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PROBLEM SOLVING: (1-22 1ST PART ; 23-42 2ND PART)

23. CGW Corporation sells Product T at a unit price of P5 deriving annual gross sales of P50,000.
The variable cost to produce T is P4.50 per unit and total fixed costs is P10,000. If it increases
T’s unit price to P8, a decrease of sales to only 4,000 units would result. The effect of the price
increase on CGW’s net income from the sales of Product T will be a:
A. P9,000 increase. B. P18,000 decrease. C. P4,000 increase. D. No effect.

24. 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 $ 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 $3.50 with a higher-grade unit that costs $5.50 and (2) acquiring a $180,000 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
$172,800 in the upcoming period, it must sell
A. 19,300 units. B. 21,316 units. C. 22,500 units. D. 23,800 units.

25. Planners have determined that sales will increase by 25% next year, and that the profit margin
will remain at 15% of sales. Which of the following statements is correct?
A. Profit will grow by 25%.
B. The profit margin will grow by 15%.
C. Profit will grow proportionately faster than sales.
D. Ten percent of the increase in sales will become net income.

26. Lindsay Company reported the following results from sales of 5,000 units of Product A for June:
Sales $200,000
Variable costs (120,000)
Fixed costs (60,000)
Operating income $ 20,000 
Assume that Lindsay increases the selling price of Product A by 10 percent in July. How many
units of Product A would have to be sold in July to generate an operating income of $20,000?
A. 4,000 B. 4,300 C. 4,500 D. 5,000

27. A product has a selling price of P5 and variable cost of P3.50 per unit. The effect of a P0.50 per
unit increase in cost is to increase the break-even level of activity by
A. 50% B. 33-1/3% C. 14.3% D. P1.50 per unit.

28. LXQ Turo Turo stores are open for 15 hours a day (from 6:00 a.m. to 9:00 p.m.). It sells
packaged meals at a price of P40 per meal. Variable cost per meal is P30 while total fixed costs
for operation of all the stores amounted to 200,000 monthly. It is thinking to reduce its store
hours to only 12 hours a day as this would reduce fixed costs (utilities and wages) by P60,000 a
month. It is expected that the reduced store hours would result in loss of 1,500 packed meals
monthly sales. The reduction in store hours would result in
A. A prospective increase in monthly operating income of P45,000.
B. A prospective decrease in monthly operating income.
C. A prospective increase in monthly operating income of P60,000.

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D. No change in monthly operating income.

29. ABC Company breaks even at $300,000 sales and earns $30,000 at $350,000 sales. Which of the
following is true?
A. Fixed costs are $20,000.
B. Profit at sales of $400,000 would be $80,000.
C. The selling price per unit is $3.
D. Contribution margin is 60% of sales.

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30. A company has sales of $500,000, variable costs of $300,000, and pretax profit of $150,000. 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 sales dollars?
A. $88,000 B. $100,000 C. $110,000 D. $125,000

31. The Machan Manufacturing Company’s year-end income statement is as follows:

Sales (20,000 units) $360,000
Variable costs 220,000
Contribution margin $140,000
Fixed costs 105,000
Net income $ 35,000
Management is unhappy with the results and plans to make some changes for next year.
If management implements a new marketing program, fixed costs are expected to increase by
$19,200 and variable costs to increase by $1 per unit. Unit sales are expected to increase by 15
percent. What is the effect on income?
A. decrease of $21,200 E. no change
B. increase of $1,800 E. increase of $14,800
C. increase of $13,800

32. Wheels Corp. employs 45 sales personnel to market its sedan cars. The average car sells for
P690,000 and a 6% commission is paid to the sales person. It is considering changing the
scheme to a commission arrangement that would pay each person a package of P30,000 plus a
commission of 2% of the sales made by the person. The amount of total monthly car sales at
which Wheels Corp. would be indifferent (answer may be rounded off) as to which plan to
select is
A. P45,000,000 B. P36,500,000 C. P33,750,000 D. P22,500,000

33. Two companies are expected to have annual sales of 1,000,000 decks of playing cards next year.
Estimates for next year are presented below:
Company 1 Company 2
Selling price per deck $ 3.00 $3.00
Cost of paper deck 0.62 0.65
Printing ink per deck 0.13 0.15
Labor per deck 0.75 1.25
Variable overhead per deck 0.30 0.35
Fixed costs $960,000 $252,000
Given these data, which of the following responses is correct?
(In units) A. B. C. D.
Breakeven point for Co. 1 800,000 800,000 533,334 533,334
Breakeven point for Co. 2 420,000 420,000 105,000 105,000
Volume at which profits of Co. 1 and Co.
2 are equal 1,180,000 1,000,000 1,000,000 1,180,000

Questions 34 and 35 are 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 $49,500. The unit contribution margins for X and Y
are $2.50 and $1.20, respectively.

