bluejets to 1 unit of PROBLEM 14: The following data relate to Harvester Company which
Bluepen, what would be the new breakeven sales in units and in sells a single product:
pesos? Selling price per unit P 80.00
5. Assuming that the sales volume would remain at P1,000,000 but Purchase cost per unit 55.00
the sales mix was to change to 2 units of Bluejets to 1 unit of Sales commission 12.00
Bluepen, what net income would be generated? Monthly fixed costs 180,000
6. What sales revenue would be required if the firm wishes to The firm’s three salespersons would like to change their compensation
generate a net income of P286,000 if the original mix of 3 is to 1 from a 15% commission to a 7.5% commission plus P12,500 each per
prevailed? month in fixed salary. Currently, they only receive commissions as their
PROBLEM 11: Sam Uy is a distributor of sticker books. For 2011, he compensation.
plans to purchase sticker books for P30 each and sell them for P45 each. Requirements:

Prepared by: Mohammad Muariff S. Balang, CPA, First Semester, AY 2013-2014 Page|5 of 6
 1. What annual sales volume in units would the two cost structures 2. At what level of production would the automation of the
be indifferent? production process be indifferent to the present process?
2. The change in compensation plan should change the annual 3. Which of the two methods (the present or the automated) has
break-even point by how many units? higher income at the level of sales of 26,000 units?
3. Assuming the expected sales for next month is 6,000, should PROBLEM 16: Ms. Andrea Chadwick, the company president, has
Harvester Company agree with the salespersons’ request? heard that there are multiple breakeven points for every product. She
PROBLEM 15: Due to erratic sales of its sole product, a high capacity does not believe this and has asked you to provide the evidence of such
battery for laptop computers, Salcedo Company has been experiencing a possibility. Some information about the company for 2011 is as
difficulty for some time. The company’s income statement for the most follows:
recent month is given below: Total fixed manufacturing overhead P 180,000
Sales (19,500 units at P300) P 5,850,000 Total other fixed expenses 200,000
Variable costs 4,095,000 Total variable manufacturing expenses 120,000
Contribution margin P 1,755,000 Total other variable expenses 120,000
Fixed costs 1,800,000 Selling price per unit P 40.00
Net loss P (45,000) Units produced 30,000 units
By automating certain operations, the company could reduce variable Budgeted production 30,000 units
costs by P3 per unit. However, fixed costs would increase by P72,000 Units sold 25,000 units
each month.
Requirements:
Requirements: 1. Determine the breakeven sales in units under both variable
1. How would the breakeven point in units change if the company costing and absorption costing.
automated the operations? 2. Determine the breakeven sales in units using absorption costing
if the production units are actually 25,000?

Prepared by: Mohammad Muariff S. Balang, CPA, First Semester, AY 2013-2014 Page|6 of 6