COST-VOLUME-PROFIT ANALYSIS

Question 1

1. Cost-volume-profit (CVP) analysis is MOST essential in the determination of the
   a. Production level that is equal to sales
   b. Volume of operations in order to break-even
   c. Variable costs necessary to equal fixed costs
   d. Relationship between revenues and costs at various levels of operations

Answer 1

d. Relationship between revenues and costs at various levels of operations

Question 2

2. Determine the least accurate statement regarding assumptions and relationships in CVP analysis.
   a. Fixed costs are always constant
   b. Net loss is unrecovered fixed costs
   c. Fixed cost per unit varies with volume
   d. At breakeven, fixed cost is simply recovered

Answer 2

a. Fixed costs are always constant

Question 3

3. Adriel, Inc. sells a single product for P 40 per unit, which it purchases for P 20. The salespeople receive a salary plus
   a commission of 5% of sales. Last year the organization’s net income (after taxes) was P 100,800. The organization is subject to an income tax rate of 30%. The fixed costs of the organization are:

Advertising P 124,000
Rent 60,000
Salaries 180,000
Other fixed costs 32,000
Total P 396,000

What is the breakeven point in units?
a. 8,800 units
b. 18,000 units
c. 19,800 units
d. 22,000 units

Answer 3

d. 22,000 units

Solution: Breakeven Point in Units: 396,000 ÷ (40 – 20 – 2*) *Commission: 5% (40)

Question 4

4. Using the same information from the previous question (item 3): Aiah is considering changing the compensation
   plan for sales personnel. If Aiah increases the commission to 10% of sales and reduces salaries by P 80,000, what
   peso sales volume must Aiah have to earn the same net income as last year?
   a. P 1,042,000
   b. P 1,100,000
   c. P 1,150,000
   d. P 1,630,000

Answer 4

Solution: Required unit sales: [(396,000 – 80,000) + (100,800 ÷ 0.7)] ÷ (40 – 20 – 4) = 28,750 units

Question 5

5. What is the fixed cost for a company that has sales of P 200,000, a contribution margin ratio of 20% and a margin
   of safety (MS) of P 80,000?
   a. P 16,000
   b. P 24,000
   c. P 80,000
   d. P 96,000

Answer 5

b. P 24,000

Solution 1: BES = Sales – MS = 200,000 – 80,000 = 120,000 FC = BES x CMR = 120,000 x 20%
Solution 2: CM = Sales x CMR = 40,000 Profit = MS x CMR = 16,000 FC = CM – profit = 40,000 – 16,000

Question 6

6. As projected profit increases, the
   a. Breakeven point goes down
   b. Margin of safety stays constant
   c. Contribution margin goes up
   d. Degree of operating leverage declines

Answer 6

d. Degree of operating leverage declines

Question 7

7. In a period of decreasing sales, the most rapid decrease in profit will result in a firm with a:
   a. Cost structure which includes mostly fixed costs
   b. Cost structure which includes mostly variable costs
   c. Unit cost structure which reflects mostly variable costs
   d. Cost structure balanced between variable and fixed costs

Answer 7

NOTE: High FC → High Operating Leverage (since DOL = CM ÷ profit) → profit is more sensitive to sales.