04 x04 Cost-Volume-Profit Relationships

Cost-Volume-Profit Analysis
COST-VOLUME-PROFIT ANALYSIS 7. Which of the factors is (are) involved in studying cost-volume-profit relationships?
A. Levels of production C. Fixed costs
THEORIES: B. Variable costs D. All of these
1. To which function of management is CVP analysis most applicable?
A. Planning C. Directing 8. At the breakeven point, fixed cost is always
B. Organizing D. Controlling A. Less than the contribution margin C. More than the contribution margin
B. Equal to the contribution margin. D. More than the variable cost
2. The systematic examination of the relationships among selling prices, volume of
sales and production, costs, and profits is termed: 9. At the break-even point:
A. contribution margin analysis C. budgetary analysis A. net income will increase by the unit contribution margin for each additional item
B. cost-volume-profit analysis D. gross profit analysis sold above break-even.
B. the total contribution margin changes from negative to positive
3. The term contribution margin is best defined as the: C. fixed costs are greater than contribution margin
A. difference between fixed costs and variable costs. D. the contribution margin ratio begins to increase
B. difference between revenue and fixed costs.
C. amount available to cover fixed costs and profit. 10. In cost-volume-profit analysis, the greatest profit will be earned at
D. amount available to cover variable costs. A. One hundred percent at normal productive capacity.
B. The production point with the lowest marginal cost.
4. Cost-volume-profit analysis allows management to determine the relative C. The production point at which average total revenue exceeds average marginal
profitability of a product by cost.
A. Highlighting potential bottlenecks in the production process. D. The point at which marginal cost and marginal revenue are equal.
B. Determining the contribution margin per unit and projected profits at various
levels of production. 11. Which of the following is not an assumption underlying C-V-P analysis?
C. Assigning costs to a product in a manner that maximizes the contribution margin. A. The behavior of total revenue is linear.
D. Keeping fixed costs to an absolute minimum. B. Unit variable expenses remain unchanged as activity varies.
C. Inventory levels at the beginning and end of the period are the same.
5. Cost-volume-profit analysis cannot be used if which of the following occurs? D. The number of units produced exceeds the number of units sold.
A. Costs cannot be properly classified into fixed and variable costs.
B. The per unit variable costs change. 12. Which of the following assumptions is inherent to C-V-P analysis?
C. The total fixed costs change. A. In manufacturing firms, the beginning and ending inventory levels are the same.
D. Per unit sales prices change. B. In a multi-product organization, the sales mix varies over time.
C. The behavior of total revenue is curvilinear.
6. The most useful information derived from a breakeven chart is the D. he relevant range is not a consideration.
A. Amount of sales revenue needed to cover enterprise variable costs.
B. Amount of sales revenue needed to cover enterprise fixed costs. 13. Which of the following assumptions is closely relevant to cost-volume-profit
C. Relationship among revenues, variable costs, and fixed costs at various levels of analysis?
activity. A. for multiple product analysis, the sales mix is not important
D. Volume or output level at which the enterprise breaks even. B. inventory levels remain unchanged
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C. total fixed costs and unit variable costs can be identified and remain constant 19. Pines Company has a higher degree of operating leverage than Tagaytay Company.
over the relevant range Which of the following is true?
D. B and C A. Pines has higher variable expense.
B. Pines is more profitable than Tagaytay Company’s.
14. Advocates of cost-volume-profit analysis argue that: C. Pines is more risky than Tagaytay is.
A. Fixed costs are irrelevant for decision making. D. Pines' profits are less sensitive to percentage changes in sales.
B. Fixed costs are mandatory for CVP decision making.
C. Differentiation between the patterns of variable costs and fixed costs is critical. 20. As projected net income increases the
D. Fixed costs are necessary to calculate inventory valuations. A. degree of operating leverage declines. C. break-even point goes down.
B. margin of safety stays constant. D. contribution margin ratio goes up.
15. With respect to fixed costs, C-V-P analysis assumes total fixed costs
A. per unit remains constant as volume changes 21. Given the following notations, what is the breakeven sales level in units?
B. remain constant from one period to the next SP = selling price per unit
C. vary directly with volume FC = total fixed cost
D. remain constant across changes in volume VC = variable cost per unit
A. SP / (FC/VC) C. VC/(SP – FC)
16. The CVP model assumes that over the relevant range of activity: B. FC/(VC/SP) D. FC/(SP – VC)
A. only revenues are linear. C. unit variable cost is not constant.
B. total fixed cost changes. D. revenues and total costs are linear. 22. A company increased the selling price for its product from P1.00 to P1.10 a unit
when total fixed costs increased from P400,000 to P480,000 and variable cost per
17. Which of the following is not a limiting factor of Cost-Volume-Profit analysis? unit remained unchanged. How would these changes affect the breakeven point?
A. The process assumes a linear relationship among the variables. A. The breakeven point in units would be increased.
B. The process assumes variable costs per unit are available. B. The breakeven point in units would be decreased.
C. Efficiency is assumed to be constant. C. The breakeven point in units would remain unchanged.
D. Inventory levels are assumed to not change. D. The effect cannot be determined from the information given.
18. Cost-volume-profit analysis is a technique available to management to understand 23. On January 1, 2007, Incremental Company increased its direct labor wage
better the interrelationships of several factors that affect a firm's profit. As with many rates. All other budgeted costs and revenues were unchanged. How did this
such techniques, the accountant oversimplifies the real world by making increase affect Incremental Company’s budgeted break-even point and
assumptions. Which of the following is not a major assumption underlying CVP budgeted margin of safety?
analysis?
A. B. C. D.
A. All costs incurred by a firm can be separated into their fixed and variable
Budgeted Break-even Point Increase Increase Decrease Decrease
components.
Expected Margin of Safety Increase Decrease Decrease Increase
B. The product’s selling price per unit is constant at all volume levels within a
relevant range.
C. Operating efficiency and employee productivity is constant at all volume levels. 24. As the variable cost increases but the selling price remains constant, the
D. For multi-product situations, the sales mix can vary at different volume levels. A. Degree of operating leverage declines C. Breakeven point goes down
B. Margin of safety stays constant D. Contribution margin ratio goes up
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25. A very high degree of operating leverage (DOL) indicates that a firm: A. The area of loss represents the difference between Sales and Variable Cost.
A. has high fixed costs. C. has high variable costs. B. The area of loss begins with the concept that fixed costs have to be recovered
B. has a high net income. D. is operating close to its breakeven prior to sales contributing to profit.
point. C. The area of profit represents the difference between Sales and Variable Cost.
D. The area of profit begins with the concept that no company would have any level
26. With the aid of computer software, managers can vary assumptions regarding selling of sales below the break-even point.
prices, costs, and volume and can immediately see the effects of each change on the
break-even point and profit. Such an analysis is called 31. Which of the following best describes the impact of selling more units?
A. “What if” or sensitivity analysis. C. Computer aided analysis. A. The increase in sales volume increases total variable cost.
B. Vary the data analysis. D. Data gathering. B. The increase in sales volume means an increase in total fixed cost.
C. The increase in sales increases contribution margin, causing net income to
27. If a company raises its target peso profit, its decrease.
A. break-even point rises. D. The increase in sales increases contribution margin per unit causing the break-
B. fixed costs increase. even point to decrease.
C. required total contribution margin increases.
D. selling price rises. 32. On a cost-volume-profit chart (break-even graph), where are the total fixed costs
shown?
28. Broadway Company sells three products: A, B and C. Product A's unit contribution A. As the point where the sales line intersects the vertical axis (pesos)
margin is higher than Product B's which is higher than Products C's. Which one of B. As the point where the sales line crosses the total cost line
the following events is most likely to increase the company's overall break-even C. As the point where the sales line crosses the horizontal axis (volume)
point? D. As the point where the total cost line intersects the vertical axis (pesos)
A. The installation of new automated equipment and subsequent lay-off of factory
workers. 33. When using conventional cost-volume-profit analysis, some assumptions about costs
B. A decrease in Product C's selling price. and sales prices are made. Which of the following is one of those assumptions?
C. An increase in the overall market demand for Product B. A. The contribution margin will change as volume increases
D. A change in the relative market demand for the products, with the increase B. The variable cost per unit will decrease as volume increases
favoring Product A relative to Product B and Product C. C. The sales price per unit will remain constant as volume increases
D. Fixed cost per unit will remain the same as volume increases
29. Which of the following is not a benefit of using sensitivity analysis?
A. More people can see the impact of their ideas on the project. 34. Classifying a cost as fixed or variable depends on how it behaves
B. The use of a spreadsheet program increases the accuracy of the projections. A. per unit, as the volume of activity changes.
C. What will happen is not known in advance so a variety of options can be B. in total, as the volume of activity changes.
explored prior to making a decision. C. both A and B are correct.
D. A well-written spreadsheet will allow for a variety of questions to be answered in D. none of the above.
a minimal amount of time.
35. A fixed cost is the same percentage of sales in three different months. Which of the
30. A Cost-Volume-Profit graph contains an "Area of Loss" and an "Area of following is true?
Profitability". Which of the following best explains the difference between the two A. The company had the same sales in each of those months.
points on the graph? B. The cost is both fixed and variable.
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C. The company is operating at its break-even point. A. Number of units sold. C. Total fixed costs.
D. The company is achieving its target level of profit. B. Variable cost per unit. D. Sales price per unit.
36. Per-unit variable cost 44. The margin of safety is a key concept of CVP analysis. The margin of safety is
A. remains constant within the relevant range. A. The contribution margin rate.
B. increases as volume increases within the relevant range. B. The difference between budgeted contribution margin and actual contribution
C. decreases as volume increases within the relevant range. margin.
D. decreases if volume increases beyond the relevant range. C. The difference between budgeted contribution margin and breakeven
contribution margin
37. In planning product mix for maximum profit, CVP analysis would stimulate sales of D. The difference between budgeted sales and breakeven sales.
the product by increasing the:
A. sales price C. contribution margin 45. A technique for determining what would happen in a decision analysis if a key
B. variable cost per unit D. emphasis on customer priority prediction or assumption proves to be wrong is called:
A. CVP analysis. C. Post-audit analysis.
38. A relatively low margin of safety ratio for a product is usually an indication that the B. Sensitivity analysis. D. Contribution-margin variation
product: analysis.
A. is losing money
B. has a high contribution margin 46. An increase in the unit variable cost will generally cause an increase in all of the
C. is riskier than higher margin of safety products following except
D. is less risky than higher margin of safety products A. the break-even point. C. total variable costs.
B. contribution margin. D. unit selling price.
39. Within the relevant range, total revenues and total costs
A. increase, but at a decreasing rate. C. remain constant. 47. The most likely strategy to reduce the breakeven point would be to
B. decrease. D. can be graphed as straight lines. A. Increase both the fixed costs and the contribution margin.
B. Decrease both the fixed costs and the contribution margin.
40. An assumption in a CVP analysis is that a change in costs is caused by a change in C. Decrease the fixed costs and increase the contribution margin.
A. unit direct material cost C. sales commission per unit D. Increase the fixed costs and decrease the contribution margin.
B. the number of units D. efficiency due to learning curve effect
48. The break-even point in total sales decreases when:
41. In CVP analysis, when the number of units changes, which one of the following will A. variable cost increases and sales remain unchanged
remain the same? B. variable cost increases and sales increase
A. Total sales revenues C. Total fixed costs C. fixed cost increases
B. Total variable costs D. Total contribution margin D. fixed cost decreases
42. As fixed costs for a firm rise, all other things held constant, the breakeven point will 49. Which of the following best describes the impact of an increase in fixed cost?
A. be unchanged C. increase A. The increase in fixed cost will result in an increase in selling more units.
B. not be affected by fixed costs D. decrease B. The increase in fixed cost will cause an increase in variable cost.
C. The increase in fixed cost causes net income to decrease and the break-even point
43. Which of the following would not affect the breakeven point? to decrease.
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D. The increase in fixed cost causes net income to decrease and the break-even point the traditional format are shown by function, while the expenses shown under the
to increase. contribution format are shown by function and cost behavior.
50. A company’s breakeven point in peso sales may be affected by equal percentage 54. If a company is operating at a loss,
increases in both selling price and variable cost per unit (assume all other factors are A. fixed costs are greater than sales.
equal within the relevant range). The equal percentage changes in selling price and B. selling price is lower than the variable cost per unit.
variable cost per unit will cause the breakeven point in peso sales to C. selling price is less than the average total cost per unit.
A. Decrease by less than the percentage increase in selling price. D. fixed cost per unit is greater than variable cost per unit.
B. Decrease by more than the percentage increase in the selling price.
C. Increase by less than the percentage increase in selling price. 55. As volume increases, average cost per unit
D. Remain unchanged. A. increases.
B. decreases.
51. If the fixed costs attendant to a product increase while variable costs and sales C. remains constant.
price remains constant, what will happen to contribution margin (CM) and D. increases in proportion to the change in volume.
breakeven point (BEP)?
A. B. C. D. 56. If all goes according to plan except that unit variable cost falls,
A. total contribution margin will be lower than expected.
CM Increase Decrease Unchanged Unchanged
B. the contribution margin percentage will be lower than expected.
BEP Decrease Increase Increase Unchanged
C. profit will be higher than expected.
D. per-unit contribution margin will be lower than expected.
52. Which of the following will decrease the breakeven point?
Decrease in Selling Increase in Direct Increase in Fixed Cost 57. Which of the following decreases per-unit contribution margin the most for a
Price Labor company that is currently earning a profit?
A. YES YES YES A. A 10% decrease in selling price. C. A 10% increase in fixed costs.
B. YES NO YES B. A 10% increase in variable cost per unit. D. A 10% increase in fixed cost per
C. NO NO YES unit.
D. NO NO NO
58. If variable cost as a percentage of sales increases, the
53. Which of the following is an incorrect statement? A. contribution margin percentage increases.
A. The contribution income statement that is prepared for internal users is better B. selling price increases.
than the traditional income statement as a management tool to predict the results C. break-even point in pesos increases.
of increases or decreases in sales volume, variable costs, and fixed costs. D. fixed costs decrease.
B. The greater the proportion of fixed costs in a firm's cost structure, the smaller
will be the impact on profit from a given percentage change in sales revenue. 59. Introducing income taxes into cost-volume-profit analysis
C. In an economic recession, the highly automated company with high fixed costs A. raises the break-even point.
will be less able to adapt to lower consumer demand than will a firm with a more B. lowers the break-even point.
labor-intensive production process. C. increases unit sales needed to earn a particular target profit.
D. A major difference between income statements prepared under the traditional D. decreases the contribution margin percentage.
format and those prepared under the contribution format is that expenses under
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60. If a company is earning a profit, its fixed costs C. an increase in unit variable costs would decrease the slope of the total cost line.
A. are less than total contribution margin. D. an increase in the unit selling price would shift the breakeven point in units to the
B. are equal to total contribution margin. left.
C. are greater than total variable costs.
D. can be greater than or less than total contribution margin. Bobadilla 65. An increase in the income tax rate
A. raises the break-even point.
61. A cost-volume-profit graph reflects relationships B. lowers the break-even point.
A. that are expected to hold over the relevant range. C. decreases sales required to earn a particular after-tax profit.
B. of results over the past few years. D. increases sales required to earn a particular after-tax profit. Bobadilla
C. that the company's managers would like to have happen.
D. likely to prevail for the industry. Bobadilla 66. If the sales mix shifts toward higher contribution margin products, the break-even
