CEBE CPAR

CPA REVIEW

HANDOUT No. 1909-21 MAY 2019

COST VOLUME PROFIT AND BREAK EVEN ANALYSIS

MULTIPLECHOICE

1. A company is concerned is concerned about its operating performance, as summarized below:

Revenues (P12.50 per unit) P 300,000
Variable costs 180,000
Operating loss (40,000)
How many additional units should have been sold in order for the company to break even in 2009?
a. 32,000
b. 24,000
c. 16,000
d. 8,000
(CIA, adapted)

Questions 2 and 3 are based on the following information. Data available for the current year are presented below:

Whole Company
Variable manufacturing cost of goods sold P 400,000
Unallocated costs (e.g., president’s salary) 100,000
Fixed costs controllable by division managers
(e.g., advertising, engineering supervision
costs) 90,000
Net revenue 1,000,000
Variable selling and administrative costs 130,000
Fixed costs controllable by others
(e.g., depreciation, insurance) 120,000

Division 1
Variable manufacturing cost of goods sold P 220,000
Unallocated costs (e.g., president’s salary)
Fixed costs controllable by division managers
(e.g., advertising, engineering supervision
costs) 50,000
Net revenue 600,000
Variable selling and administrative costs 70,000
Fixed costs controllable by others
(e.g., depreciation, insurance) 70,000

Division 2
Variable manufacturing cost of goods sold P 80,000
Unallocated costs (e.g., president’s salary)
Fixed costs controllable by division managers
(e.g., advertising, engineering supervision
costs) 40,000
Net revenue 400,000
Variable selling and administrative costs 60,000
Fixed costs controllable by others
(e.g., depreciation, insurance) 50,000

2. What was the contribution margin for the company?

a. P400,000 c. P530,000
b. P470,000 d. P600,000
(CIA, adapted)

3. What was the contribution of Division 1?

a. P190,000 c. P260,000
b. P310,000 d. P380,000
(CIA, adapted)
4. The following information pertains to Syl Co.
Revenues P 800,000
Variable costs 160,000
Fixed costs 40,000
What is Syl’s breakeven point in revenues?
a. P200,000
b. P160,000
c. P 50,000
d. P40,000
(AICPA, adapted)

5. BEH Company is considering dropping a product. Variable costs are P6.00 per 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 the equipment is P20,000 a year. If production is stopped, the equipment can be sold for P18,000; if
production continues, however, it will be useless at the end of 1 year and will have no salvage value. The selling price is
P10 a unit. Ignoring taxes, the minimum units to be sold in the current year to break even on a cash flow basis is
a. 4,500 units
b. 5,000 units
c. 1,800 units
d. 36,000 units
(CMA, adapted)

6. Kent Company’s operating percentages were as follows:

Revenues 100%
Cost of goods sold
Variable 50%
Fixed 10% 60%
Gross profit 40%
Other operating expenses
Variable 20%
Fixed 15% 35%
Operating income 5%

Kent’s sales totaled P2 million. At what revenue level would Kent break even?
a. P 1,900,000
b. P 1,666,667
c. P 1,250,000
d. P 833,.333
(CPA, adapted)

7. The following information relates to Clyde Corporation, which produced and sold 50,000 units during a recent accounting
period.

Revenues P 850,000
Manufacturing costs
Fixed 210,000
Variable 140,000
Selling and administrative costs
Fixed 300,000
Variable 45,000
Income tax rate 40%

For the next accounting period, if production and sales are expected to be 40,000 units, the company should anticipate a
contribution margin per unit of
a. P 1.86
b. P 3.10
c. P 7.30
d. P 13.30
(CMA, adapted)

8. Two companies are expected to have annual sales of P1 million decks of playing cards next year. Estimates for next year
are presented below:
Company 1 Company 2
Selling price per deck P 3.00 P 3.00
Cost of paper per deck .62 .65
Printing ink per deck .13 .15
Labor per deck .75 1.25
Variable overhead per deck .30 .35
Fixed costs P960,000 P252,000
 Given these data, which of the following responses is correct?
Volume in
Units at which
Breakeven Point Breakeven Point Profits of Co. 1 &
in Units for Co. 1 in Units for Co. 2 Co. 2 are Equal
a. 800,000 420,000 1,180,000
b. 800,000 420,000 1,000,000
c. 533,334 105,000 1,000,000
d. 533,334 105,000 1,180,000
(CIA, adapted)

