New Era University

College of Accountancy

Strategic Cost Management

Cost-Volume-Profit Analysis
Part I – Theory

1. Cost-volume-profit (CVP) analysis allows management to determine the relative profitability of a product by:
a. highlighting potential bottlenecks in the production process.
b. assigning costs to a product in a manner that maximizes the contribution margin.
c. keeping fixed costs to an absolute minimum.
d. determining the contribution margin per unit and projected profits at various levels of production.

2. Which of the following statements concerning cost-volume-profit (CVP) analysis is false?

a. In order to perform CVP analysis, a company must be able to separate costs into fixed and variable
components.
b. CVP analysis may be used for multi-product analysis when the proportion of different products remains
constant.
c. It is assumed in CVP analysis that the unit variable costs and unit fixed costs are constant.
d. In CVP analysis, the number of output units is the only revenue driver.

3. Which of the following represents an assumption of cost-volume-profit analysis?

I. No costs behave in a curvilinear fashion.
II. In a manufacturing company, inventory levels do not change.
III. Selling price change proportionately with sales volume.
a. I, II and III c. I and III only
b. I and II only d. II and III only

4. Assuming that there is no effect on other products that are manufactured, a company should discontinue a
product line for economic reasons when the:
a. contribution margin from the product line is negative.
b. sales of the product are less than the break-even point.
c. profit from the product line is negative.
d. contribution margin from the product line is less than that for other products.

5. East Company manufactures and sells a single product with a positive contribution margin. If the selling price
and the variable expense per unit both increase 5% and fixed expenses do not change, what is the effect on
the (1) contribution margin per unit and the (2) contribution margin ratio?
(1) (2)
a. Increase Increase
b. No change Increase
c. Increase No change
d. No change No change

6. The unit contribution margins of Product X and Product Y are P10 and P9, respectively. Total fixed expenses
will be the same regardless of which product is produced and sold. Which of the following statements will
always be true?
I. Product X has a higher contribution margin ratio than Product Y.
II. If total sales are P300,000 no matter which product is sold, it is more profitable to sell Product X than
Product Y.
III. Less units would be required to break even if only Product X is sold than if only Product Y is sold.
a. I, II and III c. II and III only
b. I and II only d. III only

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7. Which of the following will decrease the breakeven point?
(1) Increase in selling price
(2) Increase in direct labor cost
(3) Decrease in fixed cost
(1) (2) (3)
a. Yes No Yes
b. Yes Yes No
c. No No Yes
d. No Yes No

8. Snyder Corporation, which produces and sells a single product, recently experienced an increase in fixed
costs relating to depreciation on new equipment. If variable costs and sales price remain unchanged, what will
happen to contribution margin and the breakeven point?
a. Contribution margin will increase and the breakeven point will decrease.
b. Contribution margin will decrease and the breakeven point will increase.
c. Contribution margin will be unchanged and the breakeven point will increase.
d. Contribution margin will be unchanged and the breakeven point will decrease.

Refer to the CVP graph below to answer the next five questions:

9. In the CVP graph above, the difference between line AF and line AH (area FAH) is the:
a. total contribution margin. c. total cost.
b. total variable cost. d. profit.

10. Where are the total fixed costs shown in the CVP graph above?
a. As the point where the sales line intersects the vertical axis (pesos)
b. As the point where the sales line crosses the total cost line
c. As the point where the sales line crosses the horizontal axis (volume)
d. As the point where the total cost line intersects the vertical axis (pesos)

11. Analyze the following statements:

I. If the total costs line is steeper than the revenues line, profit will always be negative.
II. The greater the unit contribution margin, the steeper the profit line and the more the firm’s profit increases
for a given increase in sales volume.
a. Both statements are true. c. Only statement I is true.
b. Both statements are false. d. Only statement II is true.

12. If a company decreases its total fixed expenses while increasing the variable expense per unit, the total
expense line relative to its previous position on the cost-volume-profit graph will:
a. shift upward and have a steeper slope.
b. shift upward and have a flatter slope.
c. shift downward and have a steeper slope.
d. shift downward and have a flatter slope.