point
62. The following diagram is a cost-volume-profit graph for a manufacturing company. A. decreases.
B. increases.
E C. remains constant.
D. it is impossible to tell without more information. Bobadilla
P
C 67. Target costing is
D A. a substitute for CVP analysis.
B. used by companies that cannot classify their costs by behavior.
A C. inappropriate if a company has already established a target profit.
B
D. used in decisions to offer a new product or enter a new market. Bobadilla
O 68. In order for the break-even computation to be meaningful to management, sales mix
Volume should be computed using the
The difference between line AB and line AC (area BAC) is the A. expected mix C. most desirable mix
A. contribution ratio. C. total variable cost. B. least desirable mix D. traditional mix Bobadilla
B. contribution margin per unit. D. total fixed cost. Bobadilla
69. Which of the following is a true statement about sales mix?
63. Select the answer that best describes the labeled item on the diagram. A. Profits may decline with an increase in total peso of sales if the sales mix shifts to
A. Area CDE represents the area of net loss. sell more of the high contribution margin product.
B. Line AC graphs total fixed costs. B. Profits may decline with an increase in total peso of sales if the sales mix shifts to
C. Point D represents the point at which the contribution margin per unit increases. sell more of the lower contribution margin product.
D. Line AC graphs total costs. Bobadilla C. Profits will remain constant with an increase in total peso of sales if the total
sales in units remains constant.
64. In a cost-volume-profit graph D. Profits will remain constant with a decrease in total peso of sales if the sales mix
A. the total revenue line crosses the horizontal axis at the breakeven point. Bobadilla also remains constant. Bobadilla
B. beyond the breakeven sales volume, profits are maximized at the sales volume
where total revenues equal total costs.
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PROBLEMS: . Carribean Company produces a product that sells for P60. The variable
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. Green Corporation expects to sell 3,000 plants a month. Its operations manager manufacturing costs are P30 per unit. The fixed manufacturing cost is P10 per unit
estimated the following monthly costs: based on the current level of activity, and fixed selling and administrative costs are
Variable costs P 7,500 P8 per unit. A selling commission of 10% of the selling price is paid on each unit
Fixed costs 15,000 sold.
What sales price per plant does she need to achieve to begin making a profit if she The contribution margin per unit is:
sells the estimated number of plants per month? A. P24. C. P30.
A. P7.51 C. P5.00 B. P36. D. P54. Bobadilla
B. P7.50 D. P2.50 Bobadilla
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. Seal Yard Ornaments sells lawn ornaments for P15 each. Seal's contribution margin
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. An organization's break-even point is 4,000 units at a sales price of P50 per unit, ratio is 40%. Fixed costs are P32,000. Should fixed costs increase 30%, how many
variable cost of P30 per unit, and total fixed costs of P80,000. If the company sells additional units will Seal have to produce and sell in order to generate the same net
500 additional units, by how much will its profit increase? profit as under the current conditions?
A. P25,000 C. P10,000 A. 1,600. C. 6,933.
B. P15,000 D. P12,000 Bobadilla B. 5,333. D. 1,067. Bobadilla
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. The Red Lions Brotherhood is planning its annual Riverboat Extravaganza. The . At a break-even point of 5,000 units sold, variable expenses were P10,000 and fixed
Extravaganza committee has assembled the following expected costs for the event: expenses were P50,000. The profit from the 5,001st unit would be?
Dinner per person P 70 A. P10 C. P15
Programs and souvenir per person 30 B. P50 D. P12 Bobadilla
Orchestra 15,000
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Tickets and advertising 7,000 . Galactica Company has fixed costs of P100,000 and breakeven sales of P800,000.
Riverboat rental 48,000 Based on this relationship, what is its projected profit at P1,200,000 sales?
Floor show and strolling entertainment 10,000 A. P 50,000 C. P150,000
The committee members would like to charge P300 per person for the evening’s B. P200,000 D. P400,000 Bobadilla
activities.
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Assume that only 250 persons are expected to attend the extravaganza, what ticket . The sales price per unit will increase from P32 to P40. The variable cost per unit will
price must be charged to breakeven? remain at P24, and the fixed costs will remain unchanged at P400,000. How many
A. P420 C. P320 fewer units must be sold to break-even at the new sales price of P40 per unit?
B. P350 D. P390 Bobadilla A. 25,000 C. 10,000
B. 2,500 D. 12,500 Bobadilla
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. Consider the following:
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Fixed expenses P78,000 . The Hard Company sells widgets. The company breaks even at an annual sales
Unit contribution margin 12 volume of 80,000 units. At an annual sales volume of 100,000 units the company
Target net profit 42,000 reports a profit of P220,000. The annual fixed costs for the Hard Company are:
How many unit sales are required to earn the target net profit? A. P 880,000 C. P 800,000
A. 15,000 units C. 12,800 units B. P1,100,000 D. P1,000,000 Bobadilla
B. 10,000 units D. 20,000 units Bobadilla
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. Albatross Company has fixed costs of P90,300. At a sales volume of P360,000,
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return on sales is 10%; at a P600,000 volume, return on sales is 20%. What is the . Bulusan Company has sales of P400,000 with variable costs of P300,000, fixed costs
break-even volume? of P120,000, and an operating loss of P20,000. How much increase in sales would
A. P225,000 C. P301,000 Bulusan need to make in order to achieve a target operating income of 10% of sales?
B. P258,000 D. P240,000 Bobadilla A. P400,000 C. P500,000
B. P462,000 D. P800,000 Bobadilla
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. An entity has fixed costs of P200,000 and variable costs per unit of P6. It plans on
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selling 40,000 units in the coming year. If the entity pays income taxes on its income . The following data apply to Diva Corporation for the year 2006:
at a rate of 40%, what sales price must the firm use to obtain an after-tax profit of Total variable cost per unit P3.50
P24,000 on the 40,000 units? Contribution margin/sales 30%
A. P11.60 C. P12.00 Breakeven sales (present volume) P1,000,000
B. P11.36 D. P12.50 Bobadilla Diva wants to sell an additional 50,000 units at the same selling price and
contribution margin per unit. By how much can fixed costs increase to generate a
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. The following is the Lux Corporation's contribution format income statement for last gross margin equal to 10% of the sales value of the additional 50,000 units to be
month: sold?
Sales P2,000,000 A. P 50,000 C. P 67,500
Less variable expenses 1,400,000 B. P 57,500 D. P125,000 Bobadilla
Contribution margin 600,000
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Less fixed expenses 360,000 . Marsman Company had a margin of safety ratio of 20%, variable costs of 60% of
Net income P 240,000 sales, fixed costs of P240,000, a break-even point of P600,000, and an operating
The company has no beginning or ending inventories. A total of 40,000 units were income of P60,000 for the current year. What are the current year's sales?
produced and sold last month. What is the company's degree of operating leverage? A. P 500,000 C. P 750,000
A. 0.12 C. 2.50 B. P 600,000 D. P 900,000 Bobadilla
B. 0.40 D. 3.30 Bobadilla
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. Regal, Inc. sells Product M for P5 per unit. The fixed costs are P210,000 and the
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. Delmar Company has the opportunity to increase its annual sales by P125,000 by variable costs are 60% of the selling price. What would be the amount of sales if
selling to a new, riskier group of customers. The uncollectible expense is expected to Regal is to realize a profit of 10% of sales?
be 10%, and collection costs will be 10%. The company’s manufacturing and selling A. P700,000 C. P525,000
expenses are 70% of sales, and its effective tax rate is 40%. If Delmar were to accept B. P472,500 D. P420,000 Bobadilla
this opportunity, the company’s after tax profits would increase by
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A. P 7,500 C. P12,500 . The following economic data were provided by the corporate planning staff of
B. P 6,000 D. P15,000 Bobadilla Heaven, Inc.:
Sales volume 30,000 units
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. In 2006 Lucia Company had a net loss of P8,000. The company sells one product Sales price per unit P30
with a selling price of P80 and a variable cost per unit of P60. In 2007, the company Unit variable costs:
would like to earn a before-tax profit of P40,000. How many additional units must Variable manufacturing P13
the company sell in 2007 than it sold in 2006? Assume that the tax rate is 40 percent. Other variable costs 8
A. 1,600 C. 2,000 Unit variable costs P21
B. 2,400 D. 5,400 Bobadilla Unit contribution margin P 8
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Materials P 0.125
Fixed costs: Direct labor 0.150
Manufacturing P150,000 Variable overhead 0.075
Other fixed costs P 50,000 Variable selling costs per peso of sales 0.150
Total fixed costs P200,000 Tanker estimates its sales for the coming year to be P2,000,000.
The management is considering installing a new, automated manufacturing process
that will increase fixed costs by P50,000 and reduce variable manufacturing cost by The expected cost of goods sold for the coming year is
P3 per unit. The management set a target a profit of P70,000 before and after the A. P1,265,000 C. P1,565,000
acquisition of the automated machine. After installation of the automated machine, B. P1,115,000 D. P 700,000 Bobadilla
what will be the change in the units required to achieve the target profit?
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A. 6,667 unit increase C. 3,333 unit decrease . At a sales volume level of 2,250 units, Baluarte Company’s contribution margin is
B. 5,667 unit decrease D. 4,333 unit decrease Bobadilla one and one-half of the fixed costs of P36,000. Contribution margin is 30% How
much peso sales should the Baluarte Company sell to earn 10 percent of sales?
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. In planning its operations for next year based on a sales forecast of A. P270,000 C. P360,000
P6,000,000, Herran, Inc. prepared the following estimated costs and expenses: B. P180,000 D. P540,000 Bobadilla
Variable Fixed 25
Direct materials . The Alpine Company’s year-end income statement is as follows:
P1,600,000 Sales (20,000 units) P360,000
Direct labor 1,400,000 Variable costs 220,000
Factory overhead 600,000 P 900,000 Contribution margin P140,000
Selling expenses 240,000 360,000 Fixed costs 105,000
Administrative expenses 60,000 140,000 Net income P 35,000
P3,900,000 P1,400,000 Alpine’s management is unhappy with the results and plans to make some changes
for next year. If management implements a new marketing program, fixed costs are
What would be the amount of peso sales at the breakeven point?
expected to increase by P19,200 and variable costs to increase by P1 per unit. Unit
A. P2,250,000. C. P4,000,000.
sales are expected to increase by 15 percent.
B. P3,500,000. D. P5,300,000. Bobadilla
22 What is the effect on income if the foregoing changes are implemented?
. The Expressive Company currently has fixed cost of P770,500. This cost is expected
A. decrease of P21,200 C. increase of P 1,800
to increase by P103,500 if the company expands its production facilities. Currently, it
B. increase of P13,800 D. increase of P14,800 Bobadilla
sells its product for P47. The product has a variable cost per unit of P24. How many
more units must the company sell to break even, at the current sales price per unit, 26
. Mercado, Inc. had the following economic data for 2007:
than it did to break even prior to the increase in fixed cost?
Net sales P400,000
A. 3,500 C. 4,500
B. 4,000 D. 6,000 Bobadilla
Margin of safety 40,000
23 What is Mercado’s breakeven point in 2007?
. The Tanker Company estimated the following data for the coming year:
A. P360,000 C. P320,000
Fixed manufacturing costs P565,000
B. P288,000 D. P 80,000 Bobadilla
Variable production costs per peso of sales
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. Marquez Co. manufactures a single product. For 2006, the company had sales of . The Childless Company sells widgets. The company breaks even at an annual sales
P90,000, variable costs of P50,000, and fixed costs of P30,000. Marquez expects its volume of 75,000 units.
cost structure and sales price per unit to remain the same in 2007; however total sales
are expected to jump by 20%. If the 2007 projections are realized, net income in Actual annual sales volume was 100,000 units, and the company reported a profit of
2007 should exceed net income in 2006 by P200,000. The annual fixed costs for the Childless Company are
A. 100% C. 20% A. P800,000 C. P200,000
B. 80% D. 50% Bobadilla B. P600,000 D. P150,000 Bobadilla
28 32
. Below is the income statement for Harpo Co. for 2006: . The costs to produce 24,000 units at 70% capacity are:
Sales P400,000 Direct materials P36,000
Variable costs ( 125,000) Direct labor 54,000
Contribution margin P275,000 Factory overhead, all fixed 29,000
Fixed costs ( 200,000) Selling expense (35% variable, 65% fixed) 24,000
Profit before tax P 75,000 What unit price would the company have to charge to make P2,250 on a sale of 1,500
Assuming that the fixed costs are expected to remain at P200,000 for 2007, and the additional units that would be shipped out of the normal market area?
sales price per unit and variable cost per unit are also expected to remain constant, A. P5.10 C. P4.10
how much profit before tax will be produced if the company anticipates 2007 sales B. P5.60 D. P5.00 Bobadilla
rising to 130% of the 2006 level?
33
A. P 97,500 C. P195,000 . The Mandarin Company's product mix includes P720,000 in sale of X and P640,000
B. P157,500 D. P180,000 Bobadilla in sale of Y. X's contribution margin is 60% and Y's is 40% of sales. Fixed costs
amount to P505,881. Y's sale at breakeven point should amount to
29
. Almos Corporation produces a product that sells for P10 per unit. The variable cost A. P640,000 C. P529,490
per unit is P6 and total fixed costs are P12,000. At this selling price, the company B. P720,000 D. P470,590 Bobadilla
earns a profit equal to 10% of total peso sales. By reducing its selling price to P9 per
34
unit, the manufacturer can increase its unit sales volume by 25%. Assume that there . Levi’s Company has revenues of P500,000, variable costs of P300,000, and pretax
are no taxes and that total fixed costs and variable cost per unit remain unchanged. If profit of P150,000. Had the company increased the sales price per unit by 10%,
the selling price were reduced to P9 per unit, the company’s profit would have been reduced fixed costs by 20%, and left variable cost per unit unchanged, what would
A. P3,000. C. P5,000. the new breakeven point in pesos have been?
B. P4,000. D. P6,000. Bobadilla A. P 88,000 C. P100,000
B. P 80,000 D. P125,000 Bobadilla
30
. Information concerning the 2007 financial projections of the Silver Company is as
35
follows: . A firm has fixed costs of P200,000 and variable cost per unit of P6. It plans to sell
Net sales of P3,000,000. 40,000 units in the coming year. If the firm pays income taxes on its income at a rate
Fixed costs of P800,000. of 40%, what sales price must the firm use to obtain an after-tax profit of P24,000?
P0.65 increase in cost of sales for each peso increase in net sales. A. P11.60 C. P11.36
What is the projected cost of sales for 2007? B. P12.00 D. P12.50 Bobadilla
A. P 950,000 C. P1,050,000
B. P2,750,000 D. P1,850,000 Bobadilla
36
. Below is the income statement for Blender Co. for 2007:
10
Sales P400,000 A. P300,000 C. P500,000
Variable costs (125,000) B. P400,000 D. P800,000 Bobadilla
Contribution margin P275,000
41
Fixed costs ( 200,000) . Balboa, Inc. had the following economic information for the year 2006:
Profit before tax P 75,000 Sales (50,000 units @ P20) P1,000,000
What is the degree of operating leverage for Blender Company for 2007? Variable manufacturing costs 400,000
A. 3.67 C. 5.33 Fixed costs 250,000
B. 1.45 D. 1.67 Bobadilla Income tax rate 40 percent
Balboa, Inc. budgets its 2007 sales at 60,000 units or P1,200,000. The company
37
. Food Factory, Inc. sells loose biscuits for P5 per unit. The fixed costs are P210,000 anticipates an increased competition; hence, an additional P75,000 advertising costs
and the variable costs are 45% of the selling price. What would be the amount of is budgeted in order to maintain its sales target for 2007.
sales if Food Factory, Inc. were to realize a profit of 15% of sales?
A. P700,000 C. P525,000 What is the amount of peso sales needed for 2007 in order to equal the after-tax
B. P472,500 D. P420,000 Bobadilla income in 2006?
A. P1,125,000 C. P1,325,000
38
. The Opposition Sales Corporation is expecting an increase of fixed costs by P78,750 B. P1,187,500 D. P1,387,500 Bobadilla
upon moving their place of business to the downtown area. The company anticipates
that the selling price per unit and the variable expenses will not change. At present, . Mauresmo Company developed the following information for the year ended
42
the sales volume necessary to breakeven is P750,000 but with the expected increase December 31, 2007:
in fixed costs, the sales volume necessary to breakeven would go up to P975,000. Product A Product B Total
Units Sold 4,000 6,000 10,000
Based on these projections, what were the total fixed costs before the increase of
P78,750? Sales P12,000 P27,000 P39,000
A. P341,250 C. P183,750 Variable costs 6,000 15,000 21,000
B. P262,500 D. P300,000 Bobadilla Contribution margin P 6,000 P12,000 18,000
39
Fixed costs 12,600
. At 40,000 units of sales, Benevolent Corporation had an operating loss of P3.00 per Net income P 5,400
unit. When sales were 70,000 units, the company had a profit of P1.20 per unit. The
If the sales mix changes to 5,000 units of Product A and 5,000 units of Product B, the
number of units to breakeven is
effect on the company’s break-even point would be
A. 35,000 C. 45,000
A. to increase it by 200 units. C. to increase it by 1,200 units.
B. 52,500 D. 57,647 Bobadilla
B. to decrease it by 200 units. D. no change. Bobadilla
40
. The following information pertains to Hennin Corporation for the year ending
December 31, 2006: . Menor Company sells two products with the following per unit data:
43
Budgeted sales P1,000,000 Standard Deluxe

