Cost-Volume-Profit Relationships

a. Variable costs, P18 million.

b. Fixed costs. P12 million.
c. Operating income, P4 million.
d. Break-even sales volume, P20 million.

Answer: B
n i f f o "g AnalrcL./Caw", union:
8rcake) en sales = P30M - PJOM
P20M
20Xf _ Fixed costs
40%
FC - P8, 000, 000

23. The break-even point in a cost-volume-profit graph is always found:

a. at 50% of full capacity.
b. at the sales volume resulting in the lowest average unit cost.
e. at th_ Volume at which total revenue equals total variable costs.
d. at the volume at which total revenue equals total fixed costs plus
total variable costs.

Answer: D

24, Bell Company sells only one product. The regular price is P5.00 and the
contribution rate is 0.40. Management decides to reduce the price from
P5.00 to P4.00 in an effort to increase volume. This 20% reduction in
selling price will cause:
a. the contribution rate to decrease from 0.40 to 0.25.
b. the contribution margin to rise from 0.40 to 0.50.
C. no change in the contribution rate of 0.40.
d. an increase in sales volume of 20%.

Answer: A
Supporting AnalpgLvV-pullIiO$:
Old New
P5 P4
Sales per unit 3
Variable costs per unit
C n o tribution margin per
unit za
CAM %

3A-17
I'nit 3-A

25. Box Company produces a single product which it sells for P80 a unit. If
the fixed costs of manufacturing and selling the product are P42.600 a
month and the variable costs are P48 a unit:
a. The fixed costs amount to P32 per unit at any level of output within
a relevant volume range.
b. The company will break even with a sales volume of P42.600 a
month.
c. An increase in sales volume above P42.600 a month will cause an
increase in fixed costs.
d. The contribution margin per unit of product is P32.

Answer: D
Supporting Analysis/Computation:
Unit Selling Price P80
Unit Variable Costs 48
Unit Contribution Margin P32

26.
In comparison to selling a product with a low contribution rate, selling a
product with a high contribution rate always:
a. requires lower sales volume to cover a given level of fixed costs.
b. results in a greater margin of safety.
c. results in higher operating income.
d. results in a higher contribution margin per unit sold.

Answer: A
27.
In the area of cost-volume-profit analysis, the contribution rate shows
how much each peso of sales contributes to:
a.
covering the fixed costs of the business and providing operating
income.
b. fixed expenses and variable expenses.
c.
variable expenses and interest charges.
d.
variable expenses when production is at normal capacity.
Answer: A

28.
A company with monthly revenue of P100,000, variable costs of P40,000.
and fixed costs of P25,000 has a contribution margin of., a. P 100,000.
b. P75,000. C. P60.000.
d. P35,000.

3M18
 Cost-Golume-Profit Relationships

Answer: C
Supporting AnalysAlCompulailon:

Sales P/00,000
Variable Costs 40,000
Contribution Margin p hO,qOP

29. A 45% contribution rate means that:

a. the company should contribute 45% of its operating income to
qualified charities for maximum tax benefits.
b. 55% of the company's revenue is consumed by fixed and variable
costs.
c. the company's revenue has increased by 45% during the current
accounting period.
d. 45% of the company's revenue is available to cover fixed costs and
to contribute toward operating income.
Answer: D

30. Product X sells at P25 per unit and has related variable costs of P20 per
unit. The fixed costs of producing Product X are P40,000 per month.
How many units of product X must be sold each month to earn a monthly
operating income of P80,000?
a. 4,800 c. 16,000
b. 8,000 d. 24,000
Answer.' D

Supporting Analysis/Computation:

P40, 000 + P80, 000

Sales (units) PS

= 24.000

31. Quality House makes handmade furniture. Although the company is very
successful, it is unable to hire enough skilled workers to meet the demand
for many of its products. The company will be most profitable if it
produces those products with the highest:
a. contribution margin per direct labor hour.
b. contribution rate.
C. sales price per unit.
d. contribution margin per unit.
Answer: A
3A-19
Unit 3-A

32.
Once the break-even point is reached
a. the total contribution margin changes from negative to positive
b. net income will increase by the unit contribution margin for r,,
item sold.
c. variable costs will remain constant in total.
d. the contribution margin ratio begins to decrease.