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13. Which of the following statements concerning the CVP graph is correct?
a. Point D represents the break-even point.
b. Area AEO represents the area of net loss.
c. The slope of line OC represents the total sales revenue.
d. The difference between line OC and line OG represents total contribution margin.

14. Which of the following average costs per unit may be expected to decrease by the greatest percentage with
an increase in the volume of units produced?
a. Average fixed cost per unit c. Average mixed cost per unit
b. Average total cost per unit d. Average variable cost per unit

15. At the break-even point, total contribution margin is:

a. zero. c. equal to total costs.
b. equal to total fixed costs. d. equal to total variable costs.

16. Which of the following statements is not correct? All other things remaining the same,
a. equal percentage increases in both the selling price and variable cost per unit will cause the break-even
point in pesos to remain unchanged.
b. equal percentage increases in both the selling price and variable cost per unit will cause the contribution
margin ratio to remain unchanged.
c. equal peso increases in both the selling price and variable cost per unit will cause the break-even point in
units to remain unchanged.
d. equal peso increases in both the selling price and variable cost per unit will cause the break-even point in
pesos to remain unchanged.

17. Which of the following would produce the largest increase in the contribution margin per unit?
a. A 15% decrease in fixed cost
b. A 23% increase in the number of units sold
c. A 7% increase in selling price
d. A 7% decrease in variable cost

18. If a company is operating at a loss,

a. selling price is less than the average total cost per unit.
b. fixed cost per unit is greater than variable cost per unit.
c. fixed costs are greater than sales.
d. selling price is lower than the variable cost per unit.

19. In cost-volume-profit analysis, the greatest profit will be earned at:

a. the point at which marginal cost and marginal revenue are equal.
b. one hundred percent at normal productive capacity.
c. the production point with the lowest marginal cost.
d. the production point at which average total revenue exceeds average marginal cost.

20. Which of the following statements are true regarding operating leverage?
I. Firms whose cost structure is comprised of high fixed costs relative to variable costs have relatively high
operating leverage.
II. Operating leverage relates to how sensitive a company's profits are to changes in sales.
III. At a given level of sales, the degree of operating leverage can be determined by dividing total contribution
margin by net income.
IV. Having low operating leverage is a riskier condition than having high operating leverage.
a. I, II, III and IV c. I and IV only
b. I, II and III only d. II and III only

21. A very high degree of operating leverage indicates that a firm:

a. has high fixed costs. c. has high variable costs.
b. has a high net income. d. is operating close to its breakeven point.

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22. In a company with low operating leverage,
a. fixed costs are high and variable costs are low.
b. less risk is assumed than in a highly leveraged firm.
c. large changes in sales volume result in small changes in net income.
d. there is a higher possibility of net loss than a higher-leveraged firm.

23. When a greater proportion of costs are fixed costs, then:

a. a small increase in sales results in a small decrease in operating income.
b. when demand is low, the risk of loss is high.
c. when demand is high, the breakeven point is increased.
d. a decrease in sales reduces the cost per unit.

24. A relatively low margin of safety ratio for a product is usually an indication that the product:
a. is riskier than higher margin of safety products.
b. is less risky than higher margin of safety products.
c. is losing money.
d. has a high contribution margin.

25. If a company desires to increase its safety margin, it should:

a. decrease the contribution margin.
b. decrease selling prices, assuming the price change will have no effect on demand.
c. stimulate sales volume.
d. attempt to raise the break-even point.

26. As projected net income increases, the:

a. margin of safety stays constant.
b. degree of operating leverage declines.
c. break-even point goes down.
d. contribution margin ratio goes up.

27. In multiproduct situations, when sales mix shifts toward the product with the highest contribution margin, then:
a. total revenues will decrease.
b. breakeven quantity will increase.
c. total contribution margin will decrease.
d. operating income will increase.

28. In CVP analysis, focusing on target net income rather than operating income:
a. will increase the breakeven point.
b. will decrease the breakeven point.
c. will not change the breakeven point.
d. does not allow calculation of breakeven point.

29. Introducing income taxes into cost-volume-profit analysis:

a. increases unit sales needed to earn a particular target profit.
b. decreases the contribution margin percentage.
c. raises the break-even point.
d. lowers the break-even point.

