MULTIPLE CHOICE Basic concepts
1. Cost-volume-profit analysis assumes that over the relevant range
A. Variable costs are nonlinear. C. Selling prices are unchanged.
B. Fixed costs are nonlinear. D. Total costs are unchanged. (aicpa) 1. C
? A basic assumption within the relevant range.
Relevant range is a band (or stretch) of activity where the behavior of sales and costs is predictable. The basic assumptions used in management accounting within the relevant range are:
a. Costs behavior - costs are segregated as to fixed or variable in behavior.
b. Linearity - the behavior of total fixed cost, total variable cost, total costs, and total sales is linear (i.e., straight line).
c. Fixed costs - total fixed cost does not change, while unit fixed cost changes; that is, UFC increases as production decreases and it decreases as production increases.
d. Variable costs - total variable cost changes in direct relation to change in the volume of production and sales, while unit variable cost is constant. Also, total variable costs are not affected by the change in unit sales price.
e. Unit sales price - unit sales price is constant.
f. Sales mix - the company produces only one product, or in multi-product operations, the sales mix is constant.
g. WIP - there is no work-in-process inventory.
h. Production equals sales - there is no change in the number of units in finished goods inventory; meaning, production equals sales.
Choice-letter “c” is correct, sales price is assumed to be constant within the relevant range. Choice-letters “a” and “b” are incorrect because variable costs and fixed costs are assumed to be linear. Choice-letter “d” is incorrect because total costs change on account of the total variable costs.
2. Cost-volume-profit analysis assumes that over the relevant range total. A. Revenues are linear. C. Variable costs are nonlinear.
B. Costs are unchanged. D. Fixed costs are nonlinear. (aicpa) 2. A
? Basic assumptions within the relevant range.
Choice-letter “a” is correct because the linearity of revenues and costs is one of the basic assumptions in the CVP analysis. Choice-letter “b” is incorrect because total costs would change because of the change in variable costs. Choice-letters “c” and “d” are incorrect because variable costs and fixed costs are assumed to be linear. 3. Breakeven analysis assumes linearity over the relevant range with respect to
Total costs Total revenue Total costs Total revenue
B. Yes Yes D. No No (aicpa)
3. B
? Breakeven linearity assumptions over the relevant range.
Relevant range is a band or width of activity (e.g., in terms of levels of output or the unit of measurement used) where the sales and costs could be predicted with reasonable certainty. Within this range, sales and total costs are assumed to behave linearly. Unit sales price is constant and total sales increase in direct relation with changes in production levels. Total cost is composed of fixed cost and variable cost where total fixed cost is constant regardless of changes in the levels of production and sales and unit variable cost is constant. Total variable costs change in direct relation with the changes in the unit of production levels.
Choice-letter “b” is correct because total costs and total revenue are assumed to be linear within the relevant range.
4. Break-even analysis assumes that over the relevant range.
A. Selling prices are unchanged. C. Total costs are unchanged.
B. Variable costs are nonlinear. D. Fixed costs are nonlinear. (rpcpa) 4. A
? An assumption about breakeven analysis over the relevant range.
Within the relevant range, the following are the assumptions on cost-volume-profit analysis and breakeven analysis: the behavior of sales and costs is linear, total fixed costs is constant but unit fixed costs changes, total variable costs change but unit variable cost is constant; units sales price is constant; there is no change in the finished goods inventory (i.e., production equals sales); there is no work-in-process inventory; and the sales mix is constant.
Within the relevant range, variable cost and fixed costs are linear and total costs change due to the change in variable costs. (Choice-letter “a” is correct).
5. The amount of variable cost per unit and total fixed cost within a relevant range behave this way in relation to production level:
A. Production increases, unit variable cost increases, total fixed cost increases. B. Production decreases, unit variable cost decreases, total fixed cost decreases. C. Production increases, unit variable cost remains constant, total fixed cost remains
the same.
D. Production increases, unit variable cost decreases, total fixed cost remains the
same. (rpcpa)
5. C
? The behavior of variable cost per unit and total fixed costs within the relevant range. Total fixed costs remain constant within the relevant range. However, unit fixed cost
decreases as production increases, and it increases as production decreases.
Total variable cost changes in direct relation to the change in the level of production and sales within the relevant range. However, unit variable cost is constant within the relevant range.
Therefore, regardless of the change in the level of production, the total fixed costs and unit variable will be constant within the relevant range. Choice-letter “c” is the correct answer.
6. Assuming that a flexible budget is in use, production levels are expected to increase within a relevant ranged, the expected effect on fixed cost per unit (FCU) and variable costs per unit (VCU) would be
A. FCU to decrease and VCU to decrease. B. FCU to decrease and VCU no change. C. FCU no change and VCU no change.
D. FCU no change and VCU to decrease. (rpcpa)
6. B
? Using the flexible budget and assuming production increases within a relevant range, determine the expected effect on fixed costs per unit (FCU) and variable cost per unit (VCU) by an increase in production levels.
Within the relevant range, total fixed cost remains constant but FCU changes (that is, FCU decreases as production increases and FCU increases as production decreases). Also within the relevant range, total variable costs changes but VCU is constant. Choice-letter “b” is correct, FCU decreases, VCU does not change. Choice-letter “b” is correct.
7. One of the major assumptions limiting to reliability of break-even analysis is that A. The cost of productivity will continually increase.
B. The cost of production factors varies with changes in technology. C. Total variable cost will remain unchanged over the relevant range.
D. Total fixed cost will remain unchanged over the relevant range. (rpcpa) 7. D
? A major assumption limiting the reliability of breakeven analysis.
The breakeven analysis is based on the following assumptions within the relevant range:
a. The behavior of sales and costs is linear within the relevant range. b. Total fixed costs are constant but unit fixed cost changes.
c. Total variable costs change but unit variable cost is constant. d. Unit sales price is constant.
e. Sales equal production; there is no change in the finished goods inventory. f. There is no work-in-process inventory.
g. The sales mix ratio is constant.
Choice-letter “d” is correct (refer to assumption letter ”b”), Choice-letter “a” is incorrect because efficiency and productivity have no direct relations with the BEP analysis; choice-letter “b” is incorrect because it is not an assumption in the BEP analysis, although the statement is true; choice-letter “c” is incorrect because total variable costs change (not unchanged) within the relevant range
8. At the breakeven point, the contribution margin equals total
B. Sales revenues. D. Fixed costs. (aicpa)
8. D
? The amount of contribution margin at breakeven point.
At breakeven point, there is no profit or loss, meaning, total sales equal total costs. Alternatively, profit is contribution margin less fixed costs and expenses. Therefore, at breakeven point contribution margin equals total fixed costs. Choice-letter “d” is correct.
9. At breakeven point, fixed cost is always
A. Less than contribution margin. C. More than variable cost.
B. Equal to contribution margin. D. More than the contribution margin. (rpcpa) 9. B
? Fixed cost at breakeven point.
At breakeven point, total fixed cost equals contribution margin. This is so because, if fixed cost and contribution are of the same amount, there is no profit or loss.
10. An assembly plant accumulates its variable and fixed manufacturing overhead costs in a single cost pool, which is then applied to work-in-process using a single application base. The assembly plant management wants to estimate the magnitude of the total manufacturing overhead costs for different volume levels of the application activity base using a flexible budget formula. If there is an increase in the application activity base that is within the relevant range of activity for the assembly plant, which one of the following relationship regarding variable and fixed costs is correct?