Breakeven sales 700,000 Selling price/unit P75 P120
Budgeted contribution margin 600,000 Variable costs/unit 45 60
Cashflow breakeven 200,000 Contribution margin/unit P30 P 60
The margin of safety for the Hennin Corporation is: Sales mix 3 2
11
If fixed costs are P630,000, the number of standard and deluxe units that Menor must A. P1,350,000 C. P1,135,000
sell to break even is Bobadilla B. P 486,425 D. P 910,000 Bobadilla
A. 1,800 standard and 1,200 deluxe. C. 9,000 standard and 6,000 deluxe.
47
B. 3,600 standard and 2,400 deluxe. D. 21,000 standard and 14,000 deluxe. . Last month, Zamora Company had an income of P0.75 per unit with sales of 60,000
units. During the current month when the unit sales are expected to be only 45,000,
44
. The following are projections about the two products of Dorine Company, there is a loss of P1.25 per unit. Both the variable cost per unit and total fixed costs
baubles and trinkets, for the coming year: remain constant.
Baubles Trinkets
Units Amount Units Amount Total The fixed costs amounted to
Sales 10,000 P10,000 7,500 P10,000 P20,000 A. P 80,000 C. P360,000
Costs B. P247,500 D. P210,000 Bobadilla
Fixed P 2,000 P 5,600 P 7,600 48
Variable 6,000 3,000 9,000 . Bytes Company is a retailer of video disks. The projected after-tax income for the
P 8,000 P 8,600 P16,600 current year is P120,000 based on a sales volume of 200,000 video disks. Bytes has
Income before taxes P 2,000 P 1,400 P 3,400 been selling the disks at P16 each. The variable costs consist of the P10 per unit
purchase price of the disks and a handling cost of P2 per disk. Bytes’ annual fixed
Assuming that the customers purchase composite units of four baubles and costs are P600,000, and Bytes is subject to a 40% income tax rate. Management is
three trinkets, the breakeven output for the two products would be planning for the coming year when it expects that the unit purchase price of the video
Bobadilla A. B. C. D. disks will increase 30%.
Baubles 6,909 6,909 5,000 5,000
Trinkets 6,909 5,182 8,000 6,000 Bytes Company’s breakeven point for the current year in number of video disks is
A. 100,000 units C. 50,000 units
45
. The sales mix for Dial Enterprise is as follows: B. 150,000 units D. 60,000 units Bobadilla
Product A: 12 units @ P5.25 sales price; P4.85 variable cost per unit.
49
Product B: 10 units @ P7.50 sales price; P6.95 variable cost per unit. . Alonzo Corporation had sales of P120,000 for the month of May. It has a margin of
Product C: 6 units @ P12.25 sales price; P10.35 variable cost per unit. safety ratio of 25 percent, and an after-tax return on sales of 6 percent. The company
assumes its sales being constant every month. If the tax rate is 40 percent, how much
Dial Enterprise's fixed costs are P75,950. is the annual fixed cost?
A. P 36,000 C. P 90,000
What are the composite break-even point? B. P432,000 D. P360,000 Bobadilla
A. 98,000 C. 3,500
50
B. 2,000 D. 4,000 Bobadilla . Cultured Company is a manufacturer of its only one product line. It had sales of
P400,000 for 2007 with a contribution margin ratio of 20 percent. Its margin of
46
. Alexandra Co. provides two products, Velvet and Cotton. Velvet accounts for 60 safety ratio was 10 percent.
percent of total sales. The variable costs as a percentage of selling prices are 60% for
Velvet and 85% for Cotton. Total fixed costs are P225,000. What are the company’s fixed costs?
A. P 72,000 C. P 80,000
If fixed costs will increase by 30 percent, what amount of peso sales would be B. P288,000 D. P320,000 Bobadilla
necessary to generate an operating profit of P48,000?
12
51
. Glareless Company manufactures and sells sunglasses. The price and cost data are as for P270,000, if production continues, however, it will be useless at the end of 1 year
follows: and will have no salvage value. The selling price is P100 a unit. Ignoring taxes, the
Selling price per pair of Sunglasses P25.00 minimum number of units to be sold in the current year to break even on a cash flow
Variable costs per pair of sunglasses: basis is
Raw materials P11.00 A. 1,500 units. C. 8,250 units.
Direct labor 5.00 B. 6,750 units. D. 9,750 units Bobadilla
Manufacturing overhead 2.50
54
Selling expenses 1.30 . Pansipit Company had a 25 percent margin of safety. Its after-tax return on sales is 6
Total variable costs per unit P19.80 percent. The company’s income is subject to tax rate of 40 percent. If fixed costs
Annual fixed costs: amount to P320,000, how much peso sales did Pansipit make for the year?
Manufacturing overhead P192,000 A. P1,066,667 C. P1,280,000
Selling and administrative 276,000 B. P1,000,000 D. P 800,000 Bobadilla
Total fixed costs P468,000
Forecasted annual sales volume (120,000 pairs) P3,000,000 . The management of Mesa Company has performed cost studies and has
55
Income tax rate 40% projected the following annual costs based on 60,000 units of production and
Glareless Company estimates that its direct labor costs will increase 8 percent next sales:
year. How many units will Glareless have to sell next year to reach breakeven? Total Annual Percent of Variable Portion of Total Annual
A. 97,500 units C. 101,740 units Costs Costs
Direct P600,000 100
52 material
. Santos Company is planning its advertising campaign for next year and has prepared
Direct labor 720,000 80
the following budget data based on a zero advertising expenditure:
Mfg. 400,000 50
Normal plant capacity 200,000 units
Overhead
Sales 150,000 units
Selling costs 192,500 25
Selling price P25 per unit
Variable manufacturing costs P15 per unit What selling price will yield a 15 percent profit from sales of 60,000 units?
A. P41.67 C. P27.30
Fixed manufacturing costs P800,000
Fixed selling costs P700,000 B. P37.50 D. P35.42 Bobadilla
An advertising agency claims that an aggressive advertising campaign would enable 56
Santos to increase its unit sales by 20%. What is the maximum amount that Santos . The following data relate to Harvester Company which sells a single product:
Unit selling price P 80.00
Company can pay for advertising and have an operating profit of P200,000 next
year? Purchase cost per unit 55.00
Sales commission 15 % of selling price 12.00
A. P100,000 C. P300,000
B. P200,000 D. P550,000 Bobadilla Monthly fixed costs P180,000
The firm’s two salespersons would like to change their compensation from a 15
53
. Adventurous Co. is considering dropping a product. Variable costs are P60.00 per percent commission to a 7.5 percent commission plus P15,000 each per month in
fixed salary. Currently, they only receive commissions as their compensation.
unit. Fixed overhead costs, exclusive of depreciation, have been allocated at a rate of
P3.50 per unit and will continue whether or not production ceases. Depreciation on
At what sales volume in units would the two cost structures be indifferent?
the equipment is P60,000 a year. If production is stopped, the equipment can be sold
13
A. 2,500 units C. 4,000 units
B. 3,000 units D. 5,000 units Bobadilla The change in compensation plan should change the monthly breakeven point by
A. 1,071 Increase C. 1,538 Increase
57
. MultiFrame Company has the following revenue and cost budgets for the two B. 1,071 Decrease D. 1,538 Decrease Bobadilla
products it sells:
Plastic Frames Glass Frames . The manager of Naughty Food Company reviewed the following data:
60
Sales price P10.00 P15.00 Fruits Meat Canned Products

Direct materials ( 2.00) ( 3.00) Contribution margin ratio 40% 50% 40%
Direct labor ( 3.00) ( 5.00) Sales mix in pesos 20% 30% 50%
Fixed overhead ( 3.00) ( 2.75) Fixed costs, P1,290,000 per month.
Net income per unit P 2.00 P 4.25 The breakeven sales for each month is
Budgeted unit sales 100,000 300,000 A. P1,677,000 C. P4,500,000
The budgeted unit sales equal the current unit demand, and total fixed overhead for B. P3,000,000 D. P6,000,000 Bobadilla
the year is budgeted at P975,000. Assume that the company plans to maintain the
61
same proportional mix. . The Oregano Watch Company manufactures a line of ladies’ watches which are sold
through discount houses. Each watch is sold for P1,500; the fixed costs are
The total number of units that MultiFrame needs to produce and sell in order to break P3,600,000 for 30,000 watches or less; variable cost is P900 per watch.
even is
A. 150,000 units C. 153,947 units What is Oregano’s degree of operating leverage at sales of 12,000 watches?
B. 100,000 units D. 300,000 units Bobadilla A. 2.0X C. 0.5X
B. 5.0X D. 0.2X Bobadilla
58
. During 2006, St. Paul Lab supplied hospitals with a comprehensive diagnostic kit for
P120. At a volume of 80,000 kits, St. Paul had fixed costs of P1,000,000 and . Duke, Inc. owns and operates a chain of food centers. The management is
62
operating income before income taxes of P200,000. Because of an adverse legal considering installing machines that will make popcorn on the premises.
decision, St. Paul’s 2007 liability insurance increased by P1,200,000 over 2006. These machines are available in two different sizes with the following details:
Assuming the volume and other costs are unchanged, what should the 2007 price be Economy Regular
if St. Paul is to make the same P200,000 operating income before income taxes? Annual capacity 20,000 50,000
A. P120 C. P150 Costs: Annual machine rental P60,000.00 P82,500.00
B. P135 D. P240 Bobadilla Popcorn cost per box 3.90 3.90
59
Cost of each box 0.80 0.80
. The following data relate to Herbert Company which sells a single product: Other variable cost per box 6.60 4.20
Unit selling price P 20.00
The level of output in boxes at which the Economy and the Regular would earn the
Purchase cost per unit 11.00
same profit (loss) is
Sales commission, 10% of selling price 2.00
A. 20,000 boxes C. 15,000 boxes
Monthly fixed costs P80,000
B. 9,375 boxes D. 12,500 boxes Bobadilla
The firm’s salespersons would like to change their compensation from a 10 percent
commission to a 5 percent commission plus P20,000 per month in salary. Currently, 63
. The Harper Corporation manufactures and sells T-shirts imprinted with college
they only receive commissions as their compensation.
names and slogans. Last year, the shirts sold for P7.50 each, and the variable cost to
14
manufacture them was P2.25 per unit. The company needed to sell 20,000 shirts to Total P2.40 per box
break even. The net income last year was P5,040. Harper’s expectations for the
coming year include the following: Annual fixed costs:
1. The sales price of the T-shirts will be P9 Selling P 169,000
2. Variable cost to manufacture will increase by one-third Administrative 280,000
3. Fixed costs will increase by 10% Total P 440,000
4. The income tax rate of 40% will be unchanged Expected annual sales volume (390,000 boxes) P1,560,000
The selling price that would maintain the same contribution margin rate as last year is The manufacturers of candies have announced that they will increase prices of their
A. P 9.00 C. P10.00 products an average of 15% in the coming year due to increases in raw material
B. P 8.25 D. P 9.75 Bobadilla (sugar, cocoa, peanuts, etc.) and labor costs. Bittersweet Company expects that all
other costs will remain at the same rates or levels as the current year. Bittersweet is
64
. During the month of June, Armani Corporation produced 12,000 units and sold them subject to 40 percent tax rate.
for P20 per unit. Total fixed costs for the period were P154,000, and the operating
profit was P26,000. The variable cost per unit for June was If net income after taxes would remain the same after the cost of candy increases but
A. P4.50 C. P6.00 no increase in the sales price is made, how many boxes of candy must Bittersweet
B. P5.00 D. P7.17 Bobadilla sell?
A. 480,000 C. 400,000
65
. Stone Company plans to sell 400,000 laundry hangers. The fixed costs are P600,000, B. 27,600 D. 29,300 Bobadilla
and the variable cost is 60% of the selling price. If the company wants to realize a
profit of P120,000, the selling price of each laundry hanger must be . Larz Company produces a single product. It sold 25,000 units last year with
68
A. P2.50 C. P4.50 the following results:

