Chapter 4 Cost Volume Profit Analysis

Answer Key

I TRUE OR FALSE
1 TRUE 11 TRUE 21 FALSE
2 FALSE 12 FALSE 22 TRUE
3 TRUE 13 FALSE 23 TRUE
4 TRUE 14 FALSE 24 TRUE
5 TRUE 15 TRUE 25 TRUE
6 FALSE 16 FALSE
7 TRUE 17 TRUE
8 FALSE 18 FALSE
9 TRUE 19 FALSE
10 FALSE 20 FALSE

II MULTIPLE CHOICE THEORY

1 C 13 B 25 D
2 B 14 B 26 C
3 D 15 B 27 C
4 A 16 A 28 B
5 B 17 D 29 B
6 D 18 C 30 A
7 A 19 D
8 A 20 B
9 B 21 B
10 C 22 B
11 B 23 D
12 C 24 C

III MULTIPLE CHOICE PROBLEMS

1 C 6,200 units fixed costs P74,400 / P12 = 6,200.00

2 D P6,000 Sales 40,000.00

x CMR (100% - 30% ) 0.70
Contribution margin 28,000.00
- Advertising expense 22,000.00
= Increase in net income 6,000.00

3 A 62.50% Selling price per unit 200.00

Variable cost per unit 75.00
CM per unit 125.00
CMR = (SP / CM) 62.5%
4 B P540.00 CM / unit = P60,000 - P24,000 = P36,000 / 2,000 units 18.00
increase in units sold 30.00
Increase in contribution margin 540.00

5 B P350,000 CMR = Total CM / Total Sales

Total Sales = P150,000 / .30 = 500,000.00
Variable cost ( at VCR of 70% = P500,000 x .70) 350,000.00

6 A P60,000 (SP per unit - VC per unit ) X = FC + Profit

(P10 - P8)X = P80,000 + P40,000 = P2X = P120,000 = P60,000

7 C P450,000 CM = FC + Target income

CM = P100,000 + P80,000 = P180,000
Total sales = CM / CMR = P180,000 / 40% = 450,000.00

8 D P160,000 CM - FC = Target income = P240,000 - P80,000 = 160,000.00

9 A P550,000 Sales - Variable Cost - Fixed Cost = Net income

S - VCR -FCR = NI 100% - 60% - P200,000 = P20,000
40% x = P220,000 P220,000 / .40 = 550,000.00

10 D 70% SP - VC = CM CMR = CM / S
P20 - P6 = P14 P14 / P20 = 0.70

11 A P700 CMR = (P20 - P6) / P20 = 70%

CMR x increase in sales = P1,000 x 70% = 700.00

12 B it decreases about 12 units

BEP in units before decrease = P4,200 / (P20 - P6 ) = 300
BEP in units after decrease = P4,200 / (P20 - P5.40* ) = 288
Decrease in number of units in BEP 12
* New VC = P6 x .90 = P5.40 P20-5.40 = P14.60

13 A P5,000 increase CM = P50 increase in sales = 100 units

Increase in profit = 1,00 x P50 = 5,000.00

14 A P71.25 Increase in Profit = CMR x Sales = 75% x P95 = 71.25

15 D P8,000 Monthly Contribution margin = 2,000 x P10 20,000.00

Monthly expenses 12,000.00
Monthly profit 8,000.00

16 A P43.50 (BEP units x SP) - VC - FC = 0

2,000 X - P55,000 - P32,000 = 0
X = P87,000 / 2,000 = 43.50

17 A 2,200 cats Total fund 32,000.00

Total fixed costs 10,000.00
Total Contribution margin 22,000.00
Variable cost to capture per cat 10.00
total cats that can be captured 2,200.00
18 C P8.00 P60 - P40 - (P60 x 20%) = P8 8.00

19 C 13.33% P8 / P60 = 13.33% 0.1333

20 D 15,000 units P120,000 / P8 = 15,000.00

21 C 18,000 units CM per unit x Total Sales in units = FC + Target net income
P8X = P120,000 + P24,000 = X = P144,000 = 18,000

