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COST-VOLUME-PROFIT ANALYSIS
Breakeven Point
5. Scrambled Brain Company has fixed costs of P90,000. At a sales volume of P300,000, return on
sales is 10%; at a P500,000 volume, return on sales is 22%. What is the break-even volume?
A. P120,000
C. P225,000*
B. P200,000
D. P450,000
6. Bush Electronics, Inc. had the following sales results for 2004:
TV sets
CD player
Peso sales component ratio
0.30
0.30
Contribution margin ratio
0.40
0.40
Bush Electronics, Inc. had fixed costs of P2,400,000.
The break-even sales in pesos for Bush Electronics, Inc. are:
TV sets
CD player
A.
P1,800,000
P1,800,000
B
P1,800,000
P1,800,000
C.
P1,500,000
P1,500,000
D.
P1,531,915
P1,531,915

Radios
0.40
0.60

Radios
P3,600,000
P1,600,000
P2,000,000
P2,042,553

7. Glareless Company manufactures and sells sunglasses. Price and cost data are as follows:
Selling price per pair of sunglasses
P25.00
Variable costs per pair of sunglasses:
Raw materials
P11.00
Direct labor
5.00
Manufacturing overhead
2.50
Selling expenses
1.30
Total variable costs per unit
P19.80
Annual fixed costs:
Manufacturing overhead
P192,000
Selling and administrative
276,000
Total fixed costs
P468,000
Forecasted annual sales volume (120,000 pairs)
P3,000,000
Income tax rate
40%
Glareless Company estimates that its direct labor costs will increase 8 percent next year. How
many units will Glareless have to sell next year to reach breakeven?
A. 97,500 units
C. 83,572 units
B. 101,740 units
D. 86,250 units
May 2005

Preweek Quizzer

8. Madel Company manufactures a single electronic product called Walastik. Walastik sells for P900
per unit. In 2000, the following variable costs were incurred to produce each Walastik device.
Direct labor
P180
Direct materials
240
Factory overhead
105
Selling costs
75
Total variable costs
P600
Madel is subject to 40 percent income tax rate, and annual fixed costs are P6,600,000. Except for
an operating loss incurred in the year of incorporation, the firm has been profitable over the last five
years.
In 2001, a significant change in Madels production technology caused a 10% increase in annual
fixed costs and a 20% unit cost increase in the direct labor component as a result of higher skilled
direct labor. However, this change permitted the replacement of a costly imported component with
a local component. The effect was to reduce unit material costs by 25%. There has been no
change in the Walastik selling price.
The annual sales units required for Madel to breakeven are:
A.
B.
C.
D.
2000
22,000
22,000
14,000
14,000
2001
20,840
22,407
22,407
20,840
Profit Planning
9. Signal Co. manufactures a single product. For 2000, the company had sales of P90,000, variable
costs of P50,000, and fixed costs of P30,000. Signal expects its cost structure and sales price per
unit to remain the same in 2001, however total sales are expected to jump by 20%. If the 2001
projections are realized, net income in 2001 should exceed net income in 2000 by
A. 100%
C. 20%
B. 80%
D. 50%
10. Six-Two Convenience Store currently opens only Monday through Saturday. Six-Two is
considering opening on Sundays. The annual incremental fixed costs of Sunday openings are
estimated at P39,000. Six-Twos gross margin on sales is 25 percent. Six-Two estimates that 60
percent of its Sunday sales to customers would be made on other days if the stores were not open
on Sundays. The one-day volume of Sunday sales that would be necessary for Six-Two to attain
the same weekly operating income as the current six-day week is
A. P6,000
C. P7,500
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B. P5,000