B. P3.75 D. P5.00 Bobadilla Sales P625,000
66
Variable costs P375,000
. The unit contribution margin of Product A is P20 and of Product B is P16. If six units Fixed costs 150,000 525,000
of Product A and eight units of Product B can be produced per machine hour, the Net income before taxes P100,000
contribution margin of the products per machine hour is Bobadilla Income taxes 40,000
A. Product A, P160; Product B, P96 C. Product A, P3.33; Product B, P2.00 Net income P 60,000
B. Product A, P120; Product B, P128 D. Product A, P32.00; Product B, P30.00
In an attempt to improve its product in the coming year, Larz is considering replacing
67 a component part in its product that has a cost of P2.50 with a new and better quality
. The Bittersweet Company is a wholesale distributor of candy. The company services
costing P4.50 per unit. A new machine will also be needed to increase plant
various grocery, convenience, and drug stores in Metro Manila. Small, but steady
capacity. The machine would cost P18,000 with a useful life of 6 years and no
growth in sales, has been achieved by the company over the past few years while
salvage value. The company uses straight-line depreciation method on all plant
candy prices have been increasing. The company is formulating its plans for the
assets.
coming fiscal year. Presented below are the data used to project the current year’s
after-tax net income of P110,400.
If Larz wishes to maintain the same contribution margin ratio after implementing the
Average selling price P4.00 per box
changes, what selling price per unit of product must it charge next year to cover the
Average variable costs
increased material costs?
Cost of candy P2.00 per box
A. P27.00 C. P25.00
Selling expenses 0.40 per box
15
B. P32.50 D. P28.33 Bobadilla Related data for last year are:
Product Unit Selling Price Unit Variable Cost Unit Contribution
69
. BM Motors, Inc. employs 40 sales personnel to market its line of economy Margin
automobiles. The average car sells for P1,200,000 and a 6% commission is paid to Biggs P120 P80 P40
the salesperson. BM Motors is considering a change to a commission arrangement Boggs 80 60 20
that would pay each salesperson a salary of P24,000 per month plus a commission of Assuming that last year’s fixed costs totaled P910,000, what was Solar Company’s
2% of the sales made by that salesperson. composite break-even point?
A. 34,125 C. 11,375
The amount of total car sales at which the two expense structures would be B. 27,302 D. 9,101 Bobadilla
indifferent is
A. P22,500,000 C. P30,000,000 73
. River and Co., maker of quality pipes, has experienced a steady growth in sales for
B. P24,000,000 D. P12,000,000 Bobadilla the past five years. However, increase in competition has led River Co. to believe
70
that an aggressive advertising campaign will be necessary next year to maintain the
. Round Company is a grocery store that is currently open only Monday through company’s present growth.
Saturday. Round Company is considering opening on Sundays. The annual
incremental costs of Sunday openings are estimated at P31,200. Round’s gross To prepare for next year’s advertising campaign, the company’s accountant has
margin on sales is 25 percent. Round estimates that 75 percent of its Sunday sales to prepared and presented the management with data for the current year, 2006, as
customers would be made on other days if the store were not open on Sundays. presented below:
Cost Schedule
The one-day volume of Sunday sales that would be necessary for Round to attain the Variable costs:
same weekly operating as the current six-day week is Direct labor P 80.00/pipe
A. P2,400 C. P9,600 Direct materials 32.50/pipe
B. P3,200 D. P9,984 Bobadilla Variable overhead 25.00/pipe
71
Total variable costs P137.50/pipe
. Ailu Company has the following operating data for its manufacturing operations: Fixed costs:
Unit selling price P 250 Manufacturing P 250,000
Unit variable cost 100 Selling 400,000
Total fixed costs 840,000 Administrative 700,000
The company’s decision to increase the wages of hourly workers will increase the Total fixed costs P1,350,000
unit variable cost by 10 percent. Increases in the salaries of factory supervisors and
property taxes for the factory will increase fixed costs by 4 percent. If sales price is Selling price, per pipe P 250.00
held constant, the next break-even point for Ailu Company will be Expected sales, 2007 (20,000 units) P5,000,000
A. Increased by 640 units. C. Decreased by 640 units. Tax rate: 40%
B. Increased by 400 units. D. Increased by 800 units. Bobadilla The company has set the sales target for 2007 at a level of P5,500,000 (or 22,000
72
pipes).
. Solar Company sells two products, Biggs and Boggs. Last year, Solar Company sold
12,000 units of Biggs and 24,000 units of Boggs. If an additional P112,500 have to be spent for advertising in 2007, what is the
required sales level in pesos to equal 2006’s after-tax income?
16
A. P4,750,000 C. P5,250,000 Variable selling cost P1.00 P1.00
B. P5,750,000 D. P4,250,000 Bobadilla The sales manager has had a P160,000 increase in the budget allotment for
advertising and wants to apply the money to the most profitable product. The
74
. Adobe Company sold 100,000 units of its product at P20 per unit. Variable costs products are not substitutes for one another in the eyes of the company’s customers.
were P14 per unit, consisting of manufacturing costs of P11 and selling costs of P3.
Fixed costs, which were incurred uniformly throughout the year, amounted to The manager may devote the entire P160,000 to increased advertising for either XY-
P792,000 (manufacturing costs of P500,000 and selling expenses of P292,000). 7 or BD-4.
There had been no beginning or ending inventories.
Suppose Tactless has only 100,000 machine hours that can be made available to
If labor costs comprise of 50 percent variable costs and 20 percent f fixed costs, a 10 produce additional units of XY-7 and BD-4. If the potential increase in sales units for
percent increase in wages and salaries would increase the number of units required to either product resulting from advertising is far in excess of this production capacity,
break even to which product should be advertised and what is the estimated increase in contribution
A. 152,423 C. 143,875 margin earned? Bobadilla
B. 175,617 D. 129,938 Bobadilla A. Product XY-7 should be produced, yielding a contribution margin of P75,000.
B. Product XY-7 should be produced, yielding a contribution margin of P133,333.
75
. Mellow, Inc. sells its single product for P40 per unit. Mellow purchases the product C. Product BD-4 should be produced, yielding a contribution margin of P187,500.
for P20. The salespeople receive a salary plus a commission of 5% of sales. Last D. Product BD-4 should be produced, yielding a contribution margin of P250,000.
year the corporation’s net income was P100,800. The corporation is subject to 30%
income tax rate. The fixed costs of the company are: 77
. Drape Corp. would like to market a new product at a selling price of P15 per unit.
Advertising P124,000 Fixed costs for this product are P1,000,000 for less than 500,000 units of output and
Rent 60,000 P1,500,000 for 500,000 or more units of output. The contribution margin percentage
Salaries 180,000 is 35%. How many units of this product must be sold to earn a target operating
Other fixed costs 32,000 income of P1 million?
Total P396,000 A. 366,667 C. 476,190
The company is considering changing the compensation plan for sales personnel. If B. 380,952 D. 256,410 Bobadilla
the organization increases the commission to 10% of revenues and reduces salaries
by P80,000, what revenues must the organization have to raise in order to earn the 78
. Care Company sold 100,000 units of its product at P20 per unit. Variable costs are
same net income as last year? P14 per unit, consisting of manufacturing costs of P11 and selling costs of P3. Fixed
A. P1,600,000 C. P1,350,000 costs, which are incurred uniformly throughout the year, amount to P792,000
B. P1,150,000 D. P1,630,000 Bobadilla (manufacturing costs of P500,000 and selling costs of P292,000). There were no
beginning or ending inventories.
76
. Tactless Manufacturing Company produces two products for which the
following data have been tabulated. Fixed manufacturing cost is applied at a If labor costs are 50% of variable costs and 20% of fixed costs, a 10% increase in
rate of P1.00 per machine hour. wages and salaries would increase the number of units required to breakeven (in
Per Unit XY-7 BD-4 fraction form) to
Selling price P4.00 P3.00 A. 807,840/5.3. C. 807,840/14.7.
Variable manufacturing cost P2.00 P1.50 B. 831,600/5.78. D. 831,600/14.28. Bobadilla
Fixed manufacturing cost P0.75 P0.20
17
Question Nos. 79 through 81 are based on the following: Questions 82 through 86 are based on the Statement of Income of Davao, Inc. which
Metal Industries, Inc. operates its production department only when orders are received represents the operating results for the current fiscal year ending December 31. Davao
for one or both of its two products, two sizes of metal discs. The manufacturing process had sales of 1,800 tons of product during the current year. The manufacturing capacity of
begins with the cutting of doughnut-shaped rings from rectangular strips of sheet metal; Davao’s facilities is 3,000 tons of product. Consider each question’s situation separately.
these rings are then pressed into discs. The sheets of metal, each 4 feet long and Sales P900,000
weighing 32 ounces, are purchased P13.60 per running foot. The department has been Variable costs
operating at a loss for the past year as shown below. Manufacturing P315,000
Sales for the year P1,720,000 Selling costs 180,000
Less: expenses 1,772,000 Total variable costs P495,000
Net loss for the department P 52,000 Contribution margin P405,000
Fixed costs
The following information is available. Manufacturing P 90,000
Selling 112,500
Ten thousand 4-foot pieces of metal yielded 40,000 large discs, each weighing 4 ounces Administration 45,000
and selling for P29, and 40,000 small discs, each weighing 2.4 ounces and selling for Total fixed costs P247,500
P14. Net income before income taxes P157,500
Income taxes (40%) (63,000)
The corporation has been producing at less than “normal capacity” and has had no Net income after income taxes P 94,500
spoilage in the cutting step of the process. The skeletons remaining after the rings have
82
been cut are sold for scrap at P8.00 per pound. . The breakeven volume in tons of product for the year is
A. 420 C. 1,100
The variable conversion cost of each large disc is 80% of the disc’s direct material cost, B. 495 D. 550 Bobadilla
and variable conversion cost of each small disc is 75% of the disc’s direct material cost.
83
Variable conversion costs are the sum of direct labor and variable overhead. . If the sales volume is estimated to be 2,100 tons in the next year, and if the prices and
Fixed costs were P860,000. costs stay at the same levels and amounts next year, the after-tax income that Davao
can expect for next year is
79
. The net cost per ounce of material is A. P135,000 C. P110,250
A. P2.00 C. P1.70 B. P283,500 D. P184,500 Bobadilla
B. P1.60 D. P1.80 Bobadilla
84
. Davao has a potential foreign customer that has offered to buy 1,500 tons at P450 per
80
. The total variable costs per unit for the large and small discs, respectively, are ton. Assume that all of Davao’s costs would be at the same levels and rates as last
A. P10.20 and P8.60. C. P 9.10 and P5.30. year. What net income after taxes would Davao make if it took this order and
B. P14.40 and P8.40. D. P11.80 and P6.60. Bobadilla rejected some business from regular customers so as not to exceed capacity?
A. P297,500 C. P211,500
81
. If the material costs for large and small discs are P8.50 and P5.10, respectively, and B. P252,000 D. P256,500 Bobadilla
the normal production capacity is 100,000-unit level, what is the breakeven point?
85
A. 91,611. C. 79,816. . Without prejudice to your answers to previous questions, and assume that Davao
B. 87,216. D. 82,412. Bobadilla plans to market its product in a new territory. Davao estimates that an advertising
and promotion program costing P61,500 annually would need to be undertaken for
18
89
the next two or three years. In addition, a P25 per ton sales commission over and . How much would the variable cost per unit of the touring model have to change
above the current commission to the sales force in the new territory would be before it had the same breakeven point in units as the mountaineering model?
required. How many tons would have to be sold in the new territory to maintain A. P2.68/unit increase C. P5.03/unit decrease
Davao’s current after-tax income of P94,500? B. P4.53/unit increase D. P2.97/unit decrease Bobadilla
A. 307.5 C. 273.3
90
B. 1,095.0 D. 1,545.0 Bobadilla . If the variable cost per unit of touring skis decreases by 10%, and the total fixed cost
of touring skis increases by 10%, the new breakeven point will be
86
. Without prejudice to preceding questions, assume that Davao estimates that the per A. 10,730 pairs
ton selling price will decline 10% next year. Variable costs will increase P40 per ton B. 13,007 pairs
and the fixed costs will not change. What sales volume in pesos will be required to C. 12,812 pairs Bobadilla
earn an after-tax income of P94,500 next year? D. Unchanged from 11,648 pairs because the cost changes are equal and offsetting
A. P1,140,000 C. P1,500,000
91
B. P 825,000 D. P1,350,000 Bobadilla . If the Anilao Ski Company sales department could guarantee the annual sale of
12,000 skis of either model, Anilao would
Question Nos. 87 through 91 are based on the following: A. Produce touring skis because they have a lower fixed cost.
Anilao Ski Company recently expanded its manufacturing capacity to allow it to B. Produce only mountaineering skis because they a lower breakeven point.
product up to 15,000 pairs of cross-country skis of either the mountaineering C. Produce mountaineering skis because they are more profitable.
model or the touring model. The sales department assures management that it can D. Be indifferent as to which model is sold because each model has the same
sell between 9,000 and 13,000 pairs (units) of either product this year. Because variable cost per unit. Bobadilla
the models are very similar, Anilao Ski will produce only one of the two models.
Question Nos. 92 through 96 are based on the following:
The following data were compiled by the accounting department. Pullman Company is a small but growing manufacturer of telecommunications
Mountaineering Touring equipment. The company has no sales force of its own; rather, it relies completely on
Selling price per unit P88.00 80.00 independent sales agents to market its products. These agents are paid a commission of
Variable cost per unit 52.80 2.80 15% of selling price for all items sold.
Fixed costs will total P369,600 if the mountaineering model is produced but will be only
P316,800 if the touring model is produced. Anilao Ski Company is subject to a 40% Maui Soliman, Pullman’s controller, has just prepared the company’s budgeted income
income tax rate. statement for next year. The statement follows:
87
. If Anilao Ski Company desires an after-tax net income of P24,000, how many pairs Pullman Company
of touring model skis will the company have to sell? Budgeted Income Statement
A. 13,118 C. 13,853 For the Year Ended December 31
B. 12,529 D. 4,460 Bobadilla Sales P16,000,000
88 Manufacturing costs:
. The total sales revenue at which Anilao Ski Company would make the same profit or Variable P7,200,000
loss regardless of the ski model it decided to produce is Fixed overhead 2,340,000 9,540,000
A. P880,000 C. P924,000 Gross margin 6,460,000
B. P422,400 D. P686,400 Bobadilla Selling and administrative costs:
19
Commissions to agents 2,400,000 Total P2,400,000
Fixed marketing costs* 120,000
Fixed administrative costs 1,800,000 4,320,000 “Super,” replied Kim. “And I note that the P2,400,000 is just what we’re paying the
Net operating income 2,140,000 agents under the old 15% commission rate.”
Less fixed interest cost 540,000
Income before income taxes 1,600,000 “It’s even better than that,” explained Maui. “We can actually save P75,000 a year
Less income tax (30%) 480,000 because that’s what we’re having to pay the auditing firm now to check out the agents’
Net income P1,120,000 reports. So our overall administrative costs would be less.”
*Primarily depreciation on storage facilities
“Pull all of these number together and we’ll show them to the executive committee
As Maui handed the statement to Kim Viceroy, Pullman’s president, she commented, “I tomorrow,” said Kim. “With the approval of the committee, we can move on the matter
went ahead and used the agents’ 15% commission rate in completing these statements, immediately.”
but we’ve just learned that they refuse to handle our products next year unless we
92
increase the commission rate to 20%.” . What is the breakeven point in pesos for next year assuming that the agents’
commission rate remains unchanged at 15%?
“That’s the last straw,” Kim replied angrily. “Those agents have been demanding more A. P10,650,000 C. P 9,000,000
and more, and this time they’ve gone too far. How can they possibly defend a 20% B. P12,000,000 D. P10,750,000 Bobadilla
commission rate?”
93
. What is the breakeven point in pesos for next year assuming that the agents’
“They claim that after paying for advertising, travel, and the other costs of promotion, commission rate is increased to 20%?
there’s nothing left over for profit,” replied Maui. A. P13,171,000 C. P13,714,286
B. P15,000,000 D. P12,750,000 Bobadilla
“I say it’s just plain robbery,” retorted Kim. “And I also say it’s time we dumped those
94
guys and got our own sales force. Can you get your people to work up some cost figures . What is the breakeven point in pesos for next if the company employs its own sales
for us to look at?” force?
A. P15,000,000 C. P13,090,909
“We’ve already worked them up,” said Maui. “Several companies we know about pay a B. P12,954,545 D. P15,157,895 Bobadilla
7.5% commission to their own salespeople, along with a small salary. Of course, we
95
would have to handle all promotion costs, too. We figure our fixed costs would increase . Assume that Pullman Company decides to continue selling through agents and pays
by P2,400,000 per year, but that would be more than offset by the P3,200,000 (20% x the 20% commission rate. The volume of sales that would be required to generate
P16,000,000) that we would avoid on agents’ commissions.” the same net income as contained in the budgeted income statement for next year
would be:
The breakdown of the P2,400,000 cost figure follows: A. P18,285,714 C. P19,225,000
Salaries: B. P18,368,421 D. P20,414,714 Bobadilla
Sales manager P 100,000
96
Salespersons 600,000 . The volume of sales at which net income would be equal regardless of whether
Travel and entertainment 400,000 Pullman Company sells through agents at a 20% commission rate or employs its own
Advertising 1,300,000 sales force:
A. P11,625,000 C. P19,200,000
20
B. P12,000,000 D. P18,600,000 Bobadilla 23,726 – 25,550 25 14 5