22 C 26,000 units CM per unit x Total Sales in units = FC + Target net income
P8X = P160,000 + P48,000 = X = P208,000 = 26,000
FC now is now P160,000 as units needed is more than 20,000

23 B 32,000 units Sales 100.0% 1,920,768

Variable cost ratio 86.7% 1,664,730
CMR 13.3% 256,038
Target net income 5.0% 96,038
Fixed cost ratio 8.3% 160,000.00

OR
P60x -P52x - P120,000 = .05(P60)x
P60x -P52x - P120,000 = P3.00x
P60x - P52x -P3x = P120,000
X = P120,000/ P5.00
24,000 since its more than 20,000 , FC is P160,000
P60x -P52x - P160,000 = .05(P60)x
P60x -P52x - P160,000 = P3.00x
P60x - P52x -P3x = P160,000
X = P160,000/ P5.00
32,000 units

24 C P0.50 CM = P200 / 400 0.50

25 C P16,000 Sales 50,000.00 x 1.2 x 1.2 72,000.00

Variable costs 25,000.00 x 1.2 x 1.2 36,000.00
Contribution margin 25,000.00 36,000.00
Fixed costs 20,000.00 20,000.00
Net income 5,000.00 16,000.00
To use the Operating Leverage factor, OLF for Feb. must be computed first.
26 A Sales increase by 10%, net income will increase by 20%
OLF x Increase in sales = 2 x 10% = 20%

27 D P6.25 Sales = Fixed costs + Variable cost + Profit

200,000x = P400,000 + 200,000x (60%) + P100,000
200,000x = P400,000 +120,000x + P100,000
200,000x - 120,000x = P400,000 + P100,000
80,000x = P500,000
X = P500,000 / 80,000 = 6.25

28 D P5.00 per unit S - VC - FC = Target net income

Sales = P20,000 + 10,000(P2.00) +P10,000
Sales = P20,000 + 20,000 +P10,000 Sales = P50,000
SP per unit = P50,000 / 10,000 = 5.00

29 A P1,120 audio video

CM 800.00 1,600.00
Sales mix 0.60 0.40
weighted average cm 480.00 640.00 1,120.00

30 C 200 units Fixed costs / wcm = P224,000 / P1,120 = 200

31 C 120 units BEP units is 200 ; audio sales mix is 60% = 200 x .60 = 120

32 C P224,000 At BEP, CM is equal to FC, therefore , CM = 224,000.00

33 C P27 Chip A Chip B

Sales price 40.00 55.00
Variable cost 20.00 25.00
Contribution margin 20.00 30.00
Sales mix 0.30 0.70
WACM 6.00 21.00 27.00

34 A 24,000 units Sales mix of pops = (40,000 units sales / [ 40,000 + 60,000] = 40%
FC = P1,800,000 WCM = P30 per unit
BEP in units = P1,800,000 / P30 per unit = 60,000
Sales mix of pops = 0.40
BEP in units of Pops 24,000.00

35 C P1,200,000
Expected sales in units 40000 + 60,000 = 100,000.00
WACM per unit 30.00
Total WACM 3,000,000.00
Total fixed costs 1,800,000.00
Expected net income 1,200,000.00

36 A 44% Sour salad Sweet salad

sales mix 60% 40%
CMR 40% 50%
WACM 24% 20% 44%
 37 D P5,500,000 FC = P2,420,000 / 44% = 5,500,000.00

38 D P3,300,000 Total sales = P5,500,000 x Sales mix 60% = 3,300,000.00

39 A 15% Sales 500,000.00

Variable cost 425,000.00
Contribution margin 75,000.00
CMR = CM / Sales P75,000 / P500,000 = 0.15

40 C 6 DOL Sales 500,000.00

Variable cost 200,000.00
Contribution margin 300,000.00
Fixed cost 250,000.00
Net income 50,000.00
DOL = CM / NI 6.00

