Management Services

MS-03 CVP Analysis

The contribution margin is the difference It's important to note that the DOL is a static MULTIPLE CHOICE QUESTIONS
between sales revenue and variable costs, measure and assumes that the cost structure
representing the amount available to cover and sales mix remain constant. In reality, cost Problem Solving Questions
fixed costs and contribute to operating structures and sales mixes can vary over time, BEP, Margin of Safety, and DOL
income. The operating income is the profit and the DOL may not accurately capture the The next items are based on the following:
generated from the core operations of the dynamic nature of a business. Therefore, the The following information pertains to Mete Co.
business before considering interest and DOL should be used as a guide rather than an
taxes. absolute predictor of profitability. Sales P400,000
Variable costs 80,000
The DOL indicates the percentage change in The DOL is a useful tool for financial analysis Fixed costs 20,000
operating income that can be expected for a and decision-making, particularly in
given percentage change in sales volume. A evaluating the risk associated with changes in 1. Mete’s breakeven point in sales peso is 28K
higher DOL implies that a company has a sales volume. It helps businesses assess the A. P20,000 C. P80,000
higher proportion of fixed costs relative to impact of different sales scenarios, plan (320k/400k)
B. P25,000 D. P100,000
variable costs. Consequently, small changes pricing strategies, determine optimal
in sales volume can have a significant impact production levels, and make informed 2. Mete’s margin of safety in sales peso is
on operating income, leading to higher decisions about cost structure and resource A. P400,000 C. P350,000 (400k
-
25k)
variability in profits. allocation. B. P375,000 D. P300,000

3. Mete’s degree of operating leverage is

320kCM
A. 1.25 C. 0.9375
LECPA Syllabus B. 1.0667 D. 1.0000 (320kGP - 20KFC)
Effective October 2022
1.0 Management Accounting 4. Assume Mete’s sales will increase by 25%, what would be the increase in profit? (round off
1.2 Management accounting concepts and techniques for planning & control to whole number)
1.2.2 Cost-volume profit (CVP) analysis C. 380,000 C. 75,000
1.2.2.1 Uses, assumptions and limitations of CVP analysis D. 80,000 D. 100,000
1.2.2.2 Factors affecting profit cost 400K -300K 100K
50017-100K = :

125 %
=

400K x
=
1.2.2.3 Breakeven point in unit sales and peso sales The next items are based on the following:
1.2.2.4 Required selling price, unit sales and peso sales to achieve a target Mound Company has a before-tax return on sales of 9% and a 25% margin of safety. Current
profit sales are P800,000.
1.2.2.5 Sensitivity analysis (including indifference point in unit sales and peso
sales) 5. What is the breakeven sales?
1.2.2.6 Use of sales mix in multi-product companies A. 600,000 C. 728,000 800kx(1 -
25 % )
1.2.2.7 Concepts of margin of safety and degree of operating leverage B. 750,000 D. None of these
1.2.2.8 Different scenarios using CVP analysis (indifference point, step fixed,
multiple drivers) 6. What is the variable cost percentage?

******end of lecture notes******

A. 75% C. 64%
(1
-
0 .

09)
B. 91% D. 80%

Page 9 October 2023 Page 10

 First 75K :

75k x 10
=
750k
CM From 754u =

/Sparcostrat =
1 2M -
750K
=
P450K
FC
754 : Remaining
.

Addn't unit req .