25,551 – 27,375 26 14 5
Question Nos. 97 through 102 are based on the following information: 27,376 – 29,200 29 16 6
San Carlos operates a general hospital but rents space and beds to separate entities for The staffing levels above represent full-time equivalents, and it should be assumed that
specialized treatment such as pediatrics, maternity, psychiatric, etc. San Carlos charges the Pediatrics Department always employs only the minimum number of required full-
each separate entity for common services to its patients like meals and laundry and for all time equivalent personnel.
administrative services such as billings, collections, etc. All uncollectible accounts are
charged directly to the entity. Space and bed rentals are fixed for the year. Annual salaries for each class of employee follow: supervising nurses, P180,000; nurses,
P130,000; and aides, P50,000. Salary expense for the year ended June 30 for supervising
For the entire year ended June 30, the Pediatrics Department at San Carlos Hospital nurses, nurses, and aides was P720,000, P1,560,000, and P1,100,000, respectively.
charged each patient an average of P650 per day, had a capacity of 60 beds, operated 24
hours per day for 365 days, and had revenue of P10,676,250. The Pediatrics Department operated at 100% capacity during 111 days of the past year. It
is estimated that during 90 of these capacity days, the demand average 17 patients more
Expenses charged by the hospital to the Pediatrics Department for the year ended June 30 than capacity and even went as high as 20 patients more on some days. The hospital has
were: an additional 20 beds available for rent for the coming fiscal year.
Basis of Allocation
97
Patient Days Bed Capacity . The contribution margin per patient day is
Dietary P 328,500 A. P400.00 C. P500.00
Janitorial P 118,400 B. P450.00 D. P525.00 Bobadilla
Laundry 197,100
98
Lab, other than direct charges to patients . How many patient days are necessary to cover fixed costs for bed capacity and for
410,625 supervisory nurses?
Pharmacy 410,625 A. 9,500 C. 10,250
Repairs and maintenance 65,700 66,045 B. 9,820 D. 12,000 Bobadilla
General administrative services 1,218,780
99
Rent 2,546,710 . The number of patient days needed to cover total costs is
Billings and collections 689,850 A. 14,780 C. 15,820
Bad debt expense 246,375 B. 15,140 D. 16,080 Bobadilla
Others 114,975 240,315
100
Total P2,463,750 P4,190,250 . If the Pediatrics Department rented an additional 20 beds and all other factors remain
The only personnel directly employed by the Pediatrics Department are the same as in the past year, what would be the increase in revenue?
A. P 994,500 C. P1,054,500
supervising nurses, nurses, and aides. The hospital has minimum personnel
B. P 877,500 D. P 897,500 Bobadilla
requirements based on total annual patient days. Hospital requirements beginning
at the minimum, expected level of operation follow: 101
.Continuing to consider the 20 additional rented beds, the increase in total variable cost
Annual Patient Days Aides Nurses Supervising Nurses applied per patient day is
10,000 – 14,000 21 11 4 A. P229,350 C. P229,650
14,001 – 17,000 22 12 4 B. P229,500 D. P239,350 Bobadilla
17,001 – 23,725 22 13 4
21
B. P340,000 D. P540,000 Bobadilla
102
.What is the increase in fixed cost applied for bed capacity, given the increase in
104
number of beds? .What is the breakeven point in number of pizzas that must be sold?
A. P1,396,667 C. P1,470,000 A. 25,929 C. 23,569
B. P1,187,238 D. P1,520,000 Bobadilla B. 18,150 D. 42,114 Bobadilla
105
Question Nos. 103 – 105 are based on the following: .What is the cash flow breakeven point in number of pizzas that must be sold?
Ms. Sharkey started a pizza restaurant in 2003. For this purpose a building was rented for A. 19,529 C. 12,990
P40,000 per month. Two women were hired to work full time at the restaurant and six B. 21,284 D. 10,773 Bobadilla
college students were hired to work 30 hours per week delivering pizza. This level of
employment has been consistent. An outside accountant was hired for tax and Question Nos. 106 through 109 are based on the following information:
bookkeeping purposes, for which Ms. Sharkey pays P30,000 per month. The necessary Timex Sporting Goods Company, a wholesale supply company, engages
restaurant equipment and delivery cars were purchased with cash. Ms. Sharkey has independent sales agents to market the company’s products throughout the
noticed that expenses for utilities and supplies have been rather constant. Ms. Sharkey country. These agents currently receive a commission of 20 percent of sales, but
increased her business between 2003 and 2006. Profits have more than doubled since they are demanding an increase to 25 percent of sales made during the year
2003. Ms. Sharkey does not understand why profits have increased faster than volume.
ending December 31, 2007. The controller already prepared the 2007 budget
before learning of the agents’ demand for an increase in commission. The
A projected income statement for the year ended December 31, 2007, prepared by
budgeted 2007 income statement is shown below. Assume that cost of goods sold
the accountant, is shown below:
is 100 percent variable cost.
Sales P9,500,000
Sales P10,000,000
Cost of food sold P2,850,000
Cost of goods sold 6,000,000
Wages & fringe benefits:
Gross margin P 4,000,000
Restaurant help 815,000
Selling and administrative
Delivery help 1,730,000
Commissions P2,000,000
Rent 480,000
Other expenses (fixed) 100,000 2,100,000
Accounting services 360,000
Income before taxes P 1,900,000
Depreciation:
Income tax (30%) 570,000
Delivery equipment 500,000
Restaurant equipment 300,000 Net income P 1,330,000
Utilities 232,500 Timex’s management is considering the possibility of employing full-time sales
Supplies 120,000 7,387,500 personnel. Three individuals would be required, at an estimated annual salary of P30,000
Net income before taxes P2,112,500 each, plus commissions of 5 percent of sales. In addition, a sales manager would be
Income taxes (40%) 845,000 employed at a fixed annual salary of P160,000. All other fixed costs, as well as the
Net income P1,267,500 variable cost percentages, would remain the same as the estimates in the 2007 budgeted
income statement.
Note: The average pizza sells for P250.
106
103 .How much is the estimated break-even point in peso sales for the year ending
.What is the tax shield on the noncash fixed costs?
December 31, 2007, based on the budgeted income statement prepared by the
A. P320,000 C. P149,500
controller?
22
111
A. P500,000 C. P250,000 .How many units should the company need to sell in order to earn a before-tax profit of
B. P400,000 D. P125,000 Bobadilla P150,000?
A. 9,143 C. 31,875
107
.How much is the estimated break-even point in peso sales for the year ending B. 30,375 D. 35,000 Bobadilla
December 31, 2007, if the company employs its own sales personnel?
112
A. P 542,857 C. P 875,000 .If the sales manager receives a bonus of P1.00 for each unit sold in excess of the
B. P 742,857 D. P1,000,000 Bobadilla break-even point, how many units must be sold each month to earn a return of 25%
on the monthly investment in fixed costs?
108
.How much volume in peso sales would be required for the year ending December 31, A. 23,344 C. 29,833
2007, to yield the same net income as projected in the budgeted income statement, if B. 27,000 D. 30,000 Bobadilla
Timex continues to use the independent sales agents and agrees to their demand for a
113
25 percent sales commission? .Assuming that Step Company will just rent a manufacturing space for a month in order
A. P 8,000,000 C. P10,000,000 to produce special order for 8,000 toys. What is the acceptable minimum selling
B. P 9,533,333 D. P13,333,333 Bobadilla price to Step Company for the special sale?
A. P14.00 C. P22.00
109
.How much is the estimated volume in peso sales that would generate an identical net B. P15.25 D. P24.00 Bobadilla
income for the year ending December 31, 2007, regardless of whether Timex
employs its own sales personnel or continues to use the independent sales agents and Question Nos. 114 through 118 are based on the following:
pays them a 25 percent commission? Bolton Company’s income statement for last month is given below:
A. P1,000,000 C. P1,500,000 Sales (15,000 units @ P30) P450,000
B. P1,250,000 D. P1,800,000 Bobadilla Less variable expenses 315,000
Question Nos. 110 through 113 are based on the following data: Less fixed expenses 90,000
Step Company produces toys and other items for use in beach and resort areas. A small, Net income P 45,000
inflatable toy has come onto the market that the company is anxious to produce and sell. The industry in which Bolton Company operates is quite sensitive to cyclical movements
Enough capacity exists in the company’s plant to produce 16,000 units of the toy each in the economy. Thus, profits vary considerably from year to year according to general
month. Variable costs to manufacture and sell one unit would be P12.50, and fixed costs economic conditions. The company has a large amount of unused capacity and is
associated with the toy would total P350,000 per month. studying ways of improving profits.
The company’s Marketing Department predicts that demand for the new toy will exceed A new equipment has come onto the market that would allow Bolton Company to
the 16,000 units that the company is able to produce. Additional manufacturing space can automate a portion of its operations. Variable costs would be reduced by P9 per unit.
be rented from another company at a fixed cost of P10,000 per month. Variable costs in However, fixed costs would increase to a total of P225,000 each month.
the rented facility would total P14 per unit, due to somewhat less efficient operations than
114
in the main plant. The new toy will sell for P30 per unit. .How much income for the month would the company earn if the new equipment is
purchased?
110
.The breakeven units for the new toy would be: A. P45,000 C. P60,000
A. 20,000 C. 21,000 B. P30,000 D. P75,000 Bobadilla
B. 18,000 D. 22,500 Bobadilla
23
115
.How many units are required as increase or decrease in breakeven point if the new P500
equipment is purchased?
A. Zero C. 3,200 units Fixed expenses per year:
B. 2,500 units D. 4,000 units Bobadilla Rent P1,600,000
Advertising 3,000,000
116
.The degree of operating leverage during the month where the new equipment is used Salaries 1,400,000
is: Total P6,000,000
A. 3.0 times C. 6.0 times
119
B. 4.5 times D. 9.0 times Bobadilla .How many units are required for the company’s Davao sales outlet to breakeven?
A. 12,000 pairs C. 20,000 pairs
117
.Refer to the original data. Rather than purchase a new equipment, the president is B. 17,143 pairs D. 22,000 pairs Bobadilla
thinking about changing the company’s marketing method. Under the new method,
120
sales would increase by 20% each month and net income would increase by .If 18,000 pairs of shoes are sold in a year, what would be Davao sales outlet’s net
one-third. Fixed costs could be slashed to only P48,000 per month. Compute the income?
break-even point for the company after the change in marketing method. A. P 600,000 C. P 500,000
A. 8,000 units C. 9,000 units B. P(600,000) D. P(500,000) Bobadilla
121
.The company is considering paying the store manager of Davao sales outlet an
118
.Assuming that during the month following the month new equipment has been started incentive commission of P75 per pair of shoes (in addition to the salesperson’s
in use, the unit sales increased by 4,500 units. The variable expenses per unit and the commission). If this change is made, what will be the new breakeven in pairs of
monthly fixed costs as affected by the acquisition of the new equipment are expected shoes?
to remain constant. A. 26,667 C. 20,000
B. 16,000 D. 22,000 Bobadilla
What is the expected profit of the company for that month?
122
A. P 81,000 C. P 85,500 .Instead of paying the manager a straight P75 per pair of shoes commission on all pairs
B. P126,000 D. P 45,000 Bobadilla of shoes sold, the company is considering paying the store manager P50 commission
on each pair of shoes sold in excess of the breakeven point. If this change is made,
Question Nos. 119 through 124 are based on the following: what will be the sales outlet’s net income or loss if 25,000 pairs of shoes are sold?
Zapatero Corporation operates a chain of shoe stores around the country. The stores A. P 250,000 C. P1,500,000
carry many styles of shoes that are all sold at the same price. To encourage sales B. P 900,000 D. P1,250,000 Bobadilla
personnel to be aggressive in their sales efforts, the company pays a substantial sales
123
commission on each pair of shoes sold. Sales personnel also receive a small basic salary. .If the company would pay the manager P50 commission on each pair of shoes sold in
excess of the breakeven point, how many pairs of shoes are required to earn
The following cost and revenue data relate to Davao sales outlet and are typical of the P900,000 profit?
company’s many sales outlets: A. 23,600 C. 25,000
Selling price P800 B. 23,000 D. 27,500 Bobadilla
Variable expenses:
124
Invoice costs P360 .The company is considering eliminating sales commissions entirely in its stores and
Sales commission 140 increasing fixed salaries by P2,142,000 annually.
24
B. 23,000 D. 28,000
If this change is made, what will be the number of pairs of shoes to be sold by Davao
129
outlet to be indifferent to commission basis? .Refer to the original data. By automating certain operations, the company could reduce
A. 25,300 C. 21,000 variable costs by P3 per unit. However, fixed costs would increase by P72,000 each
B. 15,300 D. 18,505 Bobadilla month.
The following information should be used to answer Question Nos. 125 through 131. How would the breakeven point in units change if the company automated the
Due to erratic sales of its sole product - a high-capacity battery for laptop computers, operations?
Salcedo Company has been experiencing difficulty for some time. The company’s A. 1,000 units increase C. 3,000 units increase
income statement for the most recent month is given below: B. 1,000 units decrease D. 3,000 units decrease
Sales (19,500 units @ P300) P5,850,000
130
Less variable expenses 4,095,000 .At what level of production would the automation of the production process be
Contribution margin 1,755,000 indifferent to the present process?
Less fixed expenses 1,800,000 A. 18,000 C. 24,000
Net loss P (45,000) B. 21,000 D. 28,000
125 131
.The break even in peso sales for Salcedo Company is: .Which of the two methods (the present or the automated) has higher income at the
A. P6,000,000 C. P5,852,756 level of sales of 26,000 units?
B. P2,571,429 D. P7,500,000 A. Manual, P60,000 C. Manual, P240,000
B. Automated, P60,000 D. Automated, P240,000
126
.The president believes that a P160,000 increase in the monthly advertising budget,
combined with an intensified effort by the sales staff, will result in an P800,000 Question Nos. 132 – 134 are based on the following:
increase in monthly sales. If the president is right, what will be the effect on the Almo Company manufactures and sells adjustable canopies that attach to motor homes
company’s monthly net income or loss? and trailers. The market covers new unit purchases as well as replacement canopies.
A. P120,000 increase C. P120,000 decrease Almo developed its 2007 business plan based on the assumption that canopies would sell
B. P 80,000 increase D. P 80,000 decrease at a price of P400 each. The variable costs for each canopy were projected at P200, and
the annual fixed costs were budgeted at P100,000. Almo’s after–tax profit objective was
127
.Refer to the original data. The sales manager is convinced that a 10% reduction in the P240,000; the company’s effective tax rate is 40 percent.
selling price, combined with an increase of P600,000 in the monthly advertising
budget, will cause unit sales to double. What will the new profit or loss if these While Almo’s sales usually rise during the second quarter, the May financial statements
changes are adopted? reported that sales were not meeting expectations. For the first five months of the year,
A. P 60,000 C. P 45,000 only 350 units had been sold at the established price, with variable costs as planned, and
B. P(60,000) D. P(45,000) it was clear that the 2007 after-tax profit projection would not be reached unless some
actions were taken. Almo’s president assigned a management committee to analyze the
128
.Refer to the original data. The Marketing Department thinks that a fancy new package situation and develop several alternative courses of action. The following mutually
for the laptop computer battery would help sales. The new package would increase exclusive alternatives, labeled A, B, and C, were presented to the president.
packaging costs by P7.50 per unit. Assuming no other changes, how many units
would have to be sold each month to earn a profit of P97,500?
A. 21,818 C. 25,450
25
137
Reduce the sales price by P40. The sales organization forecast that with the significantly .If the sales price is reduced by 6.25 percent starting June 1, an analysis indicates that
reduced sales price, 2,700 units can be sold during the remainder of the year. Total fixed 2,500 unit sales can be made if the company has to spent for additional advertising.
and variable unit costs will stay as budgeted. What is the maximum amount of advertising cost that the company can spend and
still the profit objective is achieved?
Lower the variable costs per unit by P25 through the use of less expensive materials and A. P35,000 C. P15,000
slightly modified manufacturing techniques. The sales price will also be reduced by P30, B. P22,500 D. P 7,500
and sales of 2,200 units for the remainder of the year are forecast.
Cut fixed costs by P10,000, and lower the sales price by 5 percent. Variable costs per unit
will be unchanged. Sales of 2,000 units are expected for the remainder of the year.
132
.Assuming no changes were made to the selling price or cost structure, how many units
must Almo sell to break even?
A. 167 C. 500
B. 250 D. 1,700
133
.Assuming no changes were made to the selling price or cost structure, how many units
must Almo sell to achieve its after-tax profit objective?
A. 1,250 C. 2,000
B. 1,700 D. 2,500
134
.If management decides to reduce the selling price by P40, what will Almo's after-tax
profit be?
A. P157,200 C. P241,200
B. P160,800 D. P301,200
135
.If the management can reduce the variable cost per unit by P25 through the use of less
expensive materials and slightly modified manufacturing techniques, with the sales
price reduced by P30, and sales of 2,200 units for the remainder of the year are
forecast, the amount of expected income for the year was:
A. P239,400 C. P241,200
B. P204,000 D. P399,000
136
.How much would be the expected income for the year if the management cut fixed
costs by P10,000, and lower the sales price by 5 percent, with variable costs per unit
unchanged and sales of 2,000 units are expected for the remainder of the year?
A. P239,400 C. P241,200
B. P204,000 D. P399,000
26
1
. Answer: B
Contribution Margin = Fixed costs
= P15,000
(Contribution Margin/Unit Sales) + Variable cost per unit