\
9. A company with P280,000 of fixed costs has the following data:
Product A Product B
Sales price per unit P5 P6
Variable costs per unit P3 P5

Assume three units of A are sold for each unit of B sold. revenues for product B at the breakeven point will equal
a. P200,000
b. P240,000
c. P600,000
d. P840,000
e.
(CIA, adapted)

10. Lyman Company has the opportunity to increase annual revenues P100,000 by selling to a new, riskier group of customers.
The bad debt expense is expected to be 15%, and collection costs will be 5%. The company’s manufacturing and selling
expenses are 70% of revenues, and its effective tax rate is 40%. If Lyman should accept this opportunity, the company’s after-
tax profits would increase by
a. P6,000
b. P10,000
c. P9,000
d. P18,000

11. Two companies produce and sell the same product in a competitive industry. Thus, the selling price of the product for
each company is the same. Company 1 has a contribution margin ratio of 40% and fixed costs of P25 million. Company 2
is more automated, making its fixed costs of 40% higher than those of Company 1. Company 2 also has a contribution
margin ratio that is 30% greater than that of Company 1. By comparison, Company 1 will have the list <List A> breakeven
point in terms of peso sales volume and will have the <List B> peso profit potential once the indifference point in dollar
sales volume is exceeded.
List A List B
a. Lower Lesser
b. Lower Greater
c. Higher Lesser
d. Higher Greater
(CIA, adapted)

12. A company manufactures a single product. Estimated cost data regarding this product and other information for the
product and the company are as follows:
Sales price per unit P40
Total variable production cost per unit P22
Sales commission (on sales) 5%
Fixed costs and expenses:
Manufacturing overhead P5,598,720
General and administrative P3,732,480
Effective income tax rate 40%

The number of units the company must sell in the coming year in order to reach its breakeven point is
a. 388,800 units
b. 518,400 units
c. 583,200 units
d. 972,000 units
(CIA, adapted)

13. On January 1, 2009, Lake Co. increased its direct labor wage rates. All other budgeted costs and revenues were
unchanged. How did this increase affect Lake’s budgeted breakeven point and budgeted margin of safety?
Budgeted Budgeted
Breakeven Point Margin of Safety
a. Increase Increase
b. Increase Decrease
c. Decrease Decrease
 d. Decrease Increase
(AICPA, adapted)

14. A retail company determines its selling price by marking up variable costs 60%. In addition, the company uses frequent
selling price markdowns to stimulate sales. If the markdowns averages 10%, what is the company’s contribution margin
ratio?
a. 27.5%
b. 30.6%
c. 37.5%
d. 41.7%
(CIA, adapted)

15. Which of the following would decrease unit contribution margin the most?
a. A 15% decrease in selling price.
b. A 15% increase in variable costs.
c. A 15% decrease in variable costs.
d. A 15% decrease in fixed costs.
(CMA, adapted)
16. The contribution margin increases when revenues remain the same and
a. Variable cost per unit decreases.
b. Variable cost per unit increases.
c. Fixed costs decrease.
d. Fixed costs increase.
(AICPA, adapted)

17. If the fixed costs attendant to a product increase while variable costs and sales price remain constant, what will happen to
contribution margin (CM) and breakeven point (BEP)?
CM BEP
a. Increase Decrease
b. Decrease Increase
c. Unchanged Increase
d. Unchanged Unchanged
(AICPA, adapted)

18. A company increased the selling price of 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 unit remained unchanged. How will these changes affect the breakeven
point?
a. The breakeven point in units will be increased.
b. The breakeven point in units will be decreased.
c. The breakeven point in units will remain unchanged.
d. The effect cannot be determined from the information given.
(AICPA, adapted)

19. The contribution margin per units is the difference between the selling price and the variable cost per unit, and the
contribution margin ratio is the ratio of the unit contribution margin to the selling price per unit. If the selling price and the
variable cost per unit both increase 10% and fixed costs do not change, what is the effect on the contribution margin per
unit and the contribution margin ratio?
a. Both remain unchanged.
b. Both increase.
c. Contribution margin per unit increases, and the contribution margin ratio remains unchanged.
d. Contribution margin per unit increases, and the contribution margin ratio decreases.
(AICPA, adapted)