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D. P4,500

Preweek Quizzer

11. Gorilla, Co. provides two products, M and W. M accounts for 60 percent of total sales, variable cost
as a percentage of selling price are 60% for M and 85% for W. Total fixed costs are P225,000. If
fixed costs will increase by 30 percent, what amount of peso sales would be necessary to generate
an operating profit of P48,000?
A. P1,350,000
C. P1,135,000
B. P486,425
D. P910,000
12. Mount Park, Inc. had the following economic information for the year 2002:
Sales(50,000 units @ P20)
P1,000,000
Variable manufacturing costs
400,000
Fixed costs
250,000
Income tax rate
40 percent
Mount Park budgets its 2003 sales at 60,000 units or P1,200,000. The company anticipates
increased competition; hence, an additional P75,000 advertising costs is budgeted in order to
maintain its sales target for 2003.
What is the amount of peso sales needed for 2003 in order to equal the after-tax income in 2002?
A. P1,125,000
C. P1,187,500
B. P1,325,000
D. P1,387,500
13. Larz Company produces a single product. It sold 25,000 units last year with the following results:
Sales
P625,000
Variable costs
P375,000
Fixed costs
150,000
525,000
Net income before taxes
P100,000
Income taxes
40,000
Net income
P 60,000
In an attempt to improve its product in the coming year, Larz is considering replacing a component
part in its product that has a cost of P2.50 with a new and better part costing P4.50 per unit. A new
machine will also be needed to increase plant capacity. The machine would cost P18,000 with a
useful life of 6 years and no salvage value. The company uses straight-line depreciation on all
plant assets.
If Larz wishes to maintain the same contribution margin ratio after implementing the changes, what
selling price per unit of product must it charge next year to cover the increased material costs?
A. P27.00
C. P32.50
B. P25.00
D. P28.33

May 2005

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Preweek Quizzer

Point of Indifference
14. Ravine Ski Company recently expanded its manufacturing capacity to allow it to produce up to
15,000 pairs of cross-country skis of either the mountaineering model or the touring model. The
sales department assures management that it can sell between 9,000 and 13,000 pairs (units) of
either product this year. Because the models are very similar, Ravine Ski will produce only one of
the two models. The information below was compiled by the accounting department.
Mountaineering
Touring
Selling price per unit
P880.00
P800.00
Variable costs per unit
P528.00
P528.00
Fixed costs will total P3,696,000 if the mountaineering model is produced but will be only
P3,168,000 if the touring model is produced. Ravine Ski is subject to a 40% income tax rate.
The total sales revenue at which Ravine Ski Company would make the same profit or loss
regardless of the ski model it decided to produce is
A. P8,800,000
C. P9,240,000
B. P4,224,000
D. P6,864,000
15. Valley of Fire Corporation has one department that produces three replacement parts for the
company. However, only one part can be produced in any month because of the adjustments that
must be made to the equipment. The department can produce up to 15,000 units of any one of the
three parts in each month. The company expresses the monthly after tax cost/volume/profit
relationships for each part using an equation method. The format of the equations and the
equation for each replacement part are given below:
(ATR) X ((SP VC) x (U) FC)
ATR = after-tax rate
VC = variable cost
FC = fixed costs
SP = selling price
U = units
Part
Part Equations
AL45
.6 ((P4.00 P1.25) (U) P33,400)
BT65
.6 ((P4.05 P2.55) (U) P15,000)
GM17
.6 ((P4.10 - P2.00) (U) - P22,365)
The production and unit sales volume level at which Valley will be indifferent as to whether Part
BT62 or GM17 is produced is
A. 7,365
C. 10,380
B. 4,092
D. 12,275
May 2005

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16. BM Motors, Inc. employs 40 sales personnel to market its line of luxury automobiles. The average
car sells for P1,200,000 and a 6% commission is paid to the salesperson. BM Motors is
considering a change to a commission arrangement that would pay each salesperson a salary of
P24,000 per month plus a commission of 2% of the sales made by that salesperson.
The amount of total car sales at which BM Motors would be indifferent as to which plan to select is
A. P22,500,000
C. P24,000,000
B. P30,000,000
D. P12,000,000
17. Zapatero, Inc. operates a chain of shoe stores around the country. The stores carry many styles of
shoes that are all sold at the same price. To encourage sales personnel to be aggressive in their
sales efforts, the company pays a substantial sales commission on each pair of shoes sold. Sales
personnel also receive a small basic salary.
The following cost and revenue data relate to Store 9 and are typical of the companys many sales
outlets:
Selling price
P800
Variable expenses:
Invoice costs
P360
Sales commission
140
P500
Fixed expenses per year:
Rent
P1,600,000
Advertising
3,000,000
Salaries
1,400,000
Total
P6,000,000
The company is considering eliminating sales commissions entirely in its stores and increasing
fixed salaries by P2,142,000 annually.
If this change is made, what will be the number of pairs of shoes to be sold by Store 9 to be
indifferent to commission basis?
A. 25,300
C. 18,505
B. 15,300
D. 21,000
Sensitivity Analysis
18. If fixed costs increase while variable cost per unit remains constant, the contribution margin will be
A. lower
C. unchanged
B. higher
D. unpredictable