PROBLEMS
4.1 sales mix CM / unit WACM BEP in units
tapa 0.15 120.00 18.00 12,750.00
tocino 0.60 60.00 36.00 51,000.00
hotdog 0.25 40.00 10.00 21,250.00
1.00 220.00 64.00 85,000.00

Combined units = FC / WACM = P5,440,000 / P64 = 85,000.00

4.2 1 sales mix CMR WACM BEP in units

Accounting 0.60 0.30 0.18 13,500,000.00
Tax 0.40 0.45 0.18 9,000,000.00
1.00 0.36 22,500,000.00

Combined units = FC / WACM = P8,100,000 / .36 = 22,500,000.00

2 Fixed costs 8,100,000.00

Desired net income 1,800,000.00
Total CM required 9,900,000.00
WACM rate 0.36
Total sales required 27,500,000.00
x % of sales mix of tax 0.40
Total sales for tax 11,000,000.00
4.3 total sales sales mix total CM CMR WACM BEP in units
Chips 800,000.00 0.80 320,000.00 0.40 0.32 480,000.00
Crackers 200,000.00 0.20 60,000.00 0.30 0.06 120,000.00
1,000,000.00 1.00 0.38 600,000.00

Combined units = FC / WACM = P228,000 / .38 = 600,000.00

4.4 1 Eight Nine

Contribution margin 350,000.00 560,000.00
Net income 150,000.00 150,000.00
DOL = CM / NI 2.33 3.73
CMR 0.50 0.80

2 Eight Nine
Sales P700,000 x .80 560,000.00 P700,000 x .80 560,000.00
CMR 0.50 0.80
Contribution margin 280,000.00 448,000.00
Fixed cost 200,000.00 410,000.00
Net income 80,000.00 38,000.00

using the percentage change and the degree of operating leverage, net income are:

Decrease in sales 0.20 0.20

Degree of operating leverage 2.33 3.73
Percentage decrease in net income 0.47 0.75
Net income before the decrease 150,000.00 150,000.00
New net income = (NI x 1 - % change in NI) 80,100.00 38,100.00
difference of P100 is due to rounding off
 Investment A Investment B
4.5 Contribution margin 400,000.00 750,000.00
Net income 200,000.00 200,000.00
DOL = CM / NI 2.00 3.75
1 decrease in sales by 10%
Decrease in sales 0.10 0.10
Degree of operating leverage 2.00 3.75
Percentage decrease in net income 0.20 0.38
Net income before the decrease 200,000.00 200,000.00
New net income = (NI x 1 - % change in NI) 160,000.00 125,000.00
to check
Old net income 200,000.00 200,000.00
Percentage decrease in net income 0.200 0.375
Decrease in net income 40,000.00 75,000.00
New net income 160,000.00 125,000.00

1 increase sales by 20%

Increase in sales 0.20 0.20
Degree of operating leverage 2.00 3.75
Percentage increase in net income 0.40 0.75
Net income before the increase 200,000.00 200,000.00
New net income = (NI x 1 + % change in NI) 280,000.00 350,000.00
to check
Old net income 200,000.00 200,000.00
Percentage increase in net income 0.400 0.750
Increase in net income 80,000.00 150,000.00
New net income 280,000.00 350,000.00

4.6
1 FILMS REFRESHMENTS TOTALS
Revenue from admissions 1,500.00 180.00 1,680.00
Variable costs (P1,500 * 50% = P750.00) 750.00 108.00 858.00
Contribution margins 750.00 72.00 822.00
Fixed costs:
Auditorium 220.00
Labor 290.00 510.00
Operating income 312.00
Refreshments revenue = P1,500 x 12% = 180.00
Refreshments variable cost = P180 x 60% = 108.00

2 FILMS REFRESHMENTS TOTALS

Revenue from admissions 900.00 108.00 1,008.00
Variable costs (P900*50% =P450 min is P500.) 500.00 64.80 564.80
Contribution margins 400.00 43.20 443.20
Fixed costs:
Auditorium 220.00
Labor 290.00 510.00
Operating income (66.80)
Refreshments revenue = P900 x 12% = 108.00
Refreshments variable cost = P108 x 60% = 64.80
4.7
1 Let T be the amount of additional fixed costs for advertising
(1,100,000 x P13 ) + P300,000 - .30(1,100,000 x P13) - P6,000,000 + T ) = 0
P14,300,000 + P300,000 - P4,290,000 - P6,000,000 + T = 0
T = P14,300,000 +P300,000 - P4,290,000 - P6,000,000 -0
T = 4,310,000.00