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34. Considering the company as a whole, the number of composite units to break even is
a. 1,650 b. 4,500 c. 8,250 d. 22,500

35. If the company had a profit of $22,000, the unit sales must have been
A. B. C. D.
Product X 5,000 13,000 23,800 32,500
Product Y 12,500 32,500 59,500 13,000

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36. Product Cott has sales of $200,000, a contribution margin of 20%, and a margin of safety of
$80,000. What is Cott’s fixed cost?
A. $16,000 B. $24,000 C. $80,000 D. $96,000

37. Bell Company has a 25% margin of safety. Its before-tax return on sales is 6%, and its tax rate
is 40%. Assuming that current sales are $120,000, what is Bell’s total fixed costs.
A. $36,000 C. $84,000
B. $21,600 D. $60,000

Questions 38 and 39 are based on the following information.

The marketing department of Hennessy Co. proposed a price cut on its leading brand, a product
called “Henry.” From the accounting records these are available:
Price per unit P 92.00
Discount to customers 10%
Direct cost per unit P 52.60
Variable operating expense per unit P 5.60
Proposed price cut per unit P 10.00
Estimated sales volume before price cut 1,220 pcs.

38. How much is the estimated contribution margin that will be lost due to price cut, assuming the
same pre-price cut sales volume?
A. P13,000 B. P10,980 C. P18,000 D. P17,990

39. For the same Hennessy Co., in the immediately preceding number, what is the additional
volume required after the price cut to get the same contribution margin before the price cut?
Round off to the nearest whole unit.
A. 1,000 units B. 500 units C. 704 units D. 409 units

Questions 40 through 42 are based on the following information.

Almo Company manufactures and sells adjustable canopies that attach to motor homes and trailers.
The market covers both new unit purchasers as well as replacement canopies. Almo developed its
business plan based on the assumption that canopies would sell at a price of $400 each. The
variable costs for each canopy were projected at $200, and the annual fixed costs were budgeted at
$100,000. Almo's after-tax profit objective was $240,000; the company's effective tax rate is 40%.
While Almo's sales usually rise during the second quarter, the May financial statements reported
that sales were not meeting expectations. For the first 5 months of the year, only 350 units had
been sold at the established price, with variable costs as planned, and it was clear that the after-tax
profit projection would not be reached unless some actions were taken. Almo's president assigned
a management committee to analyze the situation and develop an alternative course of action. The
following was presented to the president.
Reduce the sales price by $40. The sales organization forecasts that with the significantly reduced
sales price, 2,700 units can be sold during the remainder of the year. Total fixed and variable unit
costs will stay as budgeted.

40. Assuming no changes were made to the selling price or cost structure, how many units must
Almo sell to break even?
A. 167 B. 250 C. 500 D. 1,700

41. Assuming no changes were made to the selling price or cost structure, how many units must

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Almo sell to achieve its after-tax profit objective?

A. 1,250 B. 1,700 C. 2,000 D. 2,500

42. If management decides to reduce the selling price by $40, what will Almo's after-tax profit be?
A. $157,200 B. $160,800 C. $241,200 D. $301,200

THEORIES: (1-15 1ST PART ; 16-35 2ND PART)

16. Cost-volume-profit analysis is most important for the determination of the
A. Volume of operation necessary to break-even
B. Relationship between revenues and costs at various levels of operations
C. Variable revenues necessary to equal fixed costs
D. Sales revenue necessary to equal variable costs.

17. The sum of the costs necessary to effect a one-unit increase in the activity level is a(n)
A. Margin of safety. C. Marginal cost.
B. Opportunity cost. D. Incremental cost.

18. Which of the following assumptions does NOT pertain to cost-volume-profit analysis?
A. The units produced will equal the units sold
B. Inventories are constant
C. All costs are classified as fixed or variable
D. Sales mix may vary during the related period
E. The total revenues function is linear.

19. In a cost-volume-profit graph

A. the total revenue line crosses the horizontal axis at the breakeven point.
B. beyond the breakeven sales volume, profits are maximized at the sales volume where total
revenues equal total costs.
C. an increase in unit variable costs would decrease the slope of the total cost line.
D. an increase in the unit selling price would shift the breakeven point in units to the left.
E. an increase in the unit selling price would shift the breakeven point in units to the right.