A. The variable cost per unit is constant, and the total fixed costs decrease. B. The variable cost per unit is constant, and the total fixed costs increase. C. The variable cost per unit and the total fixed costs remain constant. D. The variable cost per unit increases, and the total fixed costs remain constant.
(cia) 10. C
? Relationship regarding variable and fixed costs within the relevant range.
Within the relevant range, unit variable cost and total fixed costs are constant. Choice-letter “c” is correct.
11. Contribution margin is the excess of revenues over A. Direct cost. C. Cost of good sold.
B. Manufacturing cost. D. All variable costs. (rpcpa)
11. D
? A procedure in computing contribution margin.
The traditional way to compute contribution margin is by getting the difference between net sales and variable costs and expenses. Other procedures to determine contribution margin (CM) are as follows:
CM = Net sales x Contribution margin ratio CM = Fixed costs + Income before income tax
Choice-letter “a” is incorrect because the difference between net sales and direct cost is direct margin or segment margin. Choice-letter “b” is also incorrect because the difference between revenues and manufacturing cost is manufacturing margin or manufacturing income. Choice-letter “c” is also incorrect because the difference between net sales and cost of goods sold is gross profit.
12. Cost-volume-profit analysis is a key factor in many decisions, including choice of product lines, pricing of products, marketing strategy, and use of productive facilities. A calculation used in a CVP analysis is the breakeven point. Once the breakeven point has been reached, operating income will increase by the
A. Gross margin per unit for each additional unit sold. B. Contribution margin per unit for each additional unit sold. C. Variable cost per unit for each additional unit sold. D. Sales price unit for each additional unit sold.
(cma) 12. B
? Effect to operating income, once the breakeven point has been reached.
Beyond the breakeven point, total sales are greater than total costs. Also, contribution margin is greater than fixed cost. The excess of contribution over fixed costs is profit. After breakeven point, income increases by every peso increase in contribution margin, which is the unit contribution margin. Choice-letter “b” is the right choice.
13. Cost-volume-profit relationships that are curvilinear may be analyzed linearly by considering only
A. Fixed and semi-variable costs. C. Relevant variable costs.
B. Relevant fixed costs. D. A relevant range of volume. (aicpa)
13. D
? The factor to be considered in analyzing curvilinear relationships.
Choice-letter “d” is correct. Curvilinear relationships exist over the long run. In the short-term, however, the relationship between two variables in a graph is linear. This short-term range is otherwise known as relevant range and the linearity assumption is valid within the relevant range. It is a range of production activity where the behavior of costs and sales is linear; meaning, unit sales, unit variable cost, and total fixed cost are constant.
Choice-letter “a” is incorrect because semi-variable costs are normally curvilinear in its representation. Choice-letters “b” and “c” are incorrect because other relevant costs are also included in the CVP analysis.
14. When an organization is operating above the breakeven point, the degree or amount that revenues may decline before losses are incurred is the
B. Marginal rate of return. D. Target (hurdle) rate of return. (cma)
14. C
? The amount of decline in sales before losses occur.
If operations are in excess of breakeven point, there is profit. The amount of decline in sales before losses occur is margin of safety. Mathematically, margin of safety equals actual (or budgeted) sales less breakeven sales.
15.The rate or amount that sales may decline before losses are incurred is called: A. Sensitive level of income. C. Margin safety .
B. Variable sales ratio. D. Residual income rates. (rpcpa) 15. C
? The rate or amount in sales before losses are incurred.
Margin of safety is the excess of sales over the breakeven point. Therefore, it is the maximum amount of reduction in sales before losses are incurred. Choice-letter “c” is correct.
16. Total unit costs are
A. Relevant for cost-volume-profit analysis.
B. Independent of the cost system used to generate them. C. Irrelevant in marginal analysis.
D. Needed for determining product contribution. (rpcpa)
16. C
? A choice that describes total unit costs.
Choice-letter “c” is correct, total unit costs are irrelevant in marginal analysis. To be relevant in marginal costing analysis, total costs should be separated as to either fixed or variable. Total unit cost per se is not relevant in marginal costing analysis. Choice-letter “a” is incorrect. Total unit costs are dependent of the cost system used to generate them. Choice-letter “b” is incorrect. And total unit cost is not needed in determining the contribution margin, what is important is the variable cost. Choice-letter “d” is incorrect.
Breakeven point
17. Given the following notations, what is the breakeven sales level in units? SP = selling price per unit
FC = total fixed costs VC = variable cost per unit
A. SP ÷ (FC ÷VC). C. VC÷ (SP – FC).
B. FC ÷ [1 – (VC ÷ SP)]. D. FC ÷ (SP – VC). (aicpa)
17. B
Choice-letter “b” is correct. Unit contribution margin equals unit sales price (USP) less unit variable costs (UVC). Therefore, breakeven point (BEP) in units and in pesos are computed as follows:
BEP (units) = Fixed costs / Unit contribution margin or FC / (USP – UVC)
BEP (pesos) = Fixed costs / Contribution margin ratio or FC ÷ (100% - VCR)
In the marginal costing analysis, sales ratio is always equal to 100%. Variable cost ratio (VCR) is basically variable cost over sales.
18. A company’s breakeven point (BEP) in pesos of revenue may be affected by equal percentage increase in both selling price and variable cost per unit (assume all other factors are constant within the relevant range). The equal percentage changes in selling price and variable cost per unit will cause the breakeven point in pesos to
A. Decrease by less than the percentage increase in selling price. B. Decrease by more than the percentage increase in the selling price. C. Increase by the percentage change in variable cost per unit.
D. Remain unchanged. (cia)
18. D
? Effect to breakeven point of equal percentage increase in both sales price and unit variable cost.
The equal percentage increase in both sales price and unit variable cost does not change the contribution margin ratio. Therefore, the breakeven point will not change, assuming all other factors are constant. Choice-letter “d” is correct.
Questions 19 and 20 are based on the following selected budgeted data of Russel Gil Company for the coming year:
Selling price per unit P 12.00
Budgeted sales 600,000
Fixed expenses 150,000
Variable cost per unit 8.00 19. What is the breakeven in sales in units?
A. 35,000 C. 40,000
B. 37,500 D. 45,000
19. B
? Breakeven sales in units.
Breakeven sales in units equals total fixed costs over unit contribution margin. The unit contribution margin is P4.00 (i.e., P12 – P8). Therefore, breakeven sales in units is 37,500, computed as follows:
BEP (units) = P150,000 / P4 = 37,500 units 20. What is the margin of safety ratio in percent?
B. 20% D, 25% (rpcpa)
20. D
? Margin of safety ratio.
Margin of safety ratio (MSR) is margin of safety divided by actual (or budgeted) sales. Considering the given data, we have:
Budgeted sales P 600,000
Less: Breakeven sales (37,500 units x P12) 450,000
Margin of safety P 150,000
Therefore, MSR is 25% (i.e., P150,000 / P600,000).
21. A company is concerned about its operating performance, as summarized below: Revenues (P12.50 per unit) P300,000
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 2004?
A. 32,000 C. 16.000
B. 24,000 D. 8.000
(cia) 21. D
? The number of additional units to sell to breakeven.
The company is operating at a loss. It has to increase its actual units sold to breakeven. The additional units to sell to breakeven is the difference between breakeven point and the present actual units sold.