2 Let S be the total number of seats sold

P13S + P300,000 - .30(P13)S - P8,000,000 = P500,000
P13S + P300,000 - P3.90S - P8,000,000 = P500,000
P9.10S = P500,000 - P300,000 +P8,000,000
S = 8,200,000 / 9.10 901,099 seats

4.8
1 Average revenue per person P3.00 + 3(P1.50) = P7.50
Total revenue, 200 at P7.50 = 1,500.00
Rent expense 600.00
Total available for prizes and operating income 900.00
The club could award P900 and breakeven.

2 number of persons attended at 100 at 200 at 300

Total revenues at P7.50 750.00 1,500.00 2,250.00
Less, fixed costs and prizes (P600 + P900) 1,500.00 1,500.00 1,500.00
Operating income (loss) (750.00) - 750.00
Note how "leverage" works. Being highly leveraged means having relatively high fixed costs. In this case, there
are no variable costs. Therefore, the revenue is the same as the contribution margin. As volume departs from
the breakeven point, operating incofme is affected at a significant rate of P7.50 per person.

3 number of persons attended at 100 at 200 at 300

Total revenues at P7.50 750.00 1,500.00 2,250.00
Less, variable costs P2 per person 200.00 400.00 600.00
Contribution margin 550.00 1,100.00 1,650.00
Less, fixed costs and prizes (P200 + P900) 1,100.00 1,100.00 1,100.00
Operating income (loss) (550.00) - 550.00
Note that the risk now is lower because of less leverage. Fixed costs are less, and some of the risk has been
shifted to the hotel. Note also that lower risk brings lower rewards and lower punishments. The income and
losses are P550 instead of P750 as in the No. 2.
 4.9
1 Let N be the number of persons helped
P900,000 - P5,000N - P290,000 = 0
P5,000 N = P900,000 - 290,000
N = P610,000 / P5,000 122 persons

2 Let N be the number of persons helped

Revenue now is P900,000 x .85 = 765,000.00
P765,000 - P5,000N - P290,000 = 0
P5,000 N = P765,000 - 290,000
N = P475,000 / P5,000 95 persons
Percentage decrease (122 - 95 ) / 122 0.221 or 22.10%

3 Let P be the amount of supplement per person helped

Revenue now is P900,000 x .85 = 765,000.00
P765,000 - 122P - P290,000 = 0
122P = P765,000 - 290,000
P = P475,000 / 122 3,893 per person
Percentage decrease (P5,000 - P3,893) / P5,000 0.221 22.10%

4.10
1 Total variable costs: economy regular super
Popcorn cost per box 0.13 0.13 0.13
cost of each box 0.08 0.08 0.08
other variable costs per box 0.22 0.14 0.05
0.43 0.35 0.26

Let N be the volume in boxes that would earn same profit

P8,000 + P.43N = P11,200 +P.35N
P.08N = P11,200 - P8,000
N = P3,200 / .08 40,000 boxes

2 As volume increase, the bigger capacity models would generate more profits.
Let us compare regular and super models:
Let N be the volume in boxes that would earn same profit
P20,200 + P.26N = P11,200 +P.35N
P.09N = P20,200 - P11,200
N = P9,000 / .09 100,000 boxes

Therefore, the decision rule could be shown below:

Abticipated Annual Sales between model to use
- to 40,000 economy
40,000 to 100,000 regular
100,000 and above super
The decision rule places volume well within the capacity of each model.