Beyond 75kv : CM /u = Sp -Xc = 60 -
34 = P26/v
75k
beyond
:
For units 008
4501/12 50 754 H Sp-VC 60-28 P32/
=
= .
=
36kv + = ,
Proposed CM/u : =

Xc/u spx Var cost ratio = 25x50 % (F(2 = 104k)

Proposed Fixed
=
Cosp
[
CM/v 12 50 010
Sp -XC 25
=
BEP(newl= -
= = -

= 31

Management Services MS-03 CVP Analysis

Step-fixed Cost Indifference Point
7. Tonykinn company is contemplating marketing a new product. Fixed costs to be incurred are The next items are based on the following:
P800,000 for production of 75,000 units or less and P1,200,000 for more than 75,000 units. Travelco sells one of its products, a piece of soft-sided luggage, for P60. Variable cost per unit is
The variable cost ratio is 60% for the first 75,000 units, though it drops to 50% for units in P34, and monthly fixed costs are P60,000. A combination of changes in the way Travelco
excess of 75,000 units. If the product is expected to sell for P25 per unit, how many units produces and sells this product could reduce per-unit variable cost to P28 but increase monthly
must Tonykinn sell to breakeven? fixed costs to P104,000.
A. 120,000 D. 80,000
B. 111,000 E. none of these 12. What is the new breakeven point in units as a result of the proposed changes?
C. 96,000 A. 3,250 C. 2,308 current total cost :

B. 5,558 D. 7,333 TC1 FC1 + (VC1X = Units sold)

Multiple Products Proposed Total cost :

The next items are based on the following: 13. What is the indifference point of the two alternatives? TC2 = F(2 + (XC2 x Units
sold)
White Inc. manufactures two types of products, Xylem and Hylem, accounting for 70% and 30% A. 3,250 C. 2,308 TC1 = TC2

of the total peso sales of the company. Variable costs, as a percentage of sales, are 60% for Xylem B. 5,558 D. 7,333 60k + (34x9) = 104k + (28xQ)
and 80% for Hylem. Total fixed costs amount to P340,000. There are no costs involved. 60k 1041
- =
28Q -
34Q
Reconstruction of Accounts (44k) (6) Q =

8. The break-even point in peso sales of White Inc, is The next items are based on the following: Q 4417/6 7 333 = =
,

A. P515,152 D. P1,512,152 The present breakeven sales of Valenzuela Company are P550,000 per year. It is computed that if
B. P850,000 E. None of these fixed expenses will go up by P60,000, the sales volume required to breakeven will also increase to
C. P1,000,000 P700,000, without any change in the selling price per unit and on the variable expenses.

9. If fixed costs of White Inc. are increase by 10% the amount of peso sales needed to assure a 14. Based on the following above, the variable expense ratio of the company is:
net income of P34,000 is A. 30% D. 70%
A. P1,020,000 D. P1,500,000 B. 40% E. None of these
B. P1,225,000 E. None of these C. 60%
C. P1,200,000
15. Before the increase of P60,000, the total fixed expenses of Valenzuela Company is:
10. If fixed costs of White Inc. are increase by 10% the amount of peso sales needed to assure a A. P200,000 D. P330,000
net income after tax of P34,000 is (tax rate is 20%) B. P220,000 E. None of these
A. P1,020,000 D. P1,500,000 C. P280,000
B. P1,225,000 E. None of these Breakeven Sales= Total FC

C. P1,200,000 CMR
=
1 -
var
CM ratio

expense ratio (VER)

11. Marble Company is selling three products: Red, White and Blue. The company sells three
units of Red for every unit of Blue and two units of White for every unit of Red. Fixed costs
Elect
divideinSt
*

are P720,000 and contribution margins are P1.70 per unit of Red. P2.00 per unit of White
and P2.90 per unit of Blue. FC

1 2727 FC
.
= FC + 60K

How many units of White should the company sell at the break-even point? 0 .
2727 FC = 60K