May 2005

Preweek Quizzer

19. Firm D and Firm S are competitors within the same industry. Firm D produces its product using
large amounts of direct labor. Firm S has replaced direct labor with investment in machinery.
Projected sales for both firms are fifteen percent less than in the prior year. Which statement
regarding projected profits is true?
A. Firm D will lose more profit than Firm S.
B. Firm S will lose more profit than Firm D.
C. Firm D and Firm S will lose the same amount of profit.
D. Neither Firm D nor Firm S will lose profit.
20. 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, there is a loss of P1.25 per
unit. Both the variable cost per unit and total fixed costs remain constant. The fixed costs
amounted to
A. P80,000
C. P247,500
B. P360,000
D. P210,000
21. The Liberal Marketing Co., is expecting an increase of fixed costs by P78,750 upon moving their
place of business to the downtown area. Likewise it is anticipating that the selling price per unit
and the variable expenses will not change. At present, the sales volume necessary to breakeven is
P750,000 but with the expected increase in fixed costs, the sales volume necessary to breakeven
would go up to P975,000. Based on these projections, what were the total fixed costs before the
increase of P78,750?
A. P341,250
C. P183,750
B. P262,500
D. P300,000
22. Machan Co.s year-end income statement is as follows:
Sales (20,000 units)
P360,000
Variable costs
220,000
Contribution margin
P140,000
Fixed costs
105,000
Net income
P 35,000
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 expected to increase by
P19,200 and variable costs to increase by P1 per unit. Unit sales are expected to increase by 15
percent. What is the effect on income if the foregoing changes are implemented?
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A. Decrease of P21,200
B. Increase of P1,800

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C. Increase of P13,800
D. Increase of P14,800

B. P90,000

Preweek Quizzer
D. P360,000

23. Candyman Company is a wholesale distributor of candy. The company services grocery,
convenience, and drug stores in Metro Manila. Small but steady growth in sales has been achieved
by the company over the past few years while candy prices have been increasing. The company is
formulating its plans for the coming fiscal year. Presented below are the data used to project the
current years after-tax net income of P110,400.
Manufacturers of candy have announced that they will increase prices of their products an average
of 15% in the coming year due to increases in raw material (sugar, cocoa, peanuts, etc.) and labor
costs. Candyman Company expects that all other costs will remain at the same rates or levels as
the current year. Candyman is subject to 40 percent tax rate.
Average selling price
P4.00 per box
Average variable costs
Cost of candy
P2.00 per box
Selling expenses
0.40 per box
Total
P2.40 per box
Annual fixed costs
Selling
P169,000
Administrative
280,000
Total
P440,000
Expected annual sales volume (390,000 boxes)
P1,560,000
If net income after taxes is to remain the same after the cost of candy increases but no increase in
the sales price is made, how many boxes of candy must Candyman sell?
A. 480,000
C. 27,600
B. 400,000
D. 29,300
Margin of Safety
24. Claremont Company had is a manufacturer of its only one product line. It had sales of P400,000
for 2002 with a contribution margin ratio of 20 percent. Its margin of safety ratio was 10 percent.
What are the companys fixed costs?
A. P72,000
C. P288,000
B. P80,000
D. P320,000
25. Lemery Corporation had sales of P120,000 for the month of May. It has a margin of safety ratio of
25 percent, and after-tax return on sales of 6 percent. The company assumes its sales constant
every month. If the tax rate is 40 percent, how much is the monthly fixed costs?
A. P36,000
C. P432,000
May 2005

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Degree of Operating Leverage