30. When used in cost-volume-profit analysis, sensitivity analysis:

a. determines the most profitable mix of products to be sold.
b. allows the decision maker to introduce probabilities in the evaluation of decision alternatives.
c. is limited because, in CVP analysis, costs are not separated into fixed and variable components.
d. is done through various possible scenarios and computes the impact on profit of various predictions of
future events.

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Part II – Problems

Refer to the following information to answer the next seven questions:

Calamba Hospital operates a general hospital but rents space and beds to separate entities for specialized
treatment such as pediatrics, maternity, psychiatric, etc. Calamba charges each separate entity for common
services to its patients like meals and laundry and for all administrative services such as billings, collections,
etc. All uncollectible accounts are charged directly to the entity. Space and bed rentals are fixed for the year.

For the entire year ended June 30, the Pediatrics Department at Calamba Hospital charged each patient an
average of P65 per day, had a capacity of 60 beds, operated 24 hours per day for 365 days, and had revenue
of P1,138,800.

Expenses charged by the hospital to the Pediatrics Department for the year ended June 30 were:
Basis of Allocation
Patient Days Bed Capacity
Dietary P 42,952
Janitorial P 12,800
Laundry 28,000
Lab, other than direct charges to 47,800
patients
Pharmacy 33,800
Repairs and maintenance 5,200 7,140
General administrative services 131,760
Rent 275,320
Billings and collections 40,000
Bad debt expense 47,000
Other 18,048 25,980
P262,800 P453,000

The only personnel directly employed by the Pediatrics Department are supervising nurses, nurses, and
aides. The hospital has minimum personnel requirements based on total annual patient days. Hospital
requirements beginning at the minimum, expected level of operation follow:

Annual Patient Days Aides Nurses Supervising Nurses

10,000 – 14,000 21 11 4
14,001 – 17,000 22 12 4
17,001 – 23,725 22 13 4
23,726 – 25,550 25 14 5
25,551 – 27,375 26 14 5
27,376 – 29,200 29 16 6

The staffing levels above represent full-time equivalents, and it should be assumed that the Pediatrics
Department always employs only the minimum number of required full-time equivalent personnel. Annual
salaries for each class of employee follow: supervising nurses, P18,000; nurses, P13,000; and aides,
P5,000. Salary expense for the year ended June 30 for supervising nurses, nurses, and aides was P72,000,
P169,000, and P110,000, respectively.

The Pediatrics Department operated at 100% capacity during 111 days of the past year. It is estimated that
during 90 of these capacity days, the demand average 17 patients more than capacity and even went as high
as 20 patients more on some days. The hospital has an additional 20 beds available for rent for the coming
fiscal year.

1. What is the variable expense per patient day?

a. P15.08 c. P15.00
b. P12.50 d. P50.00

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2. What is the contribution margin per patient day?
a. P49.92 c. P50.00
b. P52.50 d. P52.00

3. How many patient days are necessary to cover total costs?

a. 15,200 c. 15,820
b. 16,080 d. 14,220

4. How many patient days are needed to cover fixed costs for bed capacity and for supervisory nurses?
a. 9,500 c. 12,500
b. 11,500 d. 10,500

5. If the Pediatrics Department rented an additional 20 beds and all other factors remain the same as in the past
year, what would be the increase in revenue?
a. P99,450 c. P105,450
b. P87,750 d. P89,750

6. Continuing to consider the 20 additional rented beds, what is the increase in total variable cost applied per
patient day?
a. P22,935 c. P22,965
b. P22,950 d. P23,935

7. What is the increased fixed cost applied for bed capacity, given the increased number of beds?
a. P151,000 c. P147,000
b. P173,950 d. P152,000

8. The NEU Symphony Guild is planning the 2021 graduation ball. The graduation ball committee has
assembled the following expected costs for the event:
Dinner (per person) P 180
Favors and program (per person) 20
Band 12,000
Rental of ballroom 25,000
Professional entertainment during intermission 10,000
Tickets and advertising 13,000
It is estimated that 600 persons will show up. What price must be charged in order to break even?
a. P500 c. P300
b. P200 d. P100

