PRACTICE PROBLEMS in CVP ANALYSIS

1. Diamond Corporation's break-even-point in sales is P1,012,500, and its variable expenses are 75% of sales. Determine the
amount of sales if the company lost P36,000 last year.
Actual sales: BEP sales + Lost last year
= P1,012,500 + (P36,000)
= P976,500
Answer: The amount of sales if the company lost P36,000 last year was P976,500.

2. Gemstone Corporation's sales are P1,500,000, its fixed expenses are P375,000, and its variable expenses are 60% of sales.
What is the margin of safety?
Margin of safety= 1 ÷ Degree of operating Leverage
= 1 ÷ (P600,000 / P225,000)
= 1 ÷ 2.67
= 0.375 or 37.50%
Answer: The margin of safety is 0.375 or 37.50%.

3. Precious gems Corporation has a margin of safety percentage of 20% based on its actual sales. The break-even point is
P500,000 and the variable expenses are 60% of sales. Given this information, how much is the actual profit is?
CM ratio = 1- Variable expense ratio
= 1 - .60 = .40 or 40%
BEP in sales = FC ÷ CM ratio
P500,000 = FC ÷ .40
FC = P500,000 x .40 = P200,000
Total actual sales = BEP in sales ÷ (1 - Margin of safety percentage)
= P500,000 ÷ (1 - .20)
= P625,000
Actual Profit = (CM ratio x Sales) – Fixed expenses
= (.40 x P625,000) – P200,000
= P50,000
Answer: The actual profit is P50,000.

4. Bounty Corporation expects the following operating results for next year:
Sales P 400,000
Margin of safety P 100,000
Contribution margin ratio 75%
Degree of operating leverage 4
What is Bounty’s expecting total fixed expenses to be next year?
MOS = Actual sales – BEP in sales
P100,000 = P400,000 – BEP in sales
BEP in sales = P400,000 – P100,000
= P300,000
Fixed cost = BEP in sales x Contribution margin ratio
= P300,000 x 75%
= P225,000
Proof no. 1 Margin of safety = P100,000 Proof no. 2 Degree of operating leverage = 4
MOS = Actual sales – BEP in sales DOL = CM / PBT
P100,000 = P400,000 – P300,000 4 = P300,000 / 75,000
P100,000 = P100,000 4=4
 Answer: Bounty is expecting total fixed expenses of P225,000 next year.

5. Abundance Corporation produces and sells a single product. Data concerning that product appear below:
Per Unit Percent of Sales
Selling price P 520 100 %
Variable expenses 312 60 %
Contribution margin P
449HJNM
208 40%
The company is currently selling 6,000 units per month. Fixed expenses are P600,000 per month. The marketing manager believes
that a P15,000 increase in the monthly advertising budget would result in a 100-unit increase in monthly sales. What should be
the overall effect on the company's monthly net operating income of this change? Indicate the amount of change in the monthly
net operating income and state whether it is an increase or a decrease.

6,000 units 6,100 units

Sales P3,120,000 P3,172,000
VC C(1,872,000) 1,903,200
CM P1,248,000 1,268,800
FC (600,00) (615,000)
Net operating income P648,000 P653,800

P653,800 - P648,000 = P5,800 increase in net operating income

Answer: The amount of change in the monthly net operating income is P5,800 increase.