= Desired Minimum Sales Price
(P15,000 ÷ 3,000) + (P7,500 ÷ 3,000) 7.50

2
. Answer: C
Unit contribution margin (P50 - P30) P 20.00
Additional profit (500 x P20) P10,000
After the break-even level, the amount of profit equals the unit contribution margin multiplied by the number of units sold
in excess of break-even units.
The candidates should remember that the profit increases by the amount of contribution margin brought by additional
units sold.
3
. Answer: A
Cost of dinner P 70.00
Favors and program 30.00
Fixed costs
(15,000 + 7,000 + 48,000 + 10,000)/250 320.00
Cost to be charged P420.00
4
. Answer: B
The number of units required to earn the target profit is equal to the sum of fixed expenses and the target profit divided
by the unit contribution margin. The number of units required to earn the target net profit is:
(P78,000 + P42,000) ÷ P12 10,000
5
. Answer: A
Selling Price P 60
Less: Variable Manufacturing Cost ( 30)
10% Commission ( 6)
Unit Contribution Margin P 24

6
. Answer: A
Current break-even:
Pesos: (P32,000 ÷ 0.40) P80,000
Units: [P32,000 ÷ P6) 5,333
Contribution margin per unit: P15 x 0.40 P 6.00
Additional units to cover additional fixed costs:

(P32,000 x 0.3)  P6 1,600
Alternative solution:
New breakeven units (P32,000 x 1.3) ÷ P6 6,933
Less current breakeven units 5,333
Increase in breakeven units 1,600
7
. Answer: A
The amount of contribution margin per unit is constant within a relevant range. The amount of profit is increased by the
amount of unit contribution margin.
Contribution margin per unit:

fixed cost ÷ breakeven unit sales 50,000 ÷ 5,000 P10.00
At breakeven point, the profit is zero. Therefore, the profit at a level of 5,001 units will be P10 which is the amount of
contribution provided by the unit (one unit) in excess of breakeven point.
8
Answer: A
CMR = Fixed cost/Sales
= 100,000/800,000 = 12.50%
Profit = (1,200,000 – 800,000)0.125 P50,000
The amount of sales that provides profit should be the sales revenues above the break even sales.
Total contribution margin 1,200,000 x 0.125 P150,000
Fixed costs 100,000
Profit P 50,000
9
. Answer: A
Current unit contribution margin (P32 – P24) P8
Current break-even units (P400,000 ÷ P8) 50,000
New unit contribution margin (P40 - P24) P16
New break-even units (400,000 ÷ 16) 25,000
Net decrease in breakeven units
(50,000 – 25,000) 25,000
10
. Answer: A
CM per unit: 220,000 / (100,000 – 80,000) 11.00
Fixed costs: 80,000 x 11 P880,000
The contribution margin per unit is linear or constant per unit.

Therefore: TCM  Units = UCM
11
. Answer: B
TCM  Sales = CMR
Change in TCM: (600,000*0.2) – (360,000*0.1) 84,000
CMR: Increase in TCM ÷ Increase in Sales
84,000 ÷ 240,000 35%
Breakeven sales 90,300 ÷ 0.35 258,000

12
. Answer: C
Before-tax profit 24,000 ÷ 0.6 40,000
Add fixed cost 200,000
Total contribution margin 240,000
Selling price = UVC + UCM

Selling Price = 6 + (240,000 ÷ 40,000) 12.00
13
. Answer: C
The company's degree of operating leverage is determined as follows:
Degree of operating leverage = Contribution margin ÷ Net income
Degree of operating leverage = P600,000 ÷ P240,000 = 2.50
14
. Answer: A
Increase in sales 125,000
Less variable costs and expenses
0.90 x 125,000 112,500
Additional profit before tax 12,500
Less additional tax 0.40 x 12,500 5,000
Additional profit 7,500
15
. Answer: B
Additional profit ÷ UCM = additional unit sales
= (40,000 + 8,000) ÷ (80-60)
= 2,400 units
16
. Answer: A
Total peso sales required 120,000 ÷ (0.25 – 0.1) 800,000*
Less prior sales 400,000
Required increase in sales 400,000
*Peso sales required to earn profit stated as percentage of sales (ROS):

S = [FC + (ROSS)]  CMR
(CMR S) = [FC + (ROSS)]
(CMR S) - (ROSS) = FC
(CMR – ROS) S = FC
S = FC  (CMR – ROS)
17
. Answer: A
Contribution margin 50,000 x (5-3.50) 75,000
Less: additional profit (250,000 x 0.10) 25,000
Additional fixed costs 50,000
Selling price = P3.50 ÷ 0.70 P5.00

18
. Answer: C
A shorter calculation of finding the amount of sales is to divide breakeven sales by (1 – MSR)
Sales = P600,000  (1 – 0.2) P750,000
An alternative solution to find sales is to compute the profit margin.
Profit margin = Contribution margin ratio x margin of safety ratio.

Profit margin = 20% x 40% 8%
Sales = Profit ÷ Profit margin
Sales (60,000 ÷ 0.08) P750,000

19
. Answer: A
Peso sales = FC/(CMR - ROS)
= P210,000/(0.40 - 0.10) P700,000
CMR = 40%
A long computation of required sales uses the following equation:
S = P210,000 + 0.10S
0.40
0.40S = P210,000 + 0.10S

0.40S - 0.10S = P210,000
S = P210,000/(0.40 – 0.10)
S = P700,000
20
. Answer: C
Current number of units required to earn the target net profit:
[(P200,000 + P70,000) ÷ P9] 30,000
After the automated machine is placed into service,

the number of units required to earn the target
net profit will be:
((P250,000 + P70,000) ÷ P12) 26,667
Change in units: 30,000 - 26,667 = 3,333 decrease in unit sales

21
. Answer: C
CMR= 100% - (3.9 ÷ 6.0) = 35%
BES = 1,400,000 ÷ .35 4,000,000
22
. Answer: C
New break-even point: P874,000 ÷ P23 38,000
Current break-even point in units: P770,500 ÷ P23 33,500
Increase in units: 38,000 - 33,500 4,500
Alternative solution: (P103,500 ÷ P23) 4,500
23
. Answer: A
The estimated cost of goods sold
= P565,000 + 0.35S*
*Sum of all percentages for variable production costs
= P565,000 + (P2,000,000 x 0.35)

= P1,265,000
24
. Answer: B
Peso sales required to earn 10% of sales;
FC/(CMR – ROS)
= P36,000/(0.30-0.10)
= 180,000
25
. Answer: A
Revised contribution margin 20,000 x 1.15 x (7-1) 138,000
Fixed cost (105,000 + 19,200) 124,200
Revised profit 13,800
Prior profit 35,000
Decrease in profit 21,200
26
. Answer: A
Margin of Safety = Budgeted sales – Breakeven sales
Margin of Safety: P400,000 – P40,000 P360,000
27
. Answer: B
DOL at P90,000 sales:
Sales 90,000
Variable costs 50,000
Total Contribution margin 40,000
Fixed costs 30,000
Profit 10,000
DOL = TCM/OP
= 40,000/10,000 4 times
% increase in sales x DOL = % increase in profit