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20. As an accountant, the most useful information you can get from break-even chart is the
A. Relationship among revenues, variable costs, and fixed costs at various levels of activity.
B. Volume or output level at which the enterprise breaks even.
C. Amount of sales revenue needed to cover enterprise fixed costs.
D. Amount of sales revenue needed to cover enterprise variable costs.

21. In a cost-volume-profit graph, the slope of the total revenue curve represents
A. the selling price per unit. D. total contribution margin
B. the contribution margin per unit E. total revenues.
C. the variable cost per unit

22. In a profit-volume graph, the slope of the profit curve represents

A. the selling price per unit D. total contribution margin
B. the contribution margin per unit E. total revenues.
C. the variable cost per unit

23. If a company’s variable costs are 70% of sales, which formula represents the computation of
dollar sales that will yield a profit equal to 10% of the contribution margin when S equals sales
in dollars for the period and FC equals total fixed costs from the period?
A. S = 0.2  FC C. S = 0.27  FC
B. S = FC  0.2 D. S = FC  0.27

24. 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 break-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.
D. Gross margin per unit for each additional unit sold.

25. 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 done through various possible scenarios and computes the impact on profit of various
predictions of future events.
D. Is limited because in cost-volume-profit analysis, costs are not separated into fixed and
variable components.

26. At its present level of operations, a small manufacturing firm has total variable costs equal to 75
percent of sales and total fixed costs equal to 15 percent of sales. Based on variable costing, if
sales change by $1.00, income will change by
A. $0.25.
B. $0.10.
C. $0.75.
D. can't be determined from the information given.

27. A company’s breakeven point in sales dollars may be affected by equal percentage increases in

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both selling price and variable costs 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 sales dollars 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.

28. The most likely strategy to reduce the breakeven point would be to
A. Increase both the fixed costs and the contribution margin.
B. Decrease both the fixed cost and the contribution margin.
C. Decrease the fixed costs and increase the contribution margin.
D. Increase the fixed costs and decrease the contribution margin.

29. A company increased the selling price of its product from $1.00 to $1.10 a unit when total fixed
costs increased from $400,000 to $480,000 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.

30. According to CVP analysis, a company could never incur a loss that exceeded its total
A. variable costs. B. fixed costs. C. costs. D. contribution margin.

31. Two companies produce and sell the same product in a competitive industry. Thus, the selling
price of the product for each company is the same. Company 1 has a contribution margin ratio
of 40% and fixed costs of $25 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 dollar sales volume and will have the <List B> dollar profit
potential once the indifference point in dollar sales volume is exceeded.
A. B. C. D.
List A Lower Lower Higher Higher
List B Lesser Greater Lesser Greater

32. Which of the following is a true statement about sales mix?

A. Profits may decline with an increase in total dollars of sales if the sales mix shifts to sell
more of the high contribution margin product.
B. Profits may decline with an increase in total dollars of sales if the sales mix shifts to sell
more of the lower contribution margin product.
C. Profits will remain constant with an increase in total dollars of sales if the total sales in units
remains constant.
D. Profits will remain constant with a decrease in total dollars of sales if the sales mix also
remains constant.

33. Saints Co. sells three chemicals: Simpol, Plutex, and Coplex. Simpol is the most profitable
product while Coplex is the least profitable. Which one of the following events will definitely
decrease the firm’s overall B.E.P. for the upcoming accounting period?
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A. An increase in the overall market of Plutex.

B. A 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 cost.

34. A very high degree of operating leverage indicates a firm

A. has high fixed costs
B. has a high net income
C. has high variable costs
D. is operating close to its breakeven point

35. Love Corp. is operationally a highly leveraged company, that is, it has high fixed costs and low
variable costs. As such, small changes in sales volume result in
A. Proportionate change in net income. C. Negligible change in net income.
B. Large changes in net income. D. No change in net income.

ANSWER KEY
Theory Problems
1. D 21. A 1. A 21. D 41. D
2. D 22. B 2. D 22. C 42. C
3. D 23. D 3. A 23. A
4. A 24. B 4. C 24. C
5. A 25. C 5. D 25. A
6. A 26. A 6. A 26. A
7. A 27. D 7. A 27. A
8. D 28. C 8. A 28. A
9. D 29. D 9. B 29. D
10. B 30. C 10. B 30. A
11. A 31. A 11. C 31. A
12. C 32. B 12. D 32. C
13. B 33. C 13. C 33. A
14. A 34. D 14. B 34. B
15. D 35. B 15. B 35. B
16. B 16. D 36. B
17. C 17. B 37. B
18. D 18. A 38. B
19. D 19. A 39. C
20. A 20. A 40. C

REFERENCE:
CPA REVIEW SCHOOL OF THE PHILIPPINES
Manila

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