The variable cost ratio is 60% (e.g., P180,000/P300,000). Therefore, the CMR is automatically 40%, and the UCM is P5 (e.g., P12.50 x 40%).
Total fixed cost equals CM plus operating loss. CM is P120,000 (e.g., P300,000 – P180,000). Therefore, total fixed cost is P160,000 (e.g., P120,000 + P40,000). The additional units to sell is calculated as follows:
Breakeven sales (P160,000 / P5) 32,000 units - Actual units sold (P300,000 / P12.50) 24,000 Needed increase in units sold to breakeven 8,000 units
Alternatively, the increase in units needed to breakeven is 8000 units determined by dividing the loss by the unit contribution margin (i.e., P40,000 / P5 = 8,000 units) 22. Kent Co.'s operating percentages were as follows:
Revenues 100%
Cost of good sold
Variable 50%
Fixed 10 60
Gross profit 40%
Other operating expenses
Variable 20
Operating income 5%
Kent’s sales totaled P2 million. At what revenue level would Kent break even?
A. P1,900.000 C. P1,250.000
B. P1,666.667 D. P 883,333
(aicpa) 22. B
? Breakeven sales.
BEP is fixed costs divided by CMR. Total fixed cost is P500,000 (i.e., P2,000,000 x 25%). The total variable cost ratio is 70% (i.e., 50% + 20%). Therefore, CMR is 30%. The breakeven point in pesos is:
BEP (pesos) = P500,000 / 30% = P1,666,667
23. For the period just ended Chanda, Inc., generated the following operating results in percentages Sales 100% Cost of sales Variable 50% Fixed 10% 60% Gross profit 40% Operating expense Variable 20% Fixed 15% 35% Operating income 5%
Total sales amounted to P3.0 million. at what level is break-even sales?
A. P3,750,000 C. P1,875,000
B. P1,850,000 D. P2,500,000 (rpcpa)
23. B
? The breakeven sales in peso.
BEP in pesos equals fixed costs divided by CMR. The fixed cost rate on sales totals 25% (fixed overhead of 10% plus fixed expenses of 15%). Therefore, total fixed costs and expenses equal P750,000 (P3 million x 25%). The CMR is 30% (that is, 100% sales ratio less 70% total variable costs and expenses ratio). Finally, BEP in pesos is P2,500,000 (P750,000 / 30%).
24. A company produced 500 units of a product and incurred the following costs. Direct materials, P8,000; direct labor, P10,000 overhead (20% fixed), P45,000. If the sales value of 500 units is P102,000, what is the contribution margin percentage?
A. 44% C. 53%
B. 47% D. 74%
(rpcpa) 24. B
Contribution margin percentage (CMR) is the quotient of contribution margin and net sales. Given the data on the problem, the contribution margin is determined as follows: Sales P102,000 Direct materials ( 8,000) Direct labor ( 10,000) Variable overhead (P45,000 x 80%) ( 36,000) Contribution margin P 48,000 The CMR is 47% (i.e., P48,000/P102,000).
25. Given the selling price at P120 per unit; contribution margin ratio at 25% and fixed cost at P250,000, the total variable expenses at the break even point would be:
A. P350,000 C. P450,000
B. P750,000 D. P250,000
(rpcpa) 25. B
? The amount of variable expenses at breakeven point.
Based on the data given, the variable expenses at the BEP may be computed by multiplying breakeven sales and VCRatio. BEP is determined as fixed cost divided by CMRatio.
BEP (P250,000/25%) P1,000,000
x VCRatio (100%- 25%) 75%
Variable expenses P 750,000
Or variable expenses (P250,000 / 25% x 75%) P 750,000
26. Which of the following formulas is used to determine the break-even point when using the contribution margin method?
A. Revenues less operating income equals variable costs plus fixed costs.
B. Unit contribution margin times the break-even number of units equals fixed costs. C. Selling price less unit fixed costs equals contribution margin
D. Total fixed costs equal total revenues. (rpcpa)
26. B
? The formula used in determining the breakeven point (BEP).
Choice-letter “b” is correct. At BEP, total fixed costs equal to contribution margin where fixed costs equal unit contribution margin times the number of breakeven units. Choice-letter “a” is incorrect because it does not have relevance in the planning and control of costs and profit. Choice-letter “c” is incorrect because sales less fixed costs is the sum of variable costs and profit (it also has no relevance). Choice-letter “d” is definitely incorrect.
27. Which of the following will result in raising the breakeven point? A. A decrease in the variable cost per unit.
B. An increase in the semi-variable cost per unit. C. An increase in the contribution margin per unit.
D. A decrease in income tax rates. (cia) 27. B
? The one that will raise breakeven point.
BEP is fixed costs over UCM. To increase BEP, fixed cost should increase and unit contribution margin should decrease. Choice-letter “b” is correct, an increase in semi-variable cost would decrease unit contribution margin, and increase in BEP. A semi-variable cost per unit is more of a variable cost than that of fixed costs.
Choice-letters “a” and “c” increase unit contribution margin resulting to decreased BEP. Choice letter “d” will not affect BEP.
28. To reduce the break-even point, the company may
A. Decrease both the fixed costs and contribution margin. B. Increase both the 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. (rpcpa) 28. C
? The technique in reducing the breakeven point (BEP).
Breakeven point is fixed costs over unit contribution margin (UCM). Therefore, to reduce the BEP, fixed costs must be decreased or UCM must be increased (choice-letter “c”: is correct).
29. NTQ Inc’s net sales in 2006 were 15% below the 2005 level. NTQ’s semi-variable costs would
A. Increase in total and increase as a percentage of net sales. B. Decrease in total and decrease as a percentage of net sales. C. Increase in total, but decrease as a percentage of net sales.
D. Decrease in total, but increase as a percentage of net sales. (rpcpa) 29. D
? Effect to semi-variable cost if net sales decrease by 15%.
Total semi-variable costs change, but not in direct relation to the change amount of sales (say, if net sales increase by 10%, semi-variable costs may increase but not by 10%). Therefore, if net sales decrease by 15%, the total semi-variable costs will also decrease but its percentage relationship to net sales will increase because the percentage decrease in net sales is greater than the percentage decrease in semi-variable costs.
30. Cost-volume-profit analysis is a key factor in many decisions, including choice of product-lines, pricing of products, marketing strategy, and utilization of productive facilities. A calculation used in CVP analysis is the even point. Once the break-even point has been reached operating income will increase by the
A. Sales price per unit for each additional unit sold.
B. Contribution margin per unit for each additional unit sold. C. Fixed cost per unit for each additional unit sold.
30. B
? The increase in operating income once the breakeven point (BEP) is reached.
Choice-letter “b” is correct; once the BEP is reached, the operating income will increase by every peso of increase in the amount of contribution margin. Total contribution margin is equal to unit contribution margin (UCM) multiplied by the units sold. At BEP, total fixed cost is equal to total contribution margin. Fixed costs are assumed to be constant even beyond the BEP. Therefore, after the BEP, as contribution margin increases (due to the continuing increase in the number of units sold) with fixed costs as constant, any increase in the contribution margin is an increase in profit.
Choice-letter “a” is incorrect because sales price is only an increase in revenue and not yet in profit. Choice-letter “c” is incorrect because fixed cost per unit does not affect the overall profit of the business, though it has great impact in the establishment of a competitive unit sales price. Choice-letter “d” is incorrect because unit gross margin does not reflect yet the net profit as variable selling and administrative expenses are still to be deducted.
