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Solution Guide
Activity on Profit Planning and CVP Analysis

1. Norman Company pays a sales commission of 5% on each unit sold. If a graph is prepared, with the vertical axis
representing per-unit cost and the horizontal axis representing units sold, how would a line that depicts sales
commissions be drawn?
a. As a straight diagonal line, sloping upward to the right.
b. As a straight diagonal line, sloping downward to the right.
c. As a horizontal line.
d. As a vertical line.

2. A review of Parry Corporation's accounting records found that at a volume of 90,000 units, the variable and fixed cost
per unit amounted to P 8 and P 4, respectively. On the basis of this information, what amount of total cost would
Parry anticipate at a volume of 85,000 units?
a. P 1,020,000.
b. P 1,040,000.
c. P 1,060,000.
d. P 1,080,000.

3. Which of the following would cause the break-even point to change?

a. Sales increased
b. Total production decreased
c. Total variable costs increased as a function of higher production
d. Fixed costs increased owing to additional equipment in physical plant

4. Breakeven or 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. Keeping fixed costs to an absolute minimum.
c. Determining the contribution margin per unit and the projected profits at various level of production.
d. Assigning costs to a product in a manner that maximizes the contribution margin.

5. 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 break-even 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 costs per unit for each additional unit sold.
d. Sales price per unit for each additional unit sold.

6. The breakeven point in units increases when units costs

a. Increase and sales price remains unchanged.
b. Decrease and sales price remains unchanged.
c. Remain unchanged and sales price increases.
d. Increase and sales price increases.

7. If fixed costs attendant to a product increase the variable costs and sales price remain constant, what will happen to
contribution margin and breakeven point?
a. Contribution margin will increase and breakeven point will decrease.
b. Contribution margin will decrease and breakeven point will increase.
c. Contribution margin will remain unchanged and breakeven point will increase.
d. Contribution margin will remain unchanged and breakeven point will also remain unchanged.

8. If the selling price and variable cost per unit both increase 10% and fixed costs do not change, what is the effect on
the contribution margin per unit and contribution margin ratio?
a. Both remain unchanged.
b. Both increase.
c. Contribution margin per unit increases and contribution margin ratio remains unchanged.
d. Contribution margin per unit increases and contribution margin ratio decreases.

9. Which one of the following is not an assumption of CVP analysis?

a. All units produced are sold.
b. All costs are variable costs.
c. Sales mix remains constant.
d. The behavior of costs and revenues are linear within the relevant range.
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10. In evaluating the margin of safety, the

a. break-even point is not relevant.
b. higher the ratio, the greater the margin of safety.
c. higher the dollar amount, the lower the margin of safety.
d. higher the ratio, the lower the fixed costs.

Items 15 to 24 are based on the following information:

Chloe Corp. produces and sells a single product. The selling price is P 25 and the variable costs is P 15 per unit. The
corporation’s fixed costs is P 100,000 per month. Average monthly sales is 11,000 units.

11. The corporation’s break-even point in units is 10,000 units

BEP (units) = Total fixed costs/ Contribution margin per unit

= P 100,000/ (25-15)
= P 100,000 / P 10 per unit
= 10,000 units

12. If the corporation desires to earn profit of P 70,000 before tax, it must generate sales of P 425,000

Target Sales (Pesos) = Fixed costs + Desired Profit (before tax)

Contribution margin ratio
= P 100,000 + 70,000
40%
= P 170,000
40%
= P 425,000

13. If the corporation pays corporate income tax at the rate of 32%, and it desires to earn after-tax profit of P 15,300, it
must generate sales of P 306,250

Target Sales (Pesos) = Fixed costs + Desired Profit (before tax)

Contribution margin ratio
= P 100,000 + [15300/(1-.32)]
40%
= P 100,000 + 22500
40%
= P 122,500
40%
= P 306,250

14. How much sales (in pesos) must be generated to earn profit that is 15% of such sales? P 400,000

Let x = target sales in pesos

Target Sales (Pesos) = Fixed costs + Desired Profit (before tax)

Contribution margin ratio
x = Fixed costs + 0.15x
Contributi.1on margin ratio
x = P 100,000 + 0.15x
40%
0.40 x = P 100,000 + 0.15x
0.40x – 0.15 x = P 100,000
0.25 x = P 100,000
0.25 0.25
x = P 400,000
Target sales (Pesos) = P 400,000

