COST VOLUME PROFIT ANALYSIS

COST ACCOUNTING 2022

P1. May Company manufactures and sells a single product. The company’s sales and
expenses for a recent month follows:
Sales (1,500 units) P37,500
Less: Variable costs 15,000
Contribution margin P22,500
Less: fixed costs 15,000
Profit P7,500

Required:
1. Determine the following:
a. Unit selling price = 25
Solution:
Unit selling price = Sales/Units
= 37,500/1,500
= 25

b. Unit variable cost = 10

Solution:
Unit variable cost = Variable Costs/Units
= 15,000/1,500
= 10

c. Contribution margin ratio (CMR) = 0.60 or 60%

Solution:
Contribution Margin Ratio (CMR) = Total Contribution Margin/Total
Sales
= 22,500/37,500
= 0.60 or 60%

2. For profit planning purposes, compute the following:

a. Break-even point in units = 1,000
Solution:
Break-even Point in Units = Total Fixed Cost/Contribution Margin per
Unit
= 15,000/15
= 1,000

Contribution Margin per Unit = Selling Price per Unit – Variable Cost per Unit
= 25 – 10
= 15

b. Break-even peso sales = 25,000

Solution:
Break-even Point in Sales= Total Fixed Cost/Contribution Margin Ratio
= 15,000/0.60
= 25,000

3. What unit sales are required to earn P6,000 profit for the month? 35,000
Solution:
Unit Sales (Required) = Total Fixed Cost + Desire Profit before
Tax/Contribution Margin Ratio
= 15,000 + 6,000/0.60
= 35,000
4. What peso sales are required to earn an after-tax profit of P4,800 (assuming tax rate is
20%) 26,400
Solution:
Sales (Required) = Total Fixed Cost + Desire Profit after
Tax (1-tax rate/CMU)
= 15,000 + 4,800 (1 – 0.20/0.60)
= 26,400

5. What is the margin of safety at its present sales of P37,500? 12,500

Solution:
Margin of Safety Pesos = Total Sales Pesos – Break-even Point Pesos
= 37,500 – 25,000
= 12,500

P2. Dave’s break-even sales are P528,000. The variable cost ratio is 60% while the profit
ratio is 8%.

Required: Determine the following:

BREAKEVEN ACTUAL
AMOUNT % AMOUNT %
SALES 528,000 100% 660,000 100%
VC 60% 60%
CM 40% 40%
FC 211,200 40% 21,200 32%
P 0% 52,800 8%

1. Fixed costs = 211,200

2. Sales = 660,000
3. Profit = 52,800
4. Margin of Safety = 660,000 – 528,000 = 132,000
5. Margin of Safety Ratio = 132,000/660,000 = 20%

P3. The following data are available for Marina Company’s one product.

Unit selling price P800

Unit variable cost
Manufacturing 400
Selling and admin 240
Fixed costs
Manufacturing 1,640,000
Selling and admin 920,000
Unit volume 24,000

Requirements:
1. Unit contribution margin and contribution margin ratio
Contribution Margin per Unit = 400

Contribution Margin Ratio = 0.50 or 50%

Solution:
Contribution Margin per Unit = Selling Price per Unit – Variable Cost per Unit
= 800 – 400
= 400
 Contribution Margin Ratio = Contribution Margin per Unit/Unit Selling Price
= 400/800
= 0.50 or 50%

2. Total contribution margin = 9,600,000

Solution:
Sales (24,000 units x 800) 19,200,000
Less: Variable costs (24,000 x 400) 9,600,000
Total Contribution Margin 9,600,000

3. Break-even volume in units and pesos

Break-even Point in Units = 4,100
Break-even Point in Sales = 3,280,000

Solution:
Break-even Point in Units = Total Fixed Cost/Contribution Margin per
Unit
= 1,640,000/400
= 4,100

Break-even Point in Sales= Total Fixed Cost/Contribution Margin Ratio

= 1,640,000/0.50
= 3,280,000

4. Margin of safety in units, pesos and margin of safety ratio

Margin of Safety in Units = 19,900
Margin of Safety in Sales = 15,920,000
Margin of Safety Ratio = 0.83 o3 83%

Solution:
Margin of Safety in Units = Total Sales - Break-even Point in Units
= 24,000 – 4,100
= 19,900

Margin of Safety in Sales = Total Sales - Break-even Point in Sales

= 19,200,000 – 3,280,000
= 15,920,000

Margin of Safety Ratio = Margin of Safety in Sales/Total Sales

= 15,920,000/19,200,000
= 0.83 or 83%

5. Degree of operating leverage = 1.21

Solution:
Degree of Operating Leverage = Total Contribution Margin/Operating
Profit
= 9,600,000/7,960,000
= 1.21

To compute the operating profit:

Sales (24,000 units x 800) 19,200,000
Less: Variable costs (24,000 x 400) 9,600,000
Total Contribution Margin 9,600,000
Less: Fixed Costs 1,640,000
Operating Profit 7,960,000
6. Selling price that Marina must charge to double the operating profit based on the given
cost structure, still selling 24,000. 1,131,67