Answer: B

33. Green Company's variable costs are 75% of sales. At a sales level
P400,000, the company's degree of operating leverage is 8. At this s.i.
level, fixed costs equal
a. P87,500. C. P50,000.
b. P 100,000. d. P75.000.

Answer. A
Supporting Analysls/Computetlon:

DOL _CM
- CM-FC

8 = 100,000
100,000 - FC

800.000 -8FC 1 00, 000

FC = P7D
34.
An increase in a product unit contribution margin would logically result in a.

which of the following effects on that product's contribution ratio?

b. Increase in direct proportion to the contribution margin increase.
Increase, but not necessarily in direct proportion to the contributio''
c. margin increase.
d. No effect on the contribution ratio.
e. Decrease in direct proportion to the contribution margin increase.
The effect cannot be determined.
Answer: B

3A-20
 Cost- Volume-Profit Relationships
35.
The contribution income statement would require a firm to:
a. separate fixed and variable costs.
b. separate revenue into different categories,
C. round off amounts to the nearest peso.
d. ignore some estimated fixed expenses, su;:h as depreciation.
e. restructure its entire accounting system.

Answer: A
36.
One could describe the strategic role of C\VP analysis as:
a. useful only early in life cycle costing.
b. useful only late in life cycle costing.
c. having little or no role in strategic positioning.
d. playing an important part in the firm's management.
e. limited except for manufacturing firms.

Answer: D
37.
CVP analysis for revenue and cost planning has the primary objective of:
a. maximizing revenue.
b. minimizing costs.
C. both revenue maximization and cost minimization.
d. achieving an optimal level of sales and profits.
e. consistently producing sales above the breakeven level.

Answer: D
38.
Calculating the margin of safety measure will help a firm answer which of the
following questions?
a. Will we break even?
b. Are we using our debt wisely?
e. How much will profits change if sales change?
d- How much profit will we earn?
e. How much revenue can we lose before we drop below the
breakeven point?

Answer: E
39. A relatively low margin of safety ratio for a product is usually an
indication that the product:
a. is losing money.
b. has a high contribution margin.
c. is riskier than higher margin of safety products.
d. is less risky than higher margin of safety products.
e. requires heavy fixed cost to produce or sell.

Answer: C

40. Operating leverage = Contribution Margin / Profit. Assuming a product

has sales well above its breakeven point sales, we could say that:
a. operating leverage is greater than one (1).
b. fixed costs are low.
c. fixed costs are high.
d. variable costs are low.
e. variable costs are high.

Answer: A

41. All things being equal, a firm that is reasonably profitable-and expecting
sales growth would want to have:
a. moderate operating leverage.
b. low operating leverage.
c. high operating leverage.
d. stable operating leverage.
e. zero operating leverage.

Answer: A

42. Operating leverage is a measure of the risk of change in profit a fire'

assumes when it has:
a. high variable cost.
b. high fixed cost.
c. high sales.
d. high turnover.
C. high expectations.

Answer: B
 Cost- Volume-Profit Relationships

43. CVP analysis with multiple products assumes that sales will continue at
the same mix of products, expressed in either sales units or sales pesos.
This assumption is essential, because a change in the product mix will
probably change:
a. the weighted-average sales price.
b. the weighted-average variable cost.
c. the weighted-average contribution margin.
d. all of the above.
e. none of the above.

Answer: D

44. In planning product mix for maximum profit, CVP analysis would
stimulate sales of the product by increasing the:
a. sales price.
b. variable cost per unit.
c. contribution margin.
d. fixed cost.
C. emphasis on customer priority.

Answer: C

45. CVP analysis in not-for-profit organizations:

a. is not possible because no profit (P) exists.
b. would require the creation of an artificial profit.
C. could be used only in determining breakeven point.
d. is just as applicable as in for-profit organizations.
e. None of the above answers is correct.