31. 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)
31. C
? The event that will decrease BEP.
Choice-letter “c” is correct because an increase in the anticipated sales of petrol relative to sales of septine and tridol will increase the weighted average unit contribution margin, which will decrease BEP.
Choice-letter “a” would increase fixed cost and breakeven point. Choice-letters “b” and “d” reduce unit contribution margin and increase BEP.
32. Cook Company sells three chemicals; Simpol, Plutex and Coplex. Simpol is the most profitable product while Coplex is the least compatible. Which of the following events will definitely decrease the firm’s overall BEP for the upcoming account period.
A. An increase in the overall market of Plutex B. An decrease in Coplex’s selling price
C. An increase in anticipated sales of Simpol relative to the sales of Plutex and Coplex
D. An increase in Simpol raw materials (rpcpa)
32. C
Composite (or overall) BEP is equal to fixed costs divided by the average UCM. To decrease the composite BEP, the fixed costs must decrease or the average UCM must increase. The company produces and sells three products. Simpol is the most profitable, Coplex is the least profitable, and Phines is at the middle.
Choice-letter “c” is correct because an increase in the anticipated sales of Simpol relative to the sales of Plutex and Coplex would trigger an increase in the average UCM, and thereby would decrease composite BEP.
Choice-letter “a” is incorrect because an increase in overall market for Phines, the product at the middle of the sales mix profitability, would hardly change the average UCM and that of breakeven point. Choice-letter “b” is incorrect because a decrease in Coplex’s selling price would aggravate a decrease in the average UCM and will increase the composite BEP. Choice-letter “d” is also incorrect because an increase in Simpol’s raw materials cost would mean a decrease in UCM and an increase in the composite BEP.
33. A company manufactures a single product. Estimated cost data regarding this product and other information for the product and the companies 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. C. 583,200 units.
B. 518,400 units. D. 972,000 units. (cia)
33. C
? The number of units to breakeven.
The sales commission is P2 per unit (5% x P40). The total unit variable cost is P24 (i.e., P22 + P2), and the unit contribution margin is P16 (i.e., P40 – P24).
Total fixed costs is P9,331,200 (i.e., P5,598,720 + P3,732,480). Therefore, the BEP in units is:
BEP (units) = P9,331,200 / P16 = 583,200 units 34. Fely Company reported the following for the year just ended:
Budgeted sales P 3,000,000
Break-even sales 2,100,000
Budgeted contribution margin 1,800,000 Cashflow break-even 600,000 The company’s margin of safety is
A. P 900,000 C. P1,200,000
B. P2,400,000 D. P1,500,000
34. A
? The amount of margin of safety.
Margin of safety is the difference between actual of budgeted sales and breakeven sales, as follows:
Budgeted sales P3,000,000
- Breakeven sales 2,100,000
Margin of safety P 900,000
35. The contribution margin ratio always increases when the
A. Breakeven point increases.
B. Breakeven point decreases.
C. Variable costs as a percentage of net sales
decrease.
D. Variable costs as a percentage of net sales
increase. (aicpa)
35. C
? The event that makes the contribution margin ratio (CMR) to increase.
CMR increases when unit sales price increases or unit variable cost decreases, or, in effect, when unit contribution margin increases. Choice-letter “c” is correct, as variable cost ratio decreases, automatically CMR increases.
CMR affects breakeven point and not the BEP affecting the CMR. Besides, the change in BEP is not automatically due to the change in the CMR. Choice-letters “a” and “b” are incorrect.
36. The following information pertains to Nova Company’s cost-volume-profit relationships:
Breakeven point in units sold 1,000 Variable costs per unit P 500
Total fixed costs P150,000
How much will be contributed to profit before income taxes by the 1,001st unit sold?
A. P650 C. P150
B. P500 D. P 0
(aicpa) 36. C
? The contribution to profit by the 1,001st unit sold.
The 1,001st unit sold is the very first unit after the breakeven point. Beyond the breakeven point, profit increases by every peso of increase in contribution margin. The profit contributed by the first unit after the BEP is the unit contribution margin.
At breakeven point, contribution margin equals fixed costs. And unit contribution margin is total fixed costs divided by breakeven units. The unit contribution margin is determined as follows:
UCM = Fixed costs / BEP units
UCM = P150,000 / 1,000 units = P150
Breakeven point in units 1,000 Variable costs per unit P 250
Total fixed costs P75,000
How much will be contributed to operating income by the 1,001st unit sold?
A. P250 C. P75
B. P325 D. Zero (rpcpa)
37. C
? The contribution to operating income by the 1,001st unit sold.
The 1,001st unit sold is the first unit sold after the breakeven point. After the breakeven point, each unit sold increases profit by the amount of the unit contribution margin (UCM). The UCM is equal to contribution margin over the number units sold. At the BEP, the CM is equal to fixed cost. The fixed cost is given at P75,000. The UCM is P75 and this is also the amount of profit on the 1,001st unit sold.
UCM = P75,000 / 1,000 units = P75
38. A retail company determines its selling price by marking up variable costs by 60%. In addition, the company uses frequent selling price markdown to stimulate sales. If the markdown average 10%, what is the company contribution margin ratio?
A. 27.5% C. 37.5%
B. 30.6% D. 41.7%
(cia) 38. B
? The contribution margin ratio.
The sales price is based on variable cost, which is the 100%. Variable cost ratio is variable cost over net sales price. Net sales price is 160% of variable cost less 10% markdown. The variable cost ratio (VCR) and contribution margin ratio (CMR) are calculated as follows:
VCR = 100% / (160% x 90%) = 69.4%. And, CMR = 100% - 69.44% = 30.6%
39. Which of the following would decrease unit contribution margin the most?
A. A 15% decrease in selling price. C. A 15% decrease in variable costs.
B. A 15% increase in variable costs. D. A 15% decrease in fixed costs. (cma)
39. A
? The one that decreases contribution margin the most.
Contribution margin is the difference between sales and variable cost. Contribution margin is decreased by a decrease in sales price, an increase in variable cost or a decrease in unit sales price and unit variable cost by the same amount.
Choice-letters “a” and “b” would decrease contribution margin. Inasmuch as the sales price is assumed to be greater than the variable cost, a 15% decrease in sales price (choice-letter “a”) would decrease contribution margin more than the decrease effected by a 15% increase in variable cost (choice-letter “b”). Choice-letter “a” is the correct choice.
Choice-letter “c” would increase contribution margin, while choice-letter “d” does not affect contribution margin.
Questions 40 and 41 are based on the following information. Lan Pala Tropical Stuff Toys manufactures and sells dolls. The following information relates to the operating results for the last quarter:
Stuff toys sold 19,375
Breakeven point in number of toys 15,500 Breakeven point in peso sales P65,875
Total fixed costs P47,275
40. What was Lan’s variable cost per doll?
A. P 4.25 C. P 1.20
B. P 3.05 D. P 0.96
(rpcpa) 40. C
? The amount of variable cost per doll.
Unit variable cost is the difference between unit sales price and unit contribution margin. At breakeven point, fixed costs equal the contribution margin. Therefore, the unit variable cost is computed as follows:
Unit sales price (P65,875 / 15,500) P4.25 - Unit contribution margin (P47,275 / 15,500) 3.05
Unit variable cost P1.20
41. What was the margin of safety percentage for the last quarter of Lan? (rounded to the nearest percent)
A. 20% C. 28%
B. 25% D. 72%
(rpcpa) 41. A
? The margin of safety ratio (MSR).