3 No, management cannot use the theater capacity or average boxes sold because the number of seats per
theater does not indicate the number of patarons attending nor the popcorn-buying habits in different
geographic locations. Each theater may have a different "boxes sold per seat" average with significant
variations. The decision rule does not take into account variations in demand that could affect the model choice.
4.11
1 Present breakeven point Total fixed costs 200,000.00 4,000 units
Unit CM (P100 - P50 )

present variable cost per unit
NI = Sales - Total Fixed costs - Total variable costs
P50,000 = P100(5,000) - P200,000 -VC(5,000)
P50,000 = P500,000 - P200,000 -VC(5,000)
VC(5,000) = P500,000 -P200,000 - P50,000
VC = P250,000 / 5,000 units
VC per unit = 50.00

2 Net income if change is effected NI = Sales - Total Fixed costs - Total variable costs
NI = P95(7,000) - P250,000 - P40(7,000)
NI = P665,000 - P250,000 - P280,000
NI = 135,000.00

Based on the new computation, net income will increase to P135,000; the company must
make the change.

3 Degree of operating leverage before DOL = CM / NI

CM 5,000 ( P100 - P50) 250,000.00 5
NI [5,000 (P100 - P50)] - P200,000 50,000.00

Degree of operating leverage before DOL = CM / NI

CM 7,000 ( P95 - P40) 385,000.00 2.85
NI [7,000 (P95 - P40)] - P250,000 135,000.00

This indicates that operating incofme will be less sensitive to changes in sales if the production
process is changed; thus the change would reduce risks. However, the change would increase
the breakeven point. Still, with lower sales price, it might be easier to achieve the higher new BEP.

4 Yes there is a change in BEP. Higher BEP

New breakeven point Total fixed costs 250,000.00 4,545 units
Unit CM (P95 - P40 )

4.12
1 Selling price - Variable costs = Contribution margin
P1,000 - [P450 + (P1,000 x 5%)] = P1,000 - (P450 + P50) = 500.00

2 At less than 12,000 cameras

BEP (P3,500,000 + P1,000,000) / P500 9,000
At more that 12,000 cameras
BEP (P6,000,000 + P1,000,000) / P500 14,000
 At 12,000 at 14,400
3 Sales new sp (P1,000 x .90 = P900) 12,000,000.00 12,960,000.00
Less, Variable costs:
cost of sales 5,400,000.00 6,480,000.00
Selling costs at 5% 600,000.00 648,000.00
Total variable costs 6,000,000.00 7,128,000.00
Contribution margin 6,000,000.00 5,832,000.00
Less, Fixed costs 4,500,000.00 7,000,000.00
Net income (Loss) 1,500,000.00 (1,168,000.00)
No, the company should not reduce the selling price because it will incur a net loss

4.13
weighted (cu x sm) BEP in sales
Products unit cm sales mix ave. cm BEP in units Total CM
A 4.00 5 20.00 3,500 14,000.00
B 10.00 1 10.00 700 7,000.00
30.00 21,000.00
Combined units = Fixed costs / WACM
Combined units = P21,000 / P30 = 700 times

4.14 selling Total

Products price units CMR CM
Alf 4.00 100,000 30% 120,000.00
Tarf 3.00 200,000 20% 120,000.00
Total contribution margin 240,000.00
Desired net income 160,000.00
Required Fixed costs 80,000.00
4.15 old new
1 Selling price per unit 3.10 3.10
Unit variable costs 2.10 1.10
Unit contribution margin 1.00 2.00
Units sold 600,000 600,000
Total Contribution margin 600,000.00 1,200,000.00
Less, Fixed costs 585,000.00 1,140,000.00
Budgeted profit 15,000.00 60,000.00

2 Budgeted breakeven point:

Fixed costs 585,000.00 1,140,000.00
Divided by the CM per unit 1.00 2.00
Break even point in units 585,000.00 570,000.00

3 A fall in volume will be more devastating under the new system because the high fixed costs will not be
affected by the fall in volume.
Unit contribution margin 1.00 2.00
Units sold 500,000 500,000
Total Contribution margin 500,000.00 1,000,000.00
Less, Fixed costs 585,000.00 1,140,000.00
Budgeted profit (loss) (85,000.00) (140,000.00)

4 Unit contribution margin 1.00 2.00

Units sold 700,000 700,000
Total Contribution margin 700,000.00 1,400,000.00
Less, Fixed costs 585,000.00 1,140,000.00
Budgeted profit (loss) 115,000.00 260,000.00

5 Changes in volume affect profits in the new process ( a high fixed cost, low variable cost set up) more than
they affect profits in the old process. Therefore, profits in the old are more stable and less risky. The higher
risk new process promises greater rewards when conditions are favorable, but the opposite if unfavorable.