220k 40 %
FC = 60k/ 2727 .
=
FC /550K =

A. 72,000 D. 360,000 VER =

1 -
40 % =
60 %

B. 108,000 E. None of these

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 Management Services MS-03 CVP Analysis
16. Yakal Company shows the following budgeted data for the year 20x0: Theoretical Questions
Estimated Sales 18,000 units
Estimated costs Amount Per unit 1. How may the following be used in calculating the break-even point in units? <Fixed
Direct labor P54,000 P3.00 Costs><Contribution Margin per unit>
Materials 8,100 0.45 A. Denominator; and Numerator C. Numerator; and Not used
Fixed overhead 13,500 0.75 B. Denominator; and Not used D. Numerator; and Denominator
Administrative expense 16,200 0.90
Total P91,800 P5.10 2. The contribution margin increase when sales volume remain the same and
A. variable cost per unit decrease C. fixed costs decrease
Selling expenses are expected to be 20% of sales and profit before tax is to amount to P1.50 B. variable cost per unit increase D. fixed costs increase.
per unit.
3. The peso amount of sales needed to attain a desired profit is calculated by dividing the
In order to attain the company’s goal for 20x0 the selling price per unit must be set at: contribution margin ratio into
A. P5.00 D. P9.75 A. fixed cost C. desired profit plus fixed cost
B. P6.60 E. None of these B. desired profit D. desired profit less fixed cost.
C. P8.25
4. At the break-even point, fixed cost is always
17. The following information pertains to Nova Co.’s cost-volume-profit relationships: A. less than the contribution margin
B. equal to the contribution margin
Breakeven point on units sold 1,000 C. more than the contribution margin
Variable costs per unit P500 D. more than the variable cost.
Total fixed cost 150,000
5. The contribution margin ratio always increase when the
How much will be contributed to profit before income taxes by the 1,001st unit sold? A. break-even point increases
A. P650 C. P150 B. break-even point decreases
B. P500 D. 0 C. variable costs as a percentage of net sales decrease
D. variable costs as a percentage of net sales increase .

6. If the fixed costs attendant to a product increase while variable costs and sales price remain
constant, what will happen to (1) contribution and (2) break-even point?
A. Increase; and Decrease C. Unchanged; and Increase
B. Decrease; and Increase D. Unchanged; and Unchanged

7. If the fixed costs for a product decrease and the variable costs (as a percentage of sales
pesos) decrease, what will be the effect on the contribution margin ratio and the break-
even point respectively?
A. Decreased; and Increased C. Decreased; and Decreased
B. Increased; and Decreased D. Increased; and Increased

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 Management Services MS-03 CVP Analysis
8. The method of cost accounting that lends itself to break-even analysis is 14. A company increased the selling price for its product from P1.00 to P1.10 a unit when the
A. variable C. absolute fixed costs increased from P400,000 P480,000 and variable cost per unit remain unchanged.
B. standard D. absorption. How would these changes affect the break-even point?
A. the break-even point units would increase
9. Each of the following would affect the break-even point except a change in the B. the break-even point in units would be decreased
A. number of units sold C. total fixed costs C. the break-even point in units would remain unchanged
B. variable costs per unit D. sales price per unit. D. the effect cannot be determined from the information given.

10. Which of the following would cause the break-even point to change? 15. Margin of safety reveals the amount by which sales could decreased before loses occur is
A. Sales increased computed by
B. total production decreased A. subtracting variable cost from sales
C. total variable cost increased as a function of higher production B. adding variable costs and fixed costs
D. fixed costs increased due to addition to physical plant. C. subtracting break-even sales from actual sales
D. adding contribution margin and fixed costs.
11. To obtain the break-even point in terms of pesos of sales , total fixed costs are divided by
which of the following ? 16. In a sales mix break-even problem, total fixed costs divided by the package contribution
A. Variable cost per unit margin is to arrive at the
B. sales price per unit less variable cost per unit) divided by sales price per unit A. total units to break-even
C. fixed cost per unit B. units to break-even for a particular product in the mix
D. variable cost per unit divided by sales price per unit. C. total break-even sales pesos
D. composite break-even point in units.
12. Cost - volume - earnings (profit) analysis allows management to determine relative
profitability of a product by 17. Margin of safety ratio is computed by dividing excess of actual or budgeted sales from
A. highlighting potential bottlenecks in the production process break-even sales or it can be determined by
B. keeping fixed costs to an absolute minimum A. dividing contribution margin ratio by variable cost ratio
C. determine the contribution margin per unit and projected profits at various levels of B. dividing profit ratio by contribution margin ratio
production C. dividing contribution margin ratio by profit ratio
D. assigning costs to a product in a manner that maximizes the contribution margin. D. dividing variable ratio by contribution margin ratio.