Margin of safety ratio is margin of safety over sales. First, let us get the margin of safety, then the margin of safety ratio.
Amount Units Actual sales (19,375 x P4.25) P82,343.75 19,375
- Breakeven sales 65,875.00 15,500
Margin of safety P16,468.75 3,875
The margin of safety ratio is 20% (i.e., P16,468.75 / P82,343.75). Alternately, the MSR may be determined using the data in units and still arrive at 20% (i.e., 3,875/19,375).
42. For a profitable company, the amount by which sale can decline before losses occur is known as the
B. Margin of safety. D. Marginal income rate. (rpcpa)
42. B
? The amount of decrease in sales before losses occur.
Losses occur when sales fall below the breakeven point (BEP). At BEP, there is still no loss. Therefore, the amount of decline in sales before losses occur is the difference between the actual (or budgeted) sales and the breakeven sales. This is called the margin of safety (choice-letter “b” is correct). Analyzing it in a different perspective, margin of safety is the amount of sales in excess of BEP. It suggests that this excess sales carries a corresponding contribution margin, and eventually, profit (e.g., Profit = Margin of Safety x CMR).
Choice-letter “a” is incorrect because variable sales ratio (or variable ratio) is the relationship of variable costs over sales. Choice-letter “c” is incorrect because sales volume variance refers to the net effect on profit of the difference in actual sales and budgeted sales. Choice-letter “d” is incorrect because marginal income rate is a loose description that relates to the relationship of margin over sales and not on the amount of a reduction in sales.
43. Bulacan Gold, Inc. manufactures and sells key rings embossed with college names and slogans. Last year, the key rings sold for P75 each, and the variable costs to manufacture them were P22.50 per unit. The company needed to sell 20,000 key rings to break-even. The net income last year was P50,400. The company expects the following for the coming year:
• The selling price of the key rings will be P90.
• Variable manufacturing costs per unit will increase by one-third.
• Fixed cost will increase by 10%.
• The income tax rate will remain unchanged.
For the company to break-even the coming year, the company should sell
A. 21,600 C. 21,250
B. 2,600 D. 19,250
(rpcpa) 43. D
? The breakeven point in the coming year.
Breakeven point is fixed costs divided by unit contribution margin. Using the “before-after analysis”, the data are treated as follows:
Before After Unit sales price P 75.00 P 90.00
Unit variable costs 22.50 30.00 (P22.50 x 1.33) Unit contribution margin P 52.50 P 60.00
Total fixed costs (20,000 x P52.50) P1,050,000 P1,155,000 (P1,050,000 x 110%) The new breakeven point in the coming year shall be 19,250 units (P1,155,000 / P60).
44. A company has revenues of P500, 000, 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 C. P110,000
B. P100,000 D. P125,000
(cia) 44. A
? The new breakeven point in pesos.
Inasmuch as there are changes in the variables of profit, the before-after analysis would be used as follows:
Before After
Sales P500,000 P550,000 (P500,000 x 110%)
-Variable cost 300,000 300,000 (same) Contribution margin P200,000 P250,000
CMR 45.45% (P250,000 / P550,000)
Fixed costs P 50,000 P 40,000 (P50,000 x 80%)
New BEP (pesos) P 88,000 (P40,000 / 45.45%)
45. Mela Corporation has a contribution margin ratio of 0.26. It aims to have a net income of P320,000 with a sales volume of P2 million. Its total fixed costs amount to
A. P200,000 C. P230,777
B. P 83,200 D. P520,000
(rpcpa) 45. A
? The amount of fixed costs.
Fixed costs and expenses may be determined by getting the difference of contribution margin and income before income tax, as follows:
Contribution margin (P2 million x .26) P 520,000 - Income before income tax 320,000 Total fixed costs and expenses P 200,000
46. Asian Corporation, a manufacturing company, is operating at 90% capacity. Since there is no other use of the 10% idle capacity, an offer for a new order at P8.20 per unit requiring 15% capacity is being considered. If the order will be accepted, the 5% additional capacity will be sub-contracted at the cost of P7.80 per unit. The variable cost per unit of production of Asian Corporation follows:
Materials P 4.00
Labor 1.75
Variable overhead 1.75
Total P 7.50
What is the expected contribution margin per unit on the new order?
A. P 0.40 C. P 0.50
B. P 0.60 D. P 0.55
(rpcpa) 46. B
? The expected unit contribution margin on the new order.
There are two unit contribution margin here. One for the 10% capacity and the other for the 5% capacity, as follows:
10% capacity 5% capacity (Regular) (Sub-contract) Unit contribution margin P8.20 P8.20 - Unit variable costs 7.50 7.80 Unit contribution margin P0.70 P0.40
The individual UCM shall be multiplied by the production mix of 10% and 5% for regular production and sub-contract, respectively. The average unit contribution margin may now be determined as:
Regular sales (P0.70 x 10/15) P0.47 Sub-contract (P0.40 x 5/15) 0.13 Average unit contribution margin P0.60
47. Last year, the contribution margin ratio of Lamesa Company was 30%. This year, fixed costs are expected to be P120, 000, the same as last year, and revenues are forecasted at P550, 000, a 10% increase over last year. For the company to increase operating income by P15,000 in the coming year, the contribution margin ratio must be
A. 20% C. 40%
B. 30% D. 70%
(aicpa) 47. B
? The contribution margin ratio to increase operating income by P15,000.
The new contribution margin ratio is determined by dividing the new contribution margin with the new sales. The new contribution margin is calculated as follows:
Sales last year (P550,000/110%) P500,000
x CMR last year 30%
CM last year 150,000
Add: Increase in contribution margin 15,000
CM this year 165,000
Divide by sales this year 550,000
CMR this year 30%
48. 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)
48. D
An increase in USP increases unit contribution margin (UCM) and decreases BEP, while an increase in FC increases BEP. The unit variable cost remains constant and there is no exact variable cost data given to precisely determine the quantitative effects of the given change in USP and FC to BEP. The effect cannot be determined from the information given because the amount of unit variable cost also affects the change in the BEP. To illustrate, let us use the following data:
a.) Say, a unit variable cost of P 0.70:
Original Data New Data
Unit sales price P1.00 P1.10
Unit variable cost 0.70 0.70
Unit contribution margin P0.30 P0.40
Fixed costs P 400,000 P 480,000
Breakeven units 1,333,333 1,200,000 (BEP decreases) b.) Say, a unit variable cost of P0.40:
Original Data New Data
Unit sales price P1.00 P1.10
Unit variable cost 0.40 0.40
Unit contribution margin P0.60 P0.70
Fixed costs P 400,000 P 480,000
Breakeven units 666,667 685,715 (BEP increases)
49. Two companies produce and sell the same product in a competitive industry. Thus, the selling price of the product of 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 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 A> breakeven point in terms of pesos sales volume and will have the <List B> peso profit potential once the indifference point in peso sales volume is exceeded.
List A List B List A List B
A. Lower Lesser C. Higher Lesser
B. Lower Greater D. Higher Greater
(cia) 49. A
? Comparing Company 1 to Company 2, their BEP and effects to operating profit beyond the BEP.