15. How many units must be sold to earn profit of P 5 per unit? 20,000 units

Let x = target sales in units

Target sales (units) = Fixed costs + Desired Profit (before tax)

Contribution margin per unit
x = Fixed costs + 5x
P 10
x = P 100,000 + 5x
P 10
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10x = P 100,000 + 5x
10x – 5x = P 100,000
5x = P 100,000
5 5
x = 20,000
Target sales (units) = 20,000 units

16. With an average monthly sales of 11,000 units, the corporation’s margin of safety in peso sales is ____.P 25,000

Average monthly sales = 11,000 units x P 25

Average monthly sales = P 275,000
Breakeven sales (Peso) = P 100,000/ 40%
Breakeven sales (Peso) = P 250,000

Average monthly sales = P 275,000

Less: Breakeven sales = 250,000
Margin of Safety (Peso) = P 25,000

17. At the present average monthly sales level of 11,000 units, the corporation’s operating leverage factor (OLF) is __. 11

Sales (11,000 units x P 25) P 275,000

Add: Variable Costs (11,000 units x P 15) 165,000
Contribution margin P 110,000
Less: Fixed Costs 100,000
Profit P 10,000

Degree of Operating Leverage = Contribution margin / Profit

= P 110,000/ P 10,000
= 11

18. If fixed costs will increase by P 40,000, the break-even point in units will increase (decrease) by _____. 4,000 units

Before
BEP (units) = Total fixed costs/ Contribution margin per unit
= P 100,000/ (25-15)
= P 100,000 / P 10 per unit
= 10,000 units

After
BEP (units) = Total fixed costs/ Contribution margin per unit
= P 140,000/ (25-15)
= P 140,000 / P 10 per unit
= 14,000 units

There is an increase of 4,000 units from the original breakeven point of 10,000 units to 14,000 units after the
increase in total fixed costs
Note: Take note of the word used : increase/decrease by (only the change is required)

19. If variable costs per unit will go up by P 2, the peso break-even sales will increase (decrease) to P 312,500

BEP (Peso) = P 100,000

(P 25- P 17)/25

BEP (Peso) = P 100,000

0.32
BEP (Peso) = P 312,500

The following information pertains to questions 30 through 32

The Miguel Company has three product lines of belts – A,B and C – with contribution margins of P 3, P 2 and P
1,respectively. The president foresees sales of 200,000 units in the coming period, consisting of 20,000 units of A,
100,000 units of B and 80,000 units of C. The company’s fixed costs for the period are P 255,000.

20. What is the company’s breakeven point in units, assuming that the given sales mix is maintained? 150,000

Break-even point (units) = Total Fixed Cost

Average contribution Margin Per unit
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= P 255,000
P 3 (20/200) + P 2 (100/200) + P 1 (80/200)
= P 255,000
P 1.70
= 150,000 units

21. If the sales mix is maintained, what is the total contribution margin when 200,000 units are sold? 340,000

Sales mix:
200,000 x 20/200 = 20,000 units x P 3 = P 60,000
200,000 x 100/200 = 100,000 units x P 2 = 200,000
200,000 x 80/200 = 80,000 units x 1 = 80,000
Total contribution margin P 340,000

22. If the sales mix is maintained, what is the operating income? P 85,000

Total Contribution Margin P 340,000

Less: Fixed Costs 255,000
Operating income P 85,000

PROBLEM SOLVING

23. A company has revenues of P 500,000, variable costs of P 300,000 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 break-even point in pesos? Answer: P 88,000
Before After
Revenues P 500,000 P 550,000
Variable cost 300,000 300,000
Contribution margin P 200,000 P 250,000
Fixed cost 50,000 40,000
Profit P 150,000 (workback)

BEP (peso) = 40,000/ (255000/550000)

= P 88,000

24. Green Company’s variable costs are 75% of sales. At a sales level of P 400,000, the company’s degree of operating
leverage is 8. At this sales level, fixed costs equal ______________.
Answer: P 87,500

Sales P 400,000
Variable costs 300,000
Contribution margin P 100,000
Fixed cost 87,500 (final answer – workback)
Profit P 12,500

DOL = Contribution Margin/ Profit

8 = P 100,000
Profit
8 Profit = P 100,000
Profit = P 100,000/8
Profit = P 12,500
25. A company has contribution margin per unit of P 18 and a contribution margin ratio of 40%. What is the unit selling
price?
Answer: P 45.00
Unit selling price = Unit CM / CMR
Unit selling price = 18/40%
Unit selling price = P 45.00