Solution:
Operating Profit (7,960,000x2) 15,920,000
Add: Fixed Cost 1,640,000
Variable Cost 9,600,000
Sales 27,160,000

Selling Price = 27,160,000/24,000

= 1,131.67

P4. Handy, Inc., sells a single product. The company’s most recent income statement is
given below.
Sales (2,000 units) P50,000
Less: Variable expenses 30,000
Contribution margin 20,000
Less: Fixed expenses 15,000
Operating income P5,000

Requirements:
1. If 200 more units are sold, how much increase in profit is expected? P2,000
Solution:
Unit Selling Price: 50,000/2,000 = 25
Unit Variable Cost: 30,000/2,000 = 15

If 200 more units are sold,

Sales (2,200 units) P55,000
Less: Variable expenses 33,000
Contribution margin 22,000
Less: Fixed expenses 15,000
Profit P7,000

7,000 – 5,000 = 2,000

2. If sales volume increases by 20%, compute the new profit. P15,000

Solution:
Sales (50,000 x 1.2) P60,000
Less: Variable expenses 30,000
Contribution margin 30,000
Less: Fixed expenses 15,000
Profit P15,000

3. If the firm was able to increase its sales volume by 15% without a change in its selling
price, variable costs, or fixed costs, would this change the break-even point? Explain.

4. If the firm was able to increase both its selling price and variable cost by 15%, would the
break-even point in units or in pesos change?

5. Prepare comparative income statements at sales level of 1,000, 1,500 and 2,000 units.

Sales in Units 1,000 1,500 2,000

Net Sales 25,000 37,500 50,000
Less: COGS 30,000 37,500 45,000
Net Profit/Loss (5,000) 0 5,000
P5. After its cost structure (variable costs P11.25 per unit and monthly fixed costs of
P90,000) and potential market, Leni Company established what it considered to be a
reasonable selling price. The company expected to sell 50,000 units per month and planned
its monthly results as follows:
Sales P750,000
Variable costs 562,500
Contribution margin 187,500
Fixed costs 90,000
Income before taxes 97,500
Income taxes 39,000
Net income P58,500

Requirements:
1. If the company wants a P90,000 before-tax profit, how many units must it sell? 48,000
Solution:
Unit Sales (Required) = Total Fixed Cost + Desired Profit before
Tax/Contribution Margin Unit
= 90,000 + 90,000/3.75
= 48,000

Contribution Margin per Unit = Total Contribution Margin/Total Sales Units

= 187,500/50,000
= 3.75

2. If the company wants a 10% before-tax return on sales, what level of sales, in pesos, does
it need?

3. If the company wants a P90,000 after-tax profit, how many units must it sell? 28,000
Solution:
Unit Sales (Required) = Total Fixed Cost + Desired Profit after
Tax (1-tax rate/CMU)
= 90,000 + 90,000 (1-0.4/3.75)
= 28,000

4. If the company wants an after-tax return on sales of 9%, how many units must it sell?

P6. Uptown Corporation manufactures and sells T-shirts imprinted with college names and
slogans. Last year, the shirts sold for P7.50 each and the variable cost to manufacture them
was P2.25 per shirt. The company needed to sell 20,000 shirts to break-even. The net after-
tax income last year was P5,040. Uptown’s expectations for the coming year include the
following:
• The sales price of the T-shirts will be P9
• Variable costs to manufacture will increase by 1/3
• Fixed costs will increase by 10%
• The income tax rate of 40% will be unchanged

http://www.accountingmcqs.com/donnelly-corporation-manufactures-and-sells-t-shir-
mcq-2412

Requirements:
1.What was last year’s contribution margin rate?

2.What is the selling price that would maintain the same CM ratio as last year? Last year,
unit variable cost was $2.25, so the unit contribution margin (UCM) was $5.25 ($7.50 price -
$2.25), and the contribution margin rate (CMR) was 70% ($5.25 / $7.50). If variable costs
increase by one-third, the new variable cost will be $3 [$2.25 � (4 � 3)]. If a 70% CMR is
desired, the $3 variable cost will be 30% of sales, and the unit sales price will be $10 ($3 x
30%).

3.What is the number of shirts Uptown must be able to sell to break-even this coming year?
The breakeven point in units equals total fixed costs divided by the unit contribution margin. Fixed cost for the
previous year was $105,000 (20,000 units at breakeven � $5.25 UCM). Fixed cost for the current year is $115,500
($105,000 � 1.1). The new UCM is $6 ($9 selling price � $3 unit variable cost). Accordingly, the BEP is 19,250 units
($115,500 � $6).

4.Sales for the coming year are expected to exceed last year’s sales by 1,000 shirts. If this
occurs, Uptown’s sales volume in the coming year will be?

5.If Uptown Corporation wishes to earn P22,500 in post-tax income for the coming year, the
company’s sales volume in pesos must be?