9. Birney Company has prepared the following budget data:

Sales 150,000 units
Selling price P25 per unit
Variable costs P15 per unit
Fixed manufacturing costs P800,000
Fixed selling and administrative expenses P700,000
An advertising agency claims that an aggressive advertising campaign would enable the company to increase
its unit sales by 20%. What is the maximum amount that the company can pay for advertising and obtain a
net operating income of P200,000?
a. P550,000 c. P200,000
b. P300,000 d. P100,000

10. A manufacturer produces a product that sells for P10 per unit. Variable costs per unit are P6 and total fixed
costs are P12,000. At this selling price, the company earns a profit equal to 10% of total peso sales. By
reducing its selling price to P9 per unit, the manufacturer can increase its unit sales volume by 25%. Assume
that there are no taxes and that total fixed costs and variable costs per unit remain unchanged. If the selling
price were reduced to P9 per unit, the profit would be:
a. P3,000 c. P5,000
b. P4,000 d. P6,000

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11. Glareless Company manufactures and sells sunglasses. Price and cost data are as follows:
Selling price per pair of sunglasses P25.00
Variable costs per pair of sunglasses:
Raw materials P11.00
Direct labor P5.00
Manufacturing overhead P2.50
Selling expenses P1.30
Annual fixed costs:
Manufacturing overhead P192,000
Selling and administrative P276,000
Forecasted annual sales volume (120,000 pairs) P3,000,000
Income tax rate 40%
Glareless Company estimates that its direct labor costs will increase 8 percent next year. How many units will
Glareless have to sell next year to reach breakeven?
a. 97,500 c. 101,740
b. 86,250 d. 83,572

12. The following data relate to Homer Company which sells a single product:
Unit selling price P20.00
Purchase cost per unit 11.00
Sales commission, 10% of selling price 2.00
Monthly fixed costs P80,000
The firm’s salespersons would like to change their compensation from a 10 percent commission to a 5
percent commission plus P20,000 per month in salary. They now receive only commission. The change in
compensation plan should change the monthly breakeven point by:
a. 1,071 increase. c. 1,538 increase.
b. 1,071 decrease. d. 1,538 decrease.

13. Bush Electronics, Inc. had the following sales results for 2013:
TV sets CD player Radios
Peso sales component ratio 0.30 0.30 0.40
Contribution margin ratio 0.40 0.40 0.60
Bush Electronics, Inc. had fixed costs of P2,400,000. The break-even sales in pesos for Bush Electronics, Inc.
are:
TV sets CD player Radios
a. P1,800,000 P1,800,000 P3,600,000
b. P1,800,000 P1,800,000 P1,600,000
c. P1,500,000 P1,500,000 P2,000,000
d. P1,531,915 P1,531,915 P2,042,553

Refer to the following information to answer the next two questions:

Parker Corporation's budget for next year appears below. The budget assumes the company will sell 30,000
units.
Sales P600,000
Less expenses:
Variable P390,000
Fixed 140,000 530,000
Net operating income P 70,000

14. The company's margin of safety as a percentage of sales is:

a. 33%. c. 12%.
b. 50%. d. 67%.

15. The degree of operating leverage is closest to:

a. 8.57. c. 7.57.
b. 3.00. d. 1.00.

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16. Mozart Pianos, Inc. purchases pianos from a large manufacturer and sells them at the retail level. The pianos
cost, on the average, P23,430 each from the manufacturer. Mozart sells the pianos to its customers at an
average price of P31,250 each. The selling and administrative costs that the company incurs in a typical
month are presented below:
Selling:
Advertising P6,000 per month
Sales salaries and commissions P9,500 per month, plus 8% of sales
Delivery of pianos to customers P300 per piano sold
Utilities P3,500 per month
Depreciation of sales facilities P6,000 per month
Administrative:
Executive salaries P24,000 per month
Insurance P4,000 per month
Clerical P8,000 per month, plus P20 per piano sold
Depreciation of office equipment P3,000 per month
During January, Mozart sold and delivered 20 pianos. What was the margin of safety in percent?
a. 36% c. 16%
b. 25% d. 56%

Refer to the following information to answer the next three questions:

Old World Corporation produces and sells a single product with the following characteristics:
Per Unit Percent of Sales
Selling price P210 100%
Variable expenses 126 60%
Contribution margin P84 40%
The company is currently selling 3,000 units per month. Fixed expenses are P215,000 per month.