Company 1 has a higher CMR and lower fixed costs which yield to lower BEP compared that of Company After the BEP, the company having higher CMR is expected to register higher profit (i.e., Profit = Margin of safety x CMR). Since Company 2 has a higher profit (e.g., 40%) than that of Company 1 (e.g., 30%), its increase in profit will tend to be greater after the BEP.
Sales with profit
50. In using cost-volume-profit analysis to calculate expected unit sales, which of the following should be deducted to fixed cost in the numerator?
B. Predicted operating income. D. Variable costs. (aicpa)
50. A
? The one added to fixed costs in the numerator in CVP analysis.
Choice-letter “a is correct, the predicted operating loss is deducted from the fixed costs in the numerator in computing sales with profit. Choice-letter “b” is incorrect because operating income is added from fixed costs in the numerator in calculating sales with profit. Choice-letter “c” is incorrect because unit contribution margin serves as the denominator in the computation of sales in units. Choice-letter “d” is incorrect because variable cost is not related to fixed cost.
51. Ipil-ipil Company would like to market a new product at a selling price of P15 per unit. Fixed costs for his product are P1,000,000 for less than 500,000 units of output and P1,500,000 for 500,000 or more units of output. The contribution margin percentage is 20%. How many units of this product must be sold to earn a target operating income of P1 million?
A. 754,900 C. 825,530
B. 833,334 D. 785,320
(rpcpa) 51. B
? The number of units to be sold to earn an income of P1 million.
There are two fixed costs given, P1 million at less than 500,000 units of production and P1.5 million at 500,000 units or more. The UCM is P3.00 (P15 x 20%). If the company produces and sells 500,000 units, the operating income shall be P500,000. That is, CM of P1,500,000 (500,000 units x P3) less fixed costs of P1,000.000. Therefore, to generate an earnings of P1,000,000, the company must product and sell more than 500,000 units and the fixed cost to be incurred shall be P1,500,000. The sales in units to product a profit of P1,000,000 is 833,334 units computed as follows:
Sales = FC + IBIT / UCM
= (P1,500,000 + P1,000,000) / P3 = 833,334 units
52. Merchandiser, Inc. sells Product O to retailers for P200. The unit variable cost is P40 with a selling commission of 10%. Fixed manufacturing costs total P1,000,000 per month while fixed selling and administrative costs total P420,000. The income tax rate is 30%. The target sales if after tax income is P123,200 would be
A. 10,950 units. C. 13,750 units.
B. 15,640 units. D.11,400 units. (rpcpa)
52. D
? The target sales if the after tax income is P123,200.
The total unit variable cost is 60 [i.e., P40 + (10% x P200)]. And the UCM is P140 (i.e., P200 – 60). The total of fixed costs and expenses is P1,420,000 (i.e., P1,000,000 + P420,000). And IBIT is P176,000 (i.e., P123,200 / 70%). Therefore, the targeted sales in units is 11,400 units computed as follows:
Sales = (P1,420,000 + P176,000) / P140 = 11,400 units
53. Nette & Company has sales of P400,00 with variable costs of P300,000, fixed costs of P120,000 and an operating loss of P20,000. By how much would Nette need to increase its sales in order to achieve a target operating income of 10% of sales?
A. P400,000 C. P500,000
B. P462,000 D. P800,000
(rpcpa) 53. A
? The amount of increase in sales to achieve a target profit of 10% of sales.
The present sales amount to P400,000, the VCR is 75% (i.e., P300,000/P400,000), and, therefore, the CMR is 25%. Since the profit ratio is given, the computation of the sales with profit shall be:
Sales = Fixed costs / (CMR – NPR)
= P120,000 / (25% - 10%) = P800,000
The increase in sales shall therefore be P400,000 (i.e., P800,000 – P400,000). Questions 54 and 55 are based on the following information. Laguna Marketing Company is expected 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 the present, the sales volume necessary to breakeven is P750,000 but with the expected increase in final sales, the sales volume necessary to breakeven would go up to P975,000. Based on these projections,
54. What is the profit-volume ratio of Laguna Marketing?
A. 35% C. 45%
B. 40% D. 65%
(rpcpa) 54. A
? The profit-volume ratio.
The profit-volume ratio is the same as the contribution margin ratio. And CMR is contribution margin divided by sales. Note that sales given in the question are at breakeven point. This means that at these sales there is no profit or loss and the change in profit is also zero. Therefore, any change in fixed cost is also the change in contribution margin. The CMR of 35% is determined as follows:
CMR = Δ FC / Δ Sales (i.e., the sales are at BEP) = P78,750 / (P975,000-P750,000) = 35%
55. What would be the total fixed costs of Laguna Marketing after the increase of P78,750?
A. P341,250 C. P2,183,750
B. P262,500 D. P 300,000
(rpcpa) 55. A
The given sales are at breakeven point. At BEP, fixed cost equals contribution margin. The fixed costs after its increase shall be the contribution margin in the second year with breakeven sales of P975,000. The fixed costs P341,250 (i.e., P975,000 x 35%).
56. Variable cost per unit is P3.50. Contribution margin is 30%. Breakeven sales is P1 million. To sell an additional 50,000 units at the same price and contribution margin, how much will fixed costs increase to have a gross margin equal to 10% of the sales value of the additional cost of 50,000 units to be sold?
A. P 67,500 C. P 57,500
B. P 50,000 D. P 125,000
(rpcpa) 56. B
? The amount of increase in fixed cost.
Increase in contribution margin less increase in operating income is increase in fixed cost. The unit sales price is P5 (i.e., P3.50 / 70%) and the UCM is P1.50 (P5 – P3.50). The gross margin (e.g., operating income) is 10% of sales. The increase in fixed cost is P50,000, calculated as follows:
Increase in CM (50,000 units x P1.50) P75,000 - Increase in operating income [50,000 units x (10% x P5)] 25,000
Increase in fixed cost P50,000
57. Birney Company is planning its advertising campaign for 2006 and has prepared the following budget data based on a zero advertising expenditures:
Normal plant capacity 200,000 units
Sales 150,000 units
Selling price P25 per unit
Variable manufacturing costs P15 per unit Fixed costs:
Manufacturing P 800,000
Selling and administration P 700,000
An advertising agency claims that an aggressive advertising campaign would enable Birney to increase its unit sales by 20%. What is the maximum amount that Birney can pay for advertising and obtain an operating profit of P200,000.
A. P100,000 C. P300,000
B. P200,000 D. P550,000
(aicpa) 57. A
? The maximum amount of advertising expense to obtain a profit of P200,000.
Increase in fixed cost is new fixed cost less old fixed cost. The old fixed cost is P1,500,000 (i.e., P800,000 + P700,000). The new fixed cost is not readily given and must be computed.
The increase in fixed cost shall be computed as follows:
New contribution margin (50,000 units x 120% x P15) P1,800,000
- New operating income 200,000
New fixed costs 1,600,000
- Old fixed costs 1,500,000
Increase in fixed costs P 100,000
Questions 58 through 60 are based on the following information. Bruell Electronics Co. is developing a new product, surge protectors for high-voltage electric flows. The cost information below relates to the product.
Unit Costs
Direct materials P 3.25
Direct labor 4.00
Distribution .75
The company will also be absorbing P120,000 of additional fixed costs associated with this new product. A corporate fixed charge of P20,000 currently absorbed by other products will be allocated to this new product.