20. The most likely strategy to reduce the breakeven point would be to
a. Increase both fixed costs and the contribution margin.
b. Decrease both fixed costs and the contribution margin.
c. Decrease the fixed costs and increase the contribution margin.
d. Increase the fixed costs and decrease the contribution margin.
(AICPA, adapted)

21. Marston Enterprises sells three chemicals: petrol, septine, and tridol. Petrol is the company’s most profitable product;
tridol is the least profitable. Which one of the following events will definitely decrease the firm’s overall breakeven point
for the upcoming accounting period?
a. The installation of new computer-controlled machinery and subsequent layoff of assembly-line workers.
b. A decrease in tridol’s selling price.
c. An increase in anticipated sales of petrol relative to sales of septine and tridol.
d. An increase in petrol’s raw material cost.
(CMA, adapted)
Questions 22 through 26 are based on the following information. The SAB Company uses a profit-volume graph similar to the
one shown below to represent the cost-volume-profit relationships of its operations. The vertical (y-axis) is the profit in dollars and
the horizontal (x-axis) is the volume in units. The diagonal line is the contribution margin line.

Profit
in P
Contribution
Margin line
A

0
Volume in
units

22. Point A on the profit-volume graph represents

a. The point at which fixed costs equal revenues.
b. A volume level of zero untis.
c. The point at which total costs equal total revenues.
d. The point at which the rate of contribution margin increases.
(CMA, adapted)

23. The vertical distance (B) from the dotted line on the profit-volume graph represents
a. The total contribution margin.
b. The contribution margin per unit.
c. The contribution margin rate.
d. The sum of the variable and fixed costs.
(CMA, adapted)

24. If SAB Company’s fixed costs increase,

a. The contribution margin line will shift upward parallel to the current line.
b. The contribution margin line will shift downward parallel to the current line.
c. The slope of the contribution margin line will be more pronounced (steeper).
d. The contribution margin line will coincide with the current contribution margin line.
(CMA, adapted)

25. If SAB Company’s variable costs per unit increase but its unit selling price stays constant,
a. The contribution margin line will shift upward parallel to the present line.
b. The contribution margin line will shift downward parallel to the present line.
c. The slope of the contribution margin line will be less pronounced (flatter).
d. The slope of the contribution margin line will change but not in a determinable manner.
(CMA, adapted)

26. If SAB Company decided to increase its unit selling price to offset exactly the increase in the variable cost per unit, the
a. Contribution margin line would shift upward parallel to the existing line.
b. Slope of the contribution margin line would be pronounced (steeper).
c. Slope of the contribution margin line would be less pronounced (flatter).
d. Contribution margin line would coincide with the existing contribution margin line.
(CMA, adapted)

27. A company has revenues of P500,00, variable costs of P300,000, and pretax profit of P150,000. If the company
increased the sales price per unit by 10%, reduced fixed costs by 20%, and left variable cost per unit unchanged, what
would be the new breakeven point in pesos?
a. P 88,000
b. P100,000
c. P110,000
d. P125,000
(CIA, adapted)
Questions 28 through 30 are based on the following information. Multi-Frame Company has the following revenue and cost
budgets for the two products it sells:
A B
Sales price P10.00 P15.00

Direct materials (2.00) (3.00)

Direct labor (3.00) (5.00)
Factory overhead (3.00) (2.75)
Net income per unit P 2.00 P 4.25

Budgeted unit sales 100,000 300,000

The budgeted units sales equal the current unit demand, and total fixed overhead for the year is budgeted at P975,000.
Assume that the company plans to maintain the same proportional mix. In numerical calculations, MultiFrame rounds to
the nearest cent and unit.

28. The total number of units MultiFrame needs to produce and sell the breakeven is
a. 150,000 units.
b. 153,947 units.
c. 100,000 units.
d. 300,000 units.
(CMA, adapted)

29. The total number of units needed to breakeven if the budgeted direct labor costs were P2 for A instead of P3 is
a. 144,444 units.
b. 150,000 units.
c. 153,947 units.
d. 100,000 units.
(CMA, adapted)

30. The total number of units needed to breakeven if sales were budgeted at 150,000 units of plastic frames and 300,000
units of glass frames with all other costs remaining constant is
a. 144,444 units.
b. 150,000 units.
c. 153,947 units.
d. 450,000 units.
(CMA, adapted)