4.16 Product A Product B

1 Fixed costs a 450,000.00 50,000.00
Contribution margin b 7.50 15.00
Break even point (a / b) 60,000 3,333
2 P35x = P50,000 + P20x + (P35 x .20)x
P35x = P50,000 + P20x + P7.00x
P35x -P20x - P7.00x = P50,000 7.00
X = P50,000 / P8.00 = 6,250 units

3 90,000x = P450,000 +90,000(P7.50)

90,000x = P450000 + P675,000
X = P1,125,000 / 90,000 = 12.50 per unit
4.17 Cost
present Structure
1 Sales 500,000.00 1.00
Variable expenses 300,000.00 0.60
Contribution margin 200,000.00 0.40
Fixed costs 150,000.00 0.30
Net income 50,000.00 0.10

2 P500,000 x 15% = P75,000 x 40% = P20,000

OR
P200,000 x 85% = P170,000 - P150,000 = P20,000

3 Operating leverage factor P200,000 / P50,000 = 4 times

4 Net income increase 4 x 5% = 20% 20%

5 present 5 (a) 5 (b )
Sales 500,000.00 600,000.00 500,000.00
Variable expenses 300,000.00 360,000.00 600,000.00
Contribution margin 200,000.00 240,000.00 (100,000.00)
Fixed costs 150,000.00 195,000.00 125,000.00
Net income 50,000.00 45,000.00 (225,000.00)

4.18 weighted (cu x sm) BEP in sales

1 Products unit cm sales mix ave. cm BEP in units Total CM
P. 3.00 3 9.00 120,000 360,000.00
B. 6.00 1 6.00 40,000 240,000.00
15.00 160,000 600,000.00
Combined units = Fixed costs / WACM
Combined units = P600,000 / P15 = 40,000 times

weighted (cu x sm) BEP in sales

2 Products unit cm sales mix ave. cm BEP in units Total CM
P. 3.00 1 3.00 40,000 120,000.00
B 6.00 2 12.00 80,000 480,000.00
15.00 600,000.00
Combined units = Fixed costs / WACM = P600,000 / P15 = 40,000 times
 No. 5
3 weighted (cu x sm) BEP in sales
Products unit cm sales mix ave. cm BEP in units Total CM
P. 3.00 1 3.00 73,334 220,002.00
B 6.00 2 12.00 146,668 880,008.00
15.00 1,100,010.00
Combined units = ( Fixed costs + Desired Profit ) / WACM
Combined units = (P600,000 + P500,000) / P15 = 73,334 times
4 WACM = P15.00
5 total CM 1,100,010.00

4.19
1 BEP = P10,000 / (P20 - P15) 2,000 units 40,000.00
Sales at 3,000 units 3,000 units 60,000.00
Margin of safety 1,000 20,000.00

Sales at 4,000 units 4,000 80,000.00

Margin of safety 2,000 40,000.00
3 at 3,000 units at 4,000 units
Sales 60,000.00 80,000.00
Less, Variable costs 45,000.00 60,000.00
Contribution margin 15,000.00 20,000.00
Less, Fixed costs 10,000.00 10,000.00
Net income 5,000.00 10,000.00

2 Operating leverage factor (cm / ni) 3 2

4 Margin of safety = increases

Operating leverage factor = decreases

4.20
Sales (P10 x 1.15) x (100,000 x 1.10) 1,265,000.00
Less, Variable costs 110,000 x (P600,000/100,000) 660,000.00
Contribution margin 605,000.00
Less, Fixed costs 400,000.00
Net income 205,000.00