58. If the selling price is P14 per unit, the breakeven point in units (rounded to the nearest hundred) for surge protectors is
A. 8,600 units. C. 15,000 units.
B. 10,000 units. D. 20,000 units.
(cma) 58. D
? Breakeven point in units.
The unit variable cost is P8 (i.e., P3.25 + P4.00 + P0.75), and the unit contribution margin is P6 (i.e., P14 – P8). Therefore, the BEP in units is 20,000 units (i.e., P120,000/P8).
Allocated fixed costs are not included in the determination of the product’s breakeven point. Allocated fixed costs, however, shall be included in the total fixed costs in the computation of overall company’s breakeven point.
59. How many surge protectors (rounded to the nearest hundred) must Bruell Electronics sell at a selling price of P14 per unit to gain P30,000 additional operating income before taxes?
A. 10,700 units. C. 25,000 units.
B. 20,000 units. D. 28,300 units.
(cma) 59. C
? Total sales in units if operating profit is P30,000.
Sales in units are fixed costs plus operating profit divided by unit contribution margin. Therefore, sales is unit is 25,000 units, computed as follows:
Sales = (FC + IBIT) / UCM
60. How many surge protectors (rounded to the nearest hundred) must Bruell Electronics sell at a selling price of P14 per unit to increase after-tax income by P30,000? Bruell Electronics’ effective income tax rate is 40%.
A. 10,700 units. C. 25,000 units.
B. 20,000 units. D. 28,300 units.
(cma) 60. D
? Sales in units if the after-tax income is P30,000.
If the after-tax income is P30,000, the income before income tax is P50,000 (i.e., P30,000 / 60%). Therefore, the sales in units is 28,334 units, as follows:
Sales in units = (P120,000 + P50,000) / P6 = 28,334 units
61. Austin Manufacturing, which is subject to a 40% income tax rate, had the following operating data for the period just ended:
Selling price per unit P 60
Variable cost per unit 22
Fixed costs 504,000
Management plans to improve the quality of its sole product by (1) replacing a component that costs P3.50 with a higher-grade unit that costs P5.50 and (2) acquiring a P180, 000 packing machine. Austin will depreciate the machine over a 10-year life with no estimated salvage value by the straight-line method of depreciation. If the company wants to earn after tax income of P172, 800 in the upcoming period, it must sell
A. 19,300 units. C. 22,500 units.
B. 21,316 units. D. 27,000 units.
(cma) 61. C
? Sales in units if the after-tax income is P172,800.
The income before income tax is P288,000 (i.e., P172,800 / 60%). There is an increase in unit variable cost of P2 (i.e., P5.50 – P3.50), and the new unit variable cost is P24 (i.e., P22 + P2). The sales price remains the same, therefore, the new unit contribution margin is P36 (P60 – P24).
Total fixed cost is increased by P18,000 (i.e., P180,000/10 years). Hence, the new fixed cost is P522,000 (i.e., P504,000 + P18,000). The sales to achieve an after-tax income of P172,800 is 22,500 units, calculated as follows:
Sales (units) = (P522,000 + P288,000) / P36 = 22,500 units
Questions 62 and 63 are based on the following information. An organization sells a single product for P40 per unit that it purchased for P20. The salespeople receive a salary plus a commission of 5% of sales. Last year the organization’s net income (after taxes) was P100,800. 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
Other fixed costs 32,000
Total P396,000
62. The breakeven point in unit sales for the organization is
A. 8,800 units. C. 19,800 units.
B. 18,000 units. D. 22,000 units.
(cia) 62. D
? Breakeven point in units.
The unit variable cost is P22 composed of unit purchase cost of P20 and commission of P2 (i.e., 5% x P40). The unit contribution margin is P18 (I.e., P40 – P22). And the BEP in units is 30,000 units (i.e., P396,000 ÷ P18).
63. The organization is considering changing the compensation plan for sales personnel. If the organization increases the commission to 10% of revenues and reduces salaries by P80,000, what revenues must the organization have to earn to have the same net income as last year?
A. P1,042,000 C. P1,150,000
B. P1,350,000 D. P1,630,000
(cia) 63. C
? Amount of sales to earn the same net income last year.
Sales in pesos is FC plus profit divided by CMR. The fixed cost is reduced to P316,000 (i.e., P396,000 – P80,000). The income before income tax (IBIT) is the same as last year at P144,000 (i.e., P100,800 / 70%). The new unit variable cost is P24 [i.e., P20 + (10% x P40)], resulting to a new unit contribution margin of P16 (i.e., P40 - P24) or a CMR of 40% ([16 / P40). The sales in pesos shall be determined as:
Sales (pesos) = (FC+ IBIT) / CMR
= (P316,000 + P144,000) / 40% = P1,150,000
64. Video King Company sells video tapes. The projected after tax net income for the year is P480,000 based on a sales volume of 200,000 units. It sells the tapes at P64 each. The variable cost consists of P40 unit purchase price (bulk orders) and a handling cost of P8 per unit. Annual fixed cost are P2,400,000 and the company’s income tax rate is 35%. An increase of 10 percent in projected unit sales volume for the year would result in an increased after tax income for the year of
A. P120,000 C. P208,000
B. P 48,000 D. P 40,000 (rpcpa)
64. C
? The amount of increase in net income given a 10% increase in unit sales.
First, let us get the incremental contribution margin, then deduct the corresponding tax thereof. The unit contribution margin is P16 (i.e., P64 – P48). With a 10% increase in volume the net income after tax shall increase by P208,000 computed as follows:
- Incremental tax (35%) 112,000
Incremental profit after tax P208,000
Multi-product sales
Questions 65 and 66 are based on the following information. The data below pertain to two types of products manufactured by Korn Corporation:
Unit sales price Unit variable costs Product Y P 120 P 70 Product Z 500 200
Fixed costs total P300,000 annually. The expected mix in units is 60% for product Y and 40% for product Z.
65. How much is Korn’s breakeven sales in units?
A. 857 C. 2,000
B. 1,111 D. 2,459 (aicpa /
rpcpa) 65. C
? Composite BEP in units.
Composite breakeven point (CBEP) in units is total fixed costs over average UCM. The average UCM is determined as follows:
Sales Average UCM Mix Ratio UCM Product Y P 50 60% P 30 Product Z 300 40% 120
Total P150
And the CBEP is 2,000 units computed as follows:
CBEP (units) = FC / Ave. UCM -= P300,000 / P150 = 2,000 units 66. How much is Korn’s breakeven sales in pesos?
A. P300,000 C. P475,000
B. P420,000 D. P544,000
(aicpa) 66. D
? Composite BEP in pesos.
CBEP in pesos is fixed costs over average CMR, and average CMR is average UCM divided average USP. Average USP is P272, determined as follows:
Product Y (P120 x 60%) P 72
Product Z (P500 x 40%) 200
Average USP P272
Average CMR is average UCM divided by average USP and is computed at 55.15% (i.e.., P150 / P272). The CBEP in pesos shall be:
CBEP (pesos) = FC / Average CMR = P300,000 / 55.15% = P544,000 Alternatively, the composite breakeven point in pesos may also be determined by getting the sum of individual product sales. First, given that the CBEP in units is 2,000 units, the allocated BEP in units shall be 1,200 units for product Y (i.e., 2,000
units x 60%) and 800 units for product Z (i.e., 2,000 units x 40%). The CBEP in pesos shall be:
Product Y (1,200 units x P120) P144,000 Product Z ( 800 units x P 500) 400,000
Composite BEP P544,000
67. Tomas Company sells products X, Y, and Z. Tomas sells three units of X for each unit of Z, and two units of Y for each unit of X. The contribution margins are P1.00 per unit of X, P1.50 per unit of Y, and P3.00 per unit of Z. Fixed costs are P600,000. How many units of X would Tomas sell at the breakeven point?