4 x 20% = 80%
28
. Answer: B
2006 DOL = 275,000/75,000 3.67
Percentage Increase in profit, 2007 = 3.67 x 30% 110%
2007 Profit = 75,000 +(75,000 x 1.10) P157,500
29
. Answer: A
Peso sales 12,000/(0.40 – 0.1) P40,000
Unit sales P40,000/10 4,000
Increased units 4,000 x 1.25 5,000
Revised contribution margin 5,000 x (9 – 6) P15,000
Less fixed cost 12,000
Revised profit P 3,000
30
. Answer: B
Projected cost of sales:
P800,000 + (P3,000,000 x 0.65) P2,750,000
31
. Answer: B
Unit CM = Change in Profit ÷ Change in Sales
= 200,000 ÷ (100,000 – 75,000)
=8
Fixed costs = Breakeven units x UCM

75,000 x 8 = 600,000
32
. Answer: B
Unit cost:
Materials (P36,000 ÷ 24,000) P1.50
Labor (P54,000 ÷ 24,000) 2.25
Variable selling expense 0.35
Variable unit cost P4.10
Required profit (2,250 ÷ 1,500) 1.50
Required minimum selling price P5.60
33
. Answer: D
Composite ratio:
X: 640,000 ÷ (720,000 + 640,000) 47.059%
Y: 720,000 ÷ (720,000 + 640,000) 52.941%
Weighted-Average Contribution Margin:

(.52941 × .60) + (.47059 × .40) 0.505882
Breakeven sales in pesos:

(505,881 ÷ 0.505882) P1,000,000
Y’s peso sales at breakeven P1M x 0.47059 P 470,590

34
. Answer: A
Sales (500,000 x 1.10) 550,000
Variable cost 300,000
CMR = 250 ÷ 550 = 45.45%

Original fixed costs:
500,000 – 300,000 – 150,000 = 50,000
New fixed cost = 50,000 x 0.80 = 40,000
Breakeven sales = 40,000/0.4545 = P88,000
35
. Answer: B
Before-tax profit (24,000 ÷ 0.6) P 40,000
Add fixed costs 200,000
Total contribution margin P240,000
Contribution margin per unit (P240,000 ÷ 40,000) P 6.00

Variable cost per unit 6.00
Selling price P12.00
36
. Answer: A
DOL = CM/OP
= 275,000/75,000
= 3.67 times
37
. Answer: C
Peso sales : FC ÷ (CMR - Profit Margin)
= P210,000 ÷ (0.55 - 0.15)
= P525,000
CMR = 100% - 45% = 55%

38
. Answer: B
CMR: Change in Fixed Costs ÷ Change in Breakeven Sales
78,750 ÷ (975,000 – 750,000)
0.35
Fixed costs before an increase of 78,750:

750,000 x 0.35 262,500
The increase in fixed costs of P78,750 equals the increase in contribution margin in order to continue at breakeven
sales.
39
. Answer: D
UCM = (70,000 x 1.20)+(40,000 x 3)
70,000 – 40,000
= P6.80
FC = Units(UCM – profit per unit)

= 70,000(6.80 – 1.20)
= P392,000
BEU = 392,000/6.80
= 57,647
40
. Answer: A
Margin of safety in peso sales = Budgeted sales – Breakeven sales
Margin of safety = P1M – P.7M P300,000
41
. Answer: A
2006 Sales 1,000,000
Advertising Cost (75000 ÷ .6) 125,000
Required 2007 peso sales 1,125,000
42
. Answer: A
Revised WACM (0.5 x 1.50) + (0.5 x 2) 1.75
Original WACM (0.4 x 1.50) + (0.6 x 2) 1.80
Revised Breakeven units 12,600/1.75 7,200
Original Breakeven units 12,600/1.80 7,000
Increase in breakeven units 200
43
. Answer: C
WACM = (30 x 0.6) + (60 x 0.4) P42
Breakeven units: 630,000/42 15,000
Breakdown:
Product Standard 15,000 x 0.6 9,000
Product Deluxe 15,000 x 0.4 6,000
44
. Answer: B
WACM = (4/7 x 0.40)+(3/7 x 0.93 = P0.62857
BE units = 7,600/0.62857 = 12,091
Baubles = 12,091 x 4/7 = 6,909
Trinkets = 12,091 x 3/7 = 5,182
45
. Answer: C
Total sales revenue per composite sales:
(12 x P5.25) + (10 x P7.50) + (6 x P12.25) P211.50
Total variable cost per composite sales:
(12 x P4.85) + (10 x P6.95) + (6 x P10.35) P189.80
Total contribution margin per composite sales
(P211.50 - P189.80) P 21.70
Composite breakeven point
P75,950 ÷ P21.70 3,500
Note: Total breakeven units: 3,500 x 28 = 98,000

46
. Answer: C
WACMR = (.6 x .4) + (.4 x .15) 30%
Fixed Costs = 225000 x 1.3 P 292,500
Sales (292500 + 48000) ÷ .3 P1,135,000
47
. Answer: C
UCM = (60,000 x 0.75)+(45,000 x 1.25)
60,000 – 45,000
= 6.75
Fixed cost = (60,000 x 6.75)-(60,000 x 0.75) P360,000
48
. Answer: B
BEV = 600,000 P150,000
16 – 12
49
. Answer: B
CMR = Before Tax Profit Margin
M/S Ratio
= (0.06 ÷ 0.6) ÷ .25
= 40%
FC = (120,000 x .40) – (120,000 x .10) = P36,000

Annual FC = 36,000 x 12 P432,000
50
. Answer: A
Profit Margin = 20% x 10% = 2%
Profit = 400,000 x 2% = 8,000
Fixed Costs = CM - Profit
Fixed Costs = (400,000 x 20%) – 8,000 P72,000
51
. Answer: A
Revised UCM = 25 – 19.80 – (5 x 0.08) P4.80
BEU = 468,000/4.80 97,500
52
. Answer: A
The Company projected zero profit based on zero advertising expenditure.
Additional CM (30,000 units @ 10) P300,000
Less: Required profit 200,000
Maximum advertising cost P100,000
53
. Answer: B
Cash-flow breakeven: 270,000 ÷ (100-60) 6,750
54
. Answer: A
CMR = Before-tax return on sales/MSR
= (0.06  0.60)  0.25 0.40 or 40%
BES = 320,000  0.40 P 800,000
Sales = 800,000  0.75 P1,066,667
55
. Answer: B
The easier calculation of sales value of 60,000 units is to divide the total annual costs by total cost ratio of 85% (100% -
15%).
Sales required = P1,912,500/0.85 P2,250,000
Unit selling price = 2,250,000/60,000 P37.50
56
. Answer: D
Indifference Point = Change in Fixed Cost ÷ Change in Variable Cost
Increase in fixed cost: 2 @ 15,000 P30,000
Decrease in variable cost (15% - 7.5%) 80 P6
Indifference point: 30,000 ÷ 6 5,000 units
57
. Answer: A
WACM = (0.25 x 5)+(0.75 x 7)
= 6.50
BEU = 975,000/6.50
= 150,000
58
. Answer: B
The additional fixed costs of P1,200,000 should be fully covered by the same amount as additional sales (also additional
contribution margin) through an increase in selling price.
Increased price P120 +(1.20M/80,000) P 135

59
. Answer: A
Breakeven point:
Old policy: P80,000/7 11,429
New policy: P100,000/8 12,500
Increase in Breakeven point 1,071
60
. Answer: B
WACMR = (.4 x .2) + (.5 x.3) + (.4 x.5) = 0.43
BES = 1,290,000 ÷ .43 = P3,000,000
61
. Answer: A
Contribution margin 12,000 x (1,500 – 900) P7,200,000
Fixed costs 3,600,000
Operating profit P3,600,000
DOL: 7.2/3.6 = 2 times

62
. Answer: B
The indifference point refers to the level of sales that would give equal profit or total costs for the two alternatives
11.30x + 60,000 = 8.90x + 82,500
2.40x = 22,500
x = 9,375
63
. Answer: C
Variable cost ratio = 2.25/7.50 = 30%
Variable cost next year = 2.25 x 1.3333 = 3
Selling price required = 3/0.30 = P10
64
. Answer: B
Total Fixed Cost P154,000
Operating Profit 26,000
Total Contribution Margin P180,000
Selling price P 20
Contribution margin per unit
(180,000 ÷ 12,000) 15
Unit variable cost P 5
65
. Answer: C
Fixed costs 600,000
Operating profit 120,000
Unit contribution margin 720,000 ÷ 400,000 1.80
Selling price (1.80 ÷ 0.40) P4.50

66
. Answer: B
Contribution margin per machine hour: Contribution margin per unit x No. of units produced per machine hours
Product A P20 x 6 P120
Product B P16 x 8 P128
67
. Answer: A
440,000 + (110,400/0.61) = 480,000
4 – 2.70
Revised variable cost: P2.40 + (P2.00 x 0.15) P2.70

68
. Answer: D
VC Ratio 375,00/625,000 = 60%
VC / unit 375,000/25,000 = P15
New VC = 15 + (4.50 – 2.50)= P17
SP = 17/0.6 = P28.33
69
. Answer: B
The level of sales that would give equal costs:
0.06S = (40 x 24,000)+ 0.02S
0.04S = 960,000
S = 24M
70
. Answer: C
Additional fixed cost/week:
31,200/52 = 600
Additional weekly sales to cover additional fixed cost:

600/0.25 = 2,400
Total Sunday’s sales (where 2,400 represents 25%):

2,400/0.25 = 9,600
600 = 0.25 x 0.25S
600 = 0.0625S
S = 9,600
71
. Answer: A
New BES = 873,600/140 = 6,240
New FC = 840,000 x 1.04 = 873,600
New CM = 250 – 100 –(100 x 0.10) = 140
Old BES = 840,000/150 = 5,600
Increase in BEU = 6,240 – 5,600 = 640
72
. Answer: C
Composite CM = 40 + (2 x 20)
= 80
Composite BE = 910,000/80
= 11,375
73
. Answer: C
Required new sales = 2005 sales + (P112,500/CMR)
= P5M +(P112,500/0.45)
P5.25M
CMR = (250 – 137.50)/250 45%

74
. Answer: A
Breakeven units = 807,840 ÷ 5.30 152,423
New CM/unit = 20 – 14.70 = 5.30
New variable cost: (14 + (14 x.5 x 0.10) = 14.70
New FC = 792,000 + (792,000 x.20x.10) = 807,840
75
. Answer: A
Indifference point = Decrease in Fixed Cost
Increase in Variable Cost
= 80,000/0.05
= P1.60M
76
. Answer: D
Processing hours per unit:
XY – 7: 0.75/1 = 0.75 or 45 minutes
BD – 4: 0.20/1 = 0.20 or 12 minutes
Additional contribution margin using 100,000 hours:

XY – 7: 100,000/0.75 x P1 = P133,333
BD – 4: 100,000/0.20 x P0.50 = P250,000
77
. Answer: B
Units sold to earn P1M:
(1,000,000 + 1,000,000) / 5.25 = 380,952
The use of P1M fixed costs will require 380,952 units which are within the first range.
78
. Answer: A
Fixed costs
= 792,000 +(792,000 x 0.20 x 0.10)
= 807,840
UCM = 20 – 14 –(14 x 0.50 x 0.10)= 5.30

Computation = 807,840/5.30
79
. Answer: A
Cost of one 4–foot piece of metal 4 x 13.60 54.40
Less proceeds from sale of scrap 6.4 / 16 x 8 3.20
Net cost of one 4- foot piece of metal 51.20
Net cost per ounce P 51.20 ÷ 25.6 oz P2.00
Output per one 4-foot piece of metal

Large 4 x 4oz 16.00
Small 4 x 2.4oz 9.60
Scrap 6.40
Total oz 32.00
80
. Answer: B
Material cost per unit
Large: 4 x P2 x 1.8 P14.40
Small 2.4 x P2 x 1.75 P 8.40
81
. Answer: A
Unit CM
Large: 29.00 – (8.5 x 1.8) = 13.70
Small: 14.00 – ( 5.1 x 1.75) = 5.075
WACM = (13.70 + 5.075) ÷ 2 = 9.3875

Breakeven point = 860,000/9.3875
= 91,611
82
. Answer: C
CM /unit 405,000 ÷ 1,800 225
BEV = 247,500 ÷ 225 1,100 units
83
. Answer: A
Operating Profit: (2,100 x 225) – 247,500 = P225,000
After–tax profit: 225,000 x 60% = 135,000
84
. Answer: C
Contribution margin
Regular sales 1,500 x 225 337,500
Special sale 1500 x 175 262,500
Total Contribution 600,000
Fixed costs 247,500
Taxable income 352,500
Income tax 141,000
Net income 211,500
85
. Answer: A
Additional FC/ New Unit CM
61,500 ÷ 200 = 307.5 tons
86
. Answer: D
New SP = 500 x .90450100%New VC 275 + 4031570%New CM13530%
Sales required:]
(Fixed costs + Before Tax profit) ÷ CMR
247,500 + (94,500 ÷ 60) P1,350,000
87
. Answer: A
Unit sales required:
(316,800 + 40,000) ÷ 27.20 = 13,118 pairs
Unit Contribution Margin, Touring:
80.00 – 52.80 P27.20
88
. Answer: A
Indifference point in peso sales:
0.4S – P369,600 = 0.34S – P316,800
0.06S = 52,800
S = P880,000
89
. Answer: D
Breakeven sales, Mountaineering:
369,600 ÷ 35.20 = 10,500
Required contribution margin – Touring
316,800 ÷ 10,500 = 30.17
Present contribution margin – Touring 27.20
Required decrease in variable cost per unit 2.97
90
. Answer: A
New breakeven point: 348,480 ÷ 32.48 10,730
New UCM, Touring: 27.20 + (52.80 x 0.1) = 32.48

New Fixed costs: 316,800 x 1.1 = 348,480
91
. Answer: C
The indifference point in number of pairs is 6,600. Inasmuch that the expected level is 12,000 units, it is better to sell
Mountaineering because it has high leverage than the touring model. Once the indifference point is exceeded, the one
with the higher contribution margin (leverage) has the advantage over the one with the lower contribution margin.
92
. Answer: B
Fixed Costs:
Overhead 2,340,000
Marketing 120,000
Administrative 1,800,000
Interest 540,000
Total 4,800,000
Contribution margin ratio:

1 - [(7,200,000 + 2,400,000)/16M] = 40%
Breakeven next year with no change in commission:

4,800,000 ÷ 0.4 = P12,000,000
93
. Answer: C
If the commission rate is increased by 5%, the contribution margin is decreased by 5% or a new contribution margin
ratio of 35%
Breakeven sales next year.