13. Cost - volume earnings analysis includes some inherent, simplifying assumptions. Which of 18. In a break-even chart, whom the costs and profit line intersect with the sales line it reveals
the following is not one of these assumptions? the
A. Costs and revenues are predictable and are linear over the relevant range A. break-even point C. point of desired sales
B. variable costs fluctuate proportionately with volume B. point of profit D. point of total sales .
C. changes in the beginning and ending inventory levels are insignificant in amount
D. sales mix will change as fixed costs increase beyond the relevant range. 19. The cost-volume-profit analysis underlying the conventional break-even point chart does
not assume that:
A. price will remain constant or fixed
B. production will equal sales
C. some costs vary inversely with volume
D. some costs are linear and continuous over the relevant range.

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 Management Services MS-03 CVP Analysis
20. The president of a company that manufacturing several different products finds that gross 25. Which of the following factors does not directly affects profit
margin sales has been decreasing. The production manager complains that some products A. quantity sold D. fixed and variable costs
are charged with too much fixed overhead and sales department is c00riticized for pushing B. sales price E. none of these.
less profitable products. Inquiry discloses that neither contribution margin nor the most C. price control
profitable volume is known for any products. A relevant quantitative technique for finding
the most profitable operating level: 26. If fixed costs decrease while variable costs per unit remain constant , the new contribution
A. correlation analysis margin in relation to the old contribution margin will be
B. cost-volume-profit analysis A. unchanged D. indeterminate
C. program evaluation review technique B. higher E. none of these.
D. statistical quality control C. lower
E. time series and trend regression analysis.
27. The major assumptions as the cost and revenues behavior underlying conventional cost
21. C-V-P analysis is based on some basic assumptions. Which of the following is not one of volume - profit calculation is the
such basic assumptions? A. consistency of fixed costs
A. That the actual sales mix will conform to the predicted sales B. linearity of relationship
B. that selling prices may vary at different levels of activity C. variability of unit prices and efficiency
C. that the material prices and labor rates will not vary significantly from the data on D. curvilinearity of relationship.
which the C-V-P projections are based
D. that the productive capacity of the plant will remain relatively constant. 28. When volume equals zero units:
A. fixed costs equal zero C. net income equals zero
22. The following formula is supposed to give sales at break-even point. Which one is incorrect? B. total costs equal zero D. variable cost equals zero.
A. Actual sales less margin of safety figure,
B. fixed costs and expenses divided by P / V ratio, 29. The peso amount of sales needed to attain a desired profit is calculated by dividing the
C. net income plus fixed costs and expenses contribution margin ratio into
D. fixed cost and expenses divided by contribution margin per unit. A. desired profit less fixed costs C. fixed cost
B. desired profit plus fixed cost D. desired profit.
23. Cost-volume-earnings analysis includes some inherent, simplifying assumptions. Which of
the following is not one of these assumptions? 30. The relevant range of volume is most applicable to
A. Cost and revenues are predictable and are linear over the relevant range A. standard costs C. fixed costs
B. variable costs fluctuate proportionately with volume B. variable costs D. total costs.
C. changes in the beginning and ending inventory levels are insignificant in amount
D. sales mix will change as fixed costs increase beyond the relevant range.

24. C-V-P analysis is most important for the determination of the **end of handouts***
A. volume of operations necessary to break-even
B. relationship between revenues and costs at various level of operation
C. variable revenues necessary to equal fixed costs
D. sales revenue necessary to equal variable costs.

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