A. 40,000 C. 360,000
B. 120,000 D. 400,000
(aicpa) 67. B
? The number of units of X to sell at the composite BEP.
First, compute the CBEP in units, then, allocate it among the products. CBEP is fixed costs over average UCM. The average UCM is determined as follows:
Sales mix UCM Sales mix ratio Ave. UCM
X 3 P1.00 3/10 P0.30
Y (3 x 2) 6 1.50 6/10 0.90 Z 1 3.00 1/10 0.30
10 P1.50
Therefore, the CBEP in units shall be 400,000 units (i.e., P600,000 / P1.50) and the share of product X is 120,000 units (i.e., 400,000 units x 3/10).
68. Maribel 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 are P720,000. Contribution margin are:
P 1.90 per unit of Red 2.00 per unit of White 2.30 per unit of Blue
How many units of White would the company sell at breakeven point?
A. 360,000 C. 72,000
B. 108,000 D. 216,000
(rpcpa) 68. D
? The number of units of White to sell at breakeven point.
First, let us determine the composite breakeven point by dividing the fixed costs by the average unit contribution margin (UCM). The average unit contribution margin is calculated by multiplying the individual UCM of the products with their respective sales mix ratio. Now, the sales mix ratio is not readily given, but is to be obtained as follows:
If: 3 Reds = 1 Blue Therefore:
2 Whites = 1 Red 6 Whites = 1 Blue And, the sales mix is:
White = 6 Blue = 1 10
The average UCM is determined as: Red P1.90 x 3/10 = P .57 White 2.00 x 6/10 = 1.20 Blue 2.30 x 1/10 = 0.23
Average UCM P2.00
The composite breakeven point (CBEP) is 360,000 units (i.e., P720,000 / P2.00). With the CBEP already determined, the share of each product on the CBEP shall be calculated based on sales mix ratio. The share of product White in the composite breakeven point is 216,000 units (i.e., 360,000 units x 6/10).
69. Laboratorio Unico, Inc. formulates and sells three major chemicals: C1, C2 and C3. It sells to industrial users who use and buy these chemicals in the following ratio: three (3) measures of C1 per one (1) measure of C3, two (2) measures of C2 per one (1) measure of C1. The company makes the following contribution margin per measure:
C1 P30
C2 P45
C3 P90
Fixed costs amounted to P1.8 million. At break-even point, the volume of C3 to be sold would be
A. 12,000 C. 24,000
B. 36,000 D. 4,000
(rpcpa ) 69. D
? The volume of C3 to be sold at breakeven point.
Composite BEP is fixed cost divide by average UCM. The fixed costs are given. The average UCM is determined by multiplying the individual UCM with their sales mix ratio, as follows:
3 C1 = 1 C3 2 C2 = 1 C1 Therefore: 6 C2 = 1 C3 The sales mix ratio is:
C1 3 = 3/10
C2 6 = 6/10
C3 1 = 1/10
10 The average UCM is
C1 = P30 x 3/10 = P 9 C2 = 45 x 6/10 = 27 C3 = 90 x 1/10 = 9 Average UCM P45
The composite BEP is 40,000 units (i.e., P1.8 million/P45). The composite BEP should be distributed among the products by their sales mix ratio.
Questions 70 and 71 are based on the based on the following information. A company sells two products X and Y. The sales mix consists of a composite unit of two units of X for every five units of Y (2:5). Fixed costs are P49,500. The unit contribution margins for X and Y are P2.50 and P1.20, respectively.
70. Considering the company as a whole, the number of composite units to break even is
A. 31,500 C. 8,250
B. 4,500 D. 9,900
(cia) 70. A
? Composite BEP in units.
Composite BEP in units is fixed costs divided by average UCM. The average UCM is determined as follows:
Product X (P2.50 x 2/7) P0.71429 Product Y (P1.20 x 5/7) 0.85714
Average UCM P1.57143
Composite BEP (pesos) = FC / Average UCM
= P49,500 / P1.57143 = 31,500 units
71. If the company had an operating income of P22,000,. the unit sales must have been
Product X Product Y Product X Product Y
A. 5,000 12,500 C. 23,800
59,500
B. 13,000 32,500 D. 28,600
71,500 (cia)
71. B
? Units sold if operating income is P22,000.
Using the average UCM in question 70 as P1.57143, the composite BEP in units shall be:
Composite BEP (pesos) = (FC + IBIT) / Average UCM
= (P49,500 + P22,000) / P1.57143 = 45,500 units The CBEP shall be allocated based on their sales mix as follows:
Product X (45,500 units x 2/7) = 13,000 units Product Y (45,500 units x 5/7) = 32,500 units
Questions 72 through 74 are based on the following information. Margarita Manufacturing Company produces two products for which the following data have been tabulated. Fixed manufacturing cost is applied at a rate of P1.00 per machine hour.
Per Unit XY-7 BD-4
Selling price P4.00 P3.00
Variable manufacturing costs P2.00 P1.50 Fixed manufacturing cost P .75 P 20 Variable selling costs P1.00 P1.00
The sales manager has a P160,000 increase in the money to the most profitable product. The products are not substitutes for one another in the eyes of the company’s customers.
72. Suppose the sales manager chooses to devote the entire P160,000 to increased advertising for XY-7. The minimum increase in sales units of XY-7 to offset the increased advertising is
A. 640,000 units. C. 128,000 units.
B. 160,000 units. D. 80,000 units.
(cma) 72. B
? The increase in unit sales to offset the increase in advertising.
The unit variable cost of XY-7 is P3.00 (i.e., P2 + P1), and its UCM is P1.00 (i.e., P4 – P3). The increased in unit sales to offset the increased in advertising is:
Increase in unit sales = Increase in fixed cost / UCM = P160,000 / P1 = 160,000 units
73. Suppose the sales manager chooses to devote the entire P160, 000 to increase advertising for BD-4, the minimum increase in revenues of BD-4 to offset the increased advertising would be
A. P160,000 C. P 960, 000
B. P320,000 D. P1,600,000
(cma) 73. C
? The increase in peso sales of produce BD-4 to offset the increase in advertising expense.
The unit variable cost of BD-4 is P2.50 (i.e., P1.50 + P1.00), and its UCM is P0.50 (i.e., P3.00 – P2.50). Its CMR is 16-2/3 %. The increase in peso sales to offset the increase in fixed advertising cost is:
Increase in peso sales = Increase in fixed cost / CMR = P160,000 / 16-2/3% = P960,000
74. Suppose Margarita has only 100,000 machine hours that can be made available to produce additional units of XY-7 and BD-4. If the potential increase in sales units for either product resulting from advertising is far in excess of this production capacity, which product should be advertised and what is the estimated increase in contribution margin earned?
A. Product XY-7 should be produced, yielding a contribution margin of P75,000.
B. Product Xy-7 should be produced, yielding a contribution margin of P133, 333.
C. Product BD-4 should be produced, yielding a contribution margin of P187,500.
D. Product BD-4 should be produced, yielding a contribution margin of P250, 000.