17. The marketing manager would like to introduce sales commissions as an incentive for the sales staff. The
marketing manager has proposed a commission of P20 per unit. In exchange, the sales staff would accept a
decrease in their salaries of P52,000 per month. (This is the company's savings for the entire sales staff.) The
marketing manager predicts that introducing this sales incentive would increase monthly sales by 300 units.
What should be the overall effect on the company's monthly net operating income of this change?
a. Decrease of P92,800 c. Increase of P11,200
b. Increase of P263,200 d. Increase of P46,000

18. The marketing manager would like to cut the selling price by P19 and increase the advertising budget by
P14,000 per month. The marketing manager predicts that these two changes would increase monthly sales
by 1,000 units. What should be the overall effect on the company's monthly net operating income of this
change?
a. Increase of P177,000 c. Decrease of P51,000
b. Increase of P51,000 d. Decrease of P6,000

19. Management is considering using a new component that would increase the unit variable cost by P5. Since
the new component would increase the features of the company's product, the marketing manager predicts
that monthly sales would increase by 200 units. What should be the overall effect on the company's monthly
net operating income of this change?
a. Increase of P800 c. Increase of P15,800
b. Decrease of P800 d. Decrease of P15,800

20. Harris Manufacturing incurs annual fixed costs of P250,000 in producing and selling a single product.
Estimated unit sales are 125,000. An after-tax income of P75,000 is desired by management. The company
projects its income tax rate at 40 percent. What is the maximum amount that Harris can expend for variable
costs per unit and still meet its profit objective if the sales price per unit is estimated at P6?
a. P3.37 c. P3.59
b. P3.00 d. P3.70

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21. Assume the following cost information for Fernandez Company:
Selling price P120 per unit
Variable costs P80 per unit
Total fixed costs P80,000
Tax rate 40%
What volume of sales pesos is required to earn an after-tax net income of P30,000?
a. P465,000 c. P390,000
b. P330,000 d. P165,000

Refer to the following information to answer the next two questions:

Martha Manufacturing produces a single product that sells for P80. Variable costs per unit equal P32. The
company expects total fixed costs to be P72,000 for the next month at the projected sales level of 2,000 units.
In an attempt to improve performance, management is considering a number of alternative actions. Each
situation is to be evaluated separately.

22. Suppose management believes that a P16,000 increase in the monthly advertising expense will result in a
considerable increase in sales. Sales must increase by how much to justify this additional expenditure?
a. 200 units c. 500 units
b. 334 units d. 1,500 units

23. Suppose that management believes that a 10% reduction in the selling price will result in a 10% increase in
sales. If this proposed reduction in selling price is implemented,
a. operating income will decrease by P8,000.
b. operating income will increase by P8,000.
c. operating income will decrease by P16,000.
d. operating income will increase by P16,000.

24. Mrs. Granberry is going to sell party lights for P20 a box. The lights cost Mrs. Granberry P5 a unit and any
unsold lights can be returned for a full refund. She is planning to rent a booth at the upcoming Happy Holidays
Convention, which offers three options:
(1) paying a fixed fee of P1,500,
(2) paying a P500 fee plus 10% of revenues made at the convention, or
(3) paying 25% of revenues made at the convention.
Which of the following statements is false?
a. Her decision will determine the risk she faces.
b. Contribution margin will vary, depending upon the option chosen.
c. One of the options will allow her to break even, even if she doesn't sell any lights.
d. Operating income will be the greatest for Option 3.

25. Patrick Ross has three booth rental options at the county fair where he plans to sell his new product. The
booth rental options are:
Option 1: P1,000 fixed fee
Option 2: P750 fixed fee + 5% of all revenues generated at the fair
Option 3: 20% of all revenues generated at the fair.
The product sells for P37.50 per unit. He is able to purchase the units for P12.50 each. Which option should
Patrick choose in order to maximize income, assuming there is a 40% probability that 70 units will be sold and
a 60% probability that 40 units will be sold?
a. Option 1 c. Option 3
b. Option 2 d. All options maximize income equally.