26. A very high operating leverage indicates that a firm
A. has high fixed costs
B. has a high net income
C. has high variable costs
D. is operating close to its breakeven point
27. The Didang Company has an operating leverage of 2. Sales for 2001 are P2,000,000 with a
contribution margin of P1,000,000. Sales are expected to be P3,000,000 in 2002. Net income for
2002 can be expected to increase by what amount over 2001?
A. P250,000
C. P500,000
B. 200 percent
D. 40 percent
Situational
Questions 28 thru 34 are based on the following information:
Calamba Hospital operates a general hospital but rents space and beds to separate entities for
specialized treatment such as pediatrics, maternity, psychiatric, etc. Calamba charges each separate
entity for common services to its patients like meals and laundry and for all 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.
For the entire year ended June 30, the Pediatrics Department at Calamba Hospital charged each
patient an average of P65 per day, had a capacity of 60 beds, operated 24 hours per day for 365 days,
and had revenue of P1,138,800.
Expenses charged by the hospital to the Pediatrics Department for the year ended June 30 were:
Basis of Allocation
Patient Days
Bed Capacity
Dietary
P 42,952
Janitorial
P 12,800
Laundry
28,000
Lab, other than direct charges to patients
47,800
Pharmacy
33,800
Repairs and maintenance
5,200
7,140
General administrative services
131,760
Rent
275,320
Billings and collections
40,000
Bad debt expense
47,000
May 2005

Preweek Quizzer

Other

18,048
.
P262,800
P453,000
The only personnel directly employed by the Pediatrics Department are supervising nurses, nurses, and
aides. The hospital has minimum personnel requirements based on total annual patient days. Hospital
requirements beginning at the minimum, expected level of operation follow:
Annual Patient Days
Aides
Nurses
Supervising Nurses
10,000 14,000
21
11
4
14,001 17,000
22
12
4
17,001 23,725
22
13
4
23,726 25,550
25
14
5
25,551 27,375
26
14
5
27,376 29,200
29
16
6
The staffing levels above represent full-time equivalents, and it should be assumed that the Pediatrics
Department always employs only the minimum number of required full-time equivalent personnel.
Annual salaries for each class of employee follow: supervising nurses, P18,000; nurses, P13,000; and
aides, P5,000. Salary expense for the year ended June 30 for supervising nurses, nurses, and aides
was P72,000, P169,000, and P110,000, respectively.
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 than capacity and even
went as high as 20 patients more on some days. The hospital has an additional 20 beds available for
rent for the coming fiscal year.
28. The variable expense per patient day is
A. P15.08
B. P12.50

C. P15.00
D. P50.00

29. The contribution margin per patient day is

A. P49.92
B. P52.50

C. P50.00
D. P52.00

30. How many patient days are necessary to cover fixed costs for bed capacity and for supervisory
nurses?
A. 9,500
C. 12,500
B. 11,500
D. 10,500
31. The number of patient days needed to cover total costs is
A. 14,200
C. 15,820
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B. 15,200

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D. 14,220

32. If the Pediatrics Department rented an additional 20 beds and all other factors remain the same as
in the past year, what would be the increase in revenue?
A. P99,450
C. P105,450
B. P87,750
D. P89,750
33. Continuing to consider the 20 additional rented beds, the increase in total variable cost applied per
patient day is
A. P22,935
C. P22,965
B. P22,950
D. P23,935
34. What is the increased fixed cost applied for bed capacity, given the increased number of beds?
A. P151,000
C. P147,000
B. P173,950
D. P152,000
Questions 35 thru 37 are based on the following information.
Ms. Casserole started a pizza restaurant in 1998. For this purpose a building was rented for P400 per
month. Two women were hired to work full time at the restaurant and six 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 bookkeeping purposes, for which Ms. Casserole pays P300 per
month. The necessary restaurant equipment and delivery cars were purchased with cash. Ms.
Casserole has noticed that expenses for utilities and supplies have been rather constant. Ms.
Casserole increased her business between 1998 and 2001. Profits have more than doubled since
1998. Ms. Casserole does not understand why profits have increased faster than volume.
A projected income statement for the year ended December 31, 2002, prepared by the accountant, is
shown below:

May 2005

Sales
Cost of food sold
Wages & fringe benefits:
Restaurant help
Delivery help
Rent
Accounting services
Depreciation:
Delivery equipment
Restaurant equipment
Utilities
Supplies
Net income before taxes
Income taxes (40%)
Net income
Note: The average pizza sells for P2.50.

Preweek Quizzer
P95,000
P28,500
8,150
17,300
4,800
3,600
5,000
3,000
2,325
1,200

73,875
P21,125
8,450
P12,675

35. What is the tax shield on the noncash fixed costs?

A. P3,200
C. P3,400
B. P14,950
D. P5,400
36. What is the breakeven point in number of pizzas that must be sold?
A. 25,929
C. 18,150
B. 23,569
D. 42,114
37. What is the cash flow breakeven point in number of pizzas that must be sold?
A. 19,529
C. 12,990
B. 21,284
D. 10,773

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