4,800,000 / 0.35 = P13,714,286
94
. Answer: A
Fixed cost under 15% commission plan 4,800,000
Increase in Fixed cost 2,400,000
Decrease in audit fee ( 75,000)
Increased fixed costs 7,125,000
The commission rate of 7.5%, instead of 15% will raise the contribution margin ratio to 47.5% (40% + 7.5%).
Revised breakeven sales 7,125,000 / .475 = P 15M

95
. Answer: A
Required sales, with 20% commission and profit target of P1,120,000:
(P4,800,000 + 1,600,000) ÷ .35 = 18,285,714
96
. Answer: D
The question asked for is the indifference point. The peso sales required to produce equal income can be easily
calculated by dividing the net increase in fixed costs by the increase in contribution margin ratio:
Difference in CMR = 35% - 47.5 = 12.5%

Increase in fixed costs = 2,400,000 – 75,000 P2,325,000
Indifference Point: 2,325,000 ÷ 0.125 P18.6M
Alternative Solution:
.355 – 4,800,000 = .475S – 7,125,000
.125S = 2,325,000
S = P18,6M
97
. Answer: C
Billing charge per patient day P650
Variable cost per patient day 150
Contribution margin P500
Number of patient days for the year:

P10,676,250/650 16,425
Variable cost per patient day:

P2,463,650÷16,425 P150
98
. Answer: B
Fixed costs for bed capacity P4,190,000
Salary, supervisory nurse 720,000
Total P4,910,000
Number of patient days required to cover fixed costs for bed capacity and salaries of supervisory nurse
4,910,000 ÷ 500 9,820
99
. Answer: B
In solving for the breakeven level where there are step fixed costs, the logical approach is to test the validity of the
ranges of activities.
First Range:
Fixed costs based on capacity4,190,000 Salaries:Aides 21 x 50,0001,050,000Nurses 11 x 130,0001,430,000Supervisor
4 x 180,000 720,0003,200,000Total7,390,000
Breakeven calculation: 7,390,000 ÷ 500 14,780
The calculated breakeven point of 14,780 is invalid because the number falls under the second range wherein the
amount of fixed costs that had been used are not relevant to that range.
Second Range (Final calculation):

Total fixed cost, lowest range 7,390,000
Additional fixed cost:
1 aide 50,000
1 nurse 130,000
Total 7,570,000
Breakeven in patient days:
7,570,000 ÷ 500 15,140
100
.Answer: A
Additional revenues if 20 beds are rented:
90 days @ 17 patient days x 650 994,500
101
.Answer: B
Increase in variable cost should be calculated based on additional patient days for 90 days at P150 per patient day.
17 beds x 90 days x P150 P229,500

102
.Answer: A
The increase in fixed cost based on bed capacity:
P4,190,250 ÷ 60 x 20 P1,396,750
103
.Answer: A
Tax shield in non cash expenses
40% x 800,000 = P320,000
104
.Answer: A
Breakeven in number of pizzas (traditional)
4,537,500/(250 – 75) = 25,929
Units sold: P9,500,000/250 = 38,000
Unit variable cost (cost of food)

2,850,000 ÷ 38,000 = P75.00
Fixed cost = 7,387,500 – 2,850,000 P4,537,500

105
.Answer: A
Cash Flow Breakeven:
3,417,500 ÷ 175 19,529
Total fixed cost: P4,537,500

Less: Noncash fixed cost ( 800,000)
Tax shield on noncash
Fixed costs ( 320,000)
Fixed cash flow P3,417,500
106
.Answer: A
Breakeven sales based on 20% commission:
P100,000 ÷ 0.20 P500,000
Contribution margin ratio:

(10M – 8M) ÷ 10M 20%
107
.Answer: D
Breakeven sales if the company employs its own salesmen:
(P350,000 ÷ 0.35) P1,000,000
The new contribution margin ratio is (20% + 15%) 35%
Fixed costs are expected to be P350,000

(100,000 + 90,000 + 160,000)
108
.Answer: D
The required peso sales to earn net income of P1,330,000 if the commission is raised to 25%:
(P100,000 + P1,900,000) ÷ 0.15 P13,333,333

109
.Answer: B
The indifference point, the level of sales where the alternatives will have equal profits:
.15S- 100,000 = .35S – 350,000
2S = 250,000
S = P1,250,000
110
.Answer: C
The problem illustrates a calculation of breakeven point for a company with a step variable and step fixed cost.
Contribution Margin per Unit:

60,000 or less (P30 – P12.50) P17.50
Units above 60,000 (P30 – P14.00) P16.00
Total contribution margin from the first

60,000 (60,000 x P17.50) P280,000
Let X = Number of units above 16,000
0 = 280,000 + 16X -360,000

X = 80,000 ÷ 16
X = 5,000 units
Breakeven units: 16,000 + 5,000 21,000
Total fixed costs P360,000

Less Contribution margin from 60,000 units 280,000
Remaining fixed costs to be covered by
additional units, each with CM of P16 P 80,000
Breakeven units: 16,000 + (80,000 ÷ 16) 21,000
111
.Answer: B
The units that will generate the desired profit of P150,000 for the company, contributes P16 each. These units are the
excess of 21,000 units to breakeven.

21,000 + (150,000 ÷ P16) 30,375
112
.Answer: B
The bonus plan of P1.00 per unit on sales made in excess of breakeven point (21,000 units) will necessarily decrease
the contribution margin to P15.
The desired profit based on fixed cost:

25% x P360,000 P90,000
Units required: 21,000 + (P90,000 ÷ 15) 27,000

113
.Answer: B
In determining the minimum selling price for the 8,000 units should consider the increased variable cost per unit and the
additional fixed cost. Any cost and losses on the first 16,000 units are irrelevant:
Variable cost per unit P14.00
Additional fixed cost per unit (10,000 ÷ 8,000) 1.25
Minimum selling price P15.25
114
.Answer: A
The net income for the month if the new equipment is acquired:
Contribution margin based on the present system P135,000
Add increase in contribution margin due to
decrease in variable cost (15,000 x 9) 135,000
Increased contribution margin 270,000
Less Increased fixed costs 225,000
Net income P 45,000

115
.Answer: B
The increase in breakeven point would be:
(12,500 – 10,000) 2,500 units
Breakeven, present (P90,000 ÷ P9) 10,000 units
Breakeven, proposed (P225,000 ÷ P18) 12,500 units
116
.Answer: C
The degree of operating leverage (DOL)
during the month that the new
equipment would be used: (270,000 ÷ 45,000) 6X
(Please see solution for No. 94)

117
.Answer: A
Breakeven units if there is a change in marketing method:
P48,000 ÷ 6 8,000 units
Contribution margin per unit:

(Fixed cost + profit) ÷ Units sold
(P48,000 + P60,000) ÷ 18,000 units P6.00

118
.Answer: B
The percentage increase in profit can be calculated by multiplying the degree of operating leverage (DOL) by the
percentage increase in sales during the second month.
The sales increased by 30% (P4,500 ÷ P15,000) and therefore the profit percentage increased by 180% (6 x 30%).
The expected profit during the next month would be:
P45,000 + (P45,000 x 1.8) P126,000

119
.Answer: C
Breakeven Units:
Fixed Costs ÷ Unit Contribution Margin
P6,000,000 ÷ 300 20,000 pairs
120
.Answer: B
Contribution margin (P18,000 x 300) P5,400,000
Less Fixed costs 6,000,000
Net loss P( 600,000)
121
.Answer: A
The breakeven level for the sales outlet is expected to rise because of additional commission, a variable cost item, and
such a commission is being paid for all pairs of shoes sold.
Breakeven in pairs of shoes:

6,000,000 ÷ (300 – 75) 26,667 pairs
122
.Answer: D
Though an additional commission is paid on pairs of shoes sold, the breakeven point is not affected and shall remain at
20,000 because the additional commission applies only to number of pairs of shoes sold in excess of breakeven level.
The profit contribution by the 5,000 pairs is based on reduced contribution margin per pair.
Profit: 5,000 x (300 – 50) P1,250,000
Sales (25,000 x P800) P20,000,000
Variable costs (24,000 x P500) 12,750,000
Total contribution margin 7,250,000
Fixed costs 600,000
Profit P 1,250,000
123
.Answer: A
Because the breakeven level is unchanged, the calculation of the number of pairs to earn P900,000 is simple. The
amount of the desired profit will be contributed by the number of pairs of shoes in excess of breakeven, each
contributing P250.
20,000 +(P900,000 ÷ 250) 23,600 pairs

124
.Answer: B
300X – P6,000,000 = 440X – P8,142,000
140X = P2,142,000
X = 15,300 pairs
125
.Answer: A
Breakeven peso sales: P1,800,000 ÷ 0.3 P6,000,000
CMR = P1,755,000 ÷ P5,850,000 30%
126
.Answer: B
Additional contribution margin P800,000 x 0.30 P240,000
Additional fixed cost 160,000
Increase in profit P 80,000
127
.Answer: B
Sales 39,000 x P270 P10,530,000
Variable cost 39,000 x P210 8,190,000
Contribution margin 2, 340,000
Fixed cost 2,400,000
Net loss P( 60,000)
128
.Answer: B
Original unit contribution margin
(1,755,000 ÷ 19,500) P90.00
Less increase in packaging cost 7.50
New Unit contribution margin P82.50

(P1,800,000 + P97,500) ÷ P82.50 23,000
129
.Answer: A
Breakeven units, Automated
(P1,800,000 + P720,000) ÷ (P90 + P30)
P2,520,000 ÷ 90 21,000
Breakeven units, Present
(P1,800,000 ÷ 90) 20,000
Increase in breakeven units 1,000
130
.Answer: C
The computation of the indifference point for the two processes can be determined by dividing the increase in fixed costs
by the decrease in variable cost per unit because the selling price was unchanged.
Indifference Point: P720,000 ÷ 30 24,000

131
.Answer: B
If the level of sales is higher than the indifference point, the one with higher leverage, i.e., higher fixed costs and lower
unit variable cost, will provide higher income. The automated process has the higher leverage and therefore, it has
higher income:
Difference in income: (26,000 – 24,000)30 P60,000

132
.Answer: C
Breakeven units = Fixed costs  Unit contribution margin
P100,000  (P400 – P200)
500 units
133
.Answer: D
Step 1: Compute before-tax profit:
P240,000  (1.0 – 0.4) P400,000
Units sales required to earn before-tax profit:

(P100,000 + P400,0000)  P200 2,500 units
Profit = Sales – Variable costs – Fixed costs
P400,000 = P400X – P200X – P100,000

P500,000 = P200X
X = 2,500 units
134
.Answer: C
Revenue (350 x P400) + (2,700 x P360) P1,112,000
Variable costs (3,050 x P200) 610,000
Fixed expenses 100,000
Operating income P 402,000
Income tax 160,800
Net income P 241,200
135
.Answer: A
Revenue (350 x P400) + (2,200 x P370) P 954,000
Variable costs (350 x P200) + (2,200 x P175) 455,000
Fixed expenses 100,000
Operating income 399,000
Income tax 159,600
136
.Answer: B
Revenue (350 x P400) + (2,000 x P380) P 900,000
Variable costs (2,350 x P200) 470,000
Contribution margin P 430,000
Fixed costs 90,000
Operating profit 340,000
Income tax 136,000
137
.Answer: D
Before tax profit objective (240,000 ÷ 0.6) P400,000
Fixed costs 100,000
Total contribution margin required 500,000
Less contribution margin made on units sold
January – May (350 x 200) 70,000
Additional contribution margin still needed P430,000
Additional contribution margin from 2,500 units
(2,500 x P175) P437,500
Less additional contribution margin required to meet profit objective 430,000
Maximum advertising cost P 7,500

04 x04 Cost-Volume-Profit Relationships

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Cost-Volume-Profit Analysis

Budgeted sales P1,000,000 Standard Deluxe

Sales price P10.00 P15.00 Fruits Meat Canned Products

A. P2.50 C. P4.50 the following results:

(Contribution Margin/Unit Sales) + Variable cost per unit

(P15,000 ÷ 3,000) + (P7,500 ÷ 3,000) 7.50

Unit Contribution Margin P 24

Additional units to cover additional fixed costs:

Contribution margin per unit:

Profit = (1,200,000 – 800,000)0.125 P50,000

The contribution margin per unit is linear or constant per unit.

Breakeven sales 90,300 ÷ 0.35 258,000

Selling price = UVC + UCM

*Peso sales required to earn profit stated as percentage of sales (ROS):

Selling price = P3.50 ÷ 0.70 P5.00

An alternative solution to find sales is to compute the profit margin.

Profit margin = Contribution margin ratio x margin of safety ratio.

Sales (60,000 ÷ 0.08) P750,000

A long computation of required sales uses the following equation:

0.40S = P210,000 + 0.10S

After the automated machine is placed into service,

Change in units: 30,000 - 26,667 = 3,333 decrease in unit sales

= P565,000 + (P2,000,000 x 0.35)

% increase in sales x DOL = % increase in profit

Fixed costs = Breakeven units x UCM

Weighted-Average Contribution Margin:

Breakeven sales in pesos:

Y’s peso sales at breakeven P1M x 0.47059 P 470,590

CMR = 250 ÷ 550 = 45.45%

Contribution margin per unit (P240,000 ÷ 40,000) P 6.00

CMR = 100% - 45% = 55%

Fixed costs before an increase of 78,750:

FC = Units(UCM – profit per unit)

Note: Total breakeven units: 3,500 x 28 = 98,000

FC = (120,000 x .40) – (120,000 x .10) = P36,000

Increased price P120 +(1.20M/80,000) P 135

DOL: 7.2/3.6 = 2 times

Unit contribution margin 720,000 ÷ 400,000 1.80

Selling price (1.80 ÷ 0.40) P4.50

Revised variable cost: P2.40 + (P2.00 x 0.15) P2.70

Additional weekly sales to cover additional fixed cost:

Total Sunday’s sales (where 2,400 represents 25%):

CMR = (250 – 137.50)/250 45%

Additional contribution margin using 100,000 hours:

UCM = 20 – 14 –(14 x 0.50 x 0.10)= 5.30

Net cost per ounce P 51.20 ÷ 25.6 oz P2.00

Output per one 4-foot piece of metal

WACM = (13.70 + 5.075) ÷ 2 = 9.3875

New UCM, Touring: 27.20 + (52.80 x 0.1) = 32.48

Contribution margin ratio:

Breakeven next year with no change in commission:

Breakeven sales next year.

Revised breakeven sales 7,125,000 / .475 = P 15M

Difference in CMR = 35% - 47.5 = 12.5%

Indifference Point: 2,325,000 ÷ 0.125 P18.6M

Number of patient days for the year:

Variable cost per patient day:

Second Range (Final calculation):

17 beds x 90 days x P150 P229,500

Units sold: P9,500,000/250 = 38,000