Answer: D

46. Which one of the following is a useful measure for comparing risk of two
alternative products, or for assessing the riskiness in any given product?
a. contribution margin ratio
b. margin of safety ratio
c. operating leverage
d. breakeven point
e. margin of safety

Answer: B

3A-23
Hit .3-A

=17. Fixed costs that are incurred jointly by two or more product lines are:
a. step-fixed costs. d. allocated fixed costs.
b. incremental fixed costs. e. additional fixed costs.
c. linear fixed costs.

Answer: D

=.jaational
e the following data to answer questions 48 through 51:

:'urian Company manufactures and sells a single product, Product D. The

ro>duct sells for P60 per unit and has a C.'M ratio of 40%. The company's
,:mthly fixed expenses are P28,800.

The variable cost per unit of Product D is

a. P31.20. C. P36.00.
b. P24.00. d. P28.80.

4 ). The break-even point for Product D is

a. P48,000 C. 800 units.
b. P72,OOG. d. 1,000 units.

`,0. If Dorian Company desires a monthly income equal to 10% of sales,

monthly sales will have to be (ignore taxes)
a. 1,500 units. C. 2,000 units.
b. 760 units. d. 1,600 units.

31. If the selling price were reduced by 5%, variable cots reduced by P1.00,
and fixed costs increased to a total of P38,400, how many units would
need to be sold to earn an income of P2],060 (ignore taxes)?
a. 1,000 units. C. 1,700 units.
b. 2,700 units. d. 2,950 units.

Supporting Anotysis/Compwwutow:

(48) Answer: C

VC per unit = P60 x 60% _ W

3A-?4
 Cost-Volume-Profit Relationships
(49) Answer: B

BEP P28.800
P7?
40% or 1{2ii9 u_ltls

(50) Answer:
D
28,80 + O. IOS
0
Sales 40%
9.40. = 28,800 0.10
3 28.800
O.30S = 1'96,_O9Q or 1 OQ ni11
S
B
(51) Answer:
38.400 + 21,000
Sales 57 - 35

59.400
22
ZO anus

52. At a sales level of P90,000, Blue Company's contribution margin is

P24,000. If the degree of operating leverage is 6 at a P90,000 sales level,
net income must equal
a. P15,000. C. P4,000.
b. P11,000. d. P20,000.

Answer: C
Supporting Analysis/Computation:

6 24,000
24,000 - FC

144,000 - 6FC = 24,

000
FC = 20,
000
P24,000
CM 20.000
Less: FC e 41
Net income

3A-25
.r
Unit 3-A

53. The degree of operating leverage is

a. a measure of how a percentage change in sales volume will affect
profits.
b. equal to the contribution margin divided by the net income.
c. greater at sales levels near the break even point.
d. all of the above

Answer: D

54. MAI Company manufacturers and sells a single product. If the selling
price and variable costs both decrease by 5% and fixed costs do not,
change, then
a. the unit contribution margin will decrease and the contribution
margin ratio will decrease.
b. the unit contribution margin will decrease and the contribution
margin ratio will remain the same.
c. the unit contribution margin will remain unchanged and the
contribution margin ratio will decrease.
d. neither the unit contribution margin nor the contribution margin
ratio will change.

Answer: B

Situational
Use the following information to answer questions 55 and 56:

Gardner Furniture Company produces two kinds of chairs: an oak model and a
chestnut wood model. The oak model sells for P60 and the chestnut wood
model sells for P100. The variable expenses are as follows:

Oak Chestnut
Variable production costs per unit P30 P35
Variable selling expenses per unit P6 P5

Expected sales in units next year are: 5,000 oak chairs and 1,000 chestnut
chairs. Fixed expenses are budgeted at P135,000 per year.

55. The yearly break-even point in total sales for the sales mix expected is
a. P270,000. C. P485,000.
b. P300,000. d. P500,000.

3A-26