CVP Exercise Maria Cristina P.

Obeso, CPA, MBA

PROBLEM 1

Contribution margin, breakeven point, margin of safety. Dianne Company makes a product that
sells for P160 per unit. Variable costs are P104 per unit, and fixed costs total P1,568,000
annually. The company sold 35,000 units during the current year.

Required:

1. Unit contribution margin, contribution margin ratio, and variable cost ratio.
2. Breakeven point in units and in pesos.
3. Margin of safety in units and in pesos.
4. Margin of safety ratio.

PROBLEM 2

Basic CVP analysis, margin of safety, CMRatio. KG Company manufactures and sells a single
product. The company’s sales and expenses for a recent month are shown below:

Total Per Unit

Sales P 600,000 P 40
Less: Variable expenses 420,000 28
Contribution margin 180,000 P. 12
Less: Fixed expenses 150,000
Net income P 30,000
Required:
1. Breakeven point in units and in pesos.
2. What is the contribution margin at breakeven point?
3. How much is the total fixed costs and expenses at breakeven point?
4. Margin of safety in pesos, in units and in percentage.
5. Compute the net income using the margin of safety ratio.
6. How many units must be sold to earn a minimum net income of P18,000?
7. If sales increase by P80,000, how much would you expect income to increase?

PROBLEM 3

Breakeven point, sales price at breakeven point. Apo Ni Aga Sorority is planning its annual A
Night of Extravaganza. The committee would like to charge P800 per person for the activity.

Dinner per person P 250

Favors and programs per person 300
Band 25,000
Tickets and advertising 40,000
Venue rental 20,000
Floorshow 15,000
Required:

1. Breakeven point in terms of units and pesos.

2. Assume that last year only 200 persons attended the event and the same number of
attendees is expected this year, what price per ticket must be charged to breakeven?
3. The committee has learned that Mega ShaSha will make an appearance during the evening.
Accordingly, the committee has decided to raised the ticket price to P850 per person.
Compute the expected breakeven point in units and in pesos.

PROBLEM 4

4. BEP, change in net income. Highlands, Inc. Produces and sells camping equipment. One of
the company’s products, a camp lantern, sells for P90 per unit. Variable expenses are P63
per lantern, and fixed expenses associated with the lantern total P135,000 per month.
 Required:
1. Determine the breakeven point in units and in pesos.
2. At present, the company is selling 8,000 lanterns a month. The sales manager is
convinced that a 10% reduction in the selling price would result in a 25% increase in the
number of lanterns sold each. How much is the change in net income if the sales
manager’s expectations are correct?

PROBLEM 5

Sales with profit. Rang-ayan Company produces a single product and presented below are data
taken from its recent income statement.

Sales (135,000 units at P20) P 2,700,000

Less: Variable costs 1,890,000
Contribution margin 810,000
Less: Fixed costs 900,000
Net loss P ( 90,000 )
Required:

1. The sales manager feels that an P80,000 increase in monthly advertising budget,
combined with an intensified effort by the sales staff, will result in a P700,000
increase in monthly sales. Considering these changes, will the company’s net
income increase or decrease?
2. The president is convinced that a 10% reduction in the selling price, combined with
an increase of P35,000 in the monthly advertising budget, will cause unit sales to
double. Considering these changes, how much is the company’s expected net
income?
3. A new package for the product is being considered to induce sales. This package
costs P0.60 per unit. Considering the new package cost, how many units would have
to be sold each month to earn a profit of P45,000?

PROBLEM 6

BEP, sales with profit. Castleton Company has analyzed the costs of producing and selling
5,000 units of its only product to be as follows:

Direct materials P 60,000

Direct labor 40,000
Variable factory overhead 20,000
Fixed factory overhead 30,000
Variable marketing and administrative expenses 10,000
Fixed marketing and administrative expenses 15,000
Required:
1. Compute the number of units needed to breakeven at a per unit sales price of
P38.50.
2. Determine the number of units that must be sold to produce an P18,000 profit, at a
P40 per unit sales price.
3. Determine the price Castleton must charge at a 5,000-unit sales level, to produce a
profit equal to 20% of sales.

PROBLEM 7

CMR, BEP, sensitivity analysis. Wild’s Company’s income statement is shown below

Total Per Unit

Sales (30,000 units) P 150,000 P 5.00
Less: Variable costs 90,000 3.00
Contribution margin 60,000 P 2.00
Less: Fixed expenses 50,000
Net Income P 10,000
Required:
1. Compute the contribution margin ratio, breakeven point in pesos, and operating
income.
 2. Calculate the new contribution margin ratio, breakeven point in pesos and operating
profit under each of the changes below:
a. Unit sales price increase by 15%
b. Unit variable costs decrease by 25%
c. Total fixed costs increase to P80,000
d. Unit sales price decreases by 20% and the sales volume increases by 20%
e. The selling price increases by P 0,50 per unit, fixed costs increase by P10,000,
and the sales volume decreases by 5%
f. Variable costs increase by P0.20 per unit, the selling price increases by 12%, and
the sales volume decreases by 10%

PROBLEM 8

Unit sales price, sensitivity analysis. Montgomery Company expected to incur the following
costs to produce and sell 70,000 units of its product:

Variable manufacturing cost P210,000

Fixed manufacturing cost 80,000
Variable marketing expense 105,000
Fixed marketing and administrative expenses 60,000
Required:
1. What price does the company have to charge for the product in order to just
breakeven if all 70,000 units are sold?
2. If management decides on a price of P8 and has a profit objective of 10%, what
amount of sales is required?
3. The company plans to expand capacity next year to 100,000 units. The increased
capacity will increase fixed manufacturing costs to P100,000. If the sales price of
each of unit of product remains at P8, how many units must the company sell to
produce a profit of 15% of sales?

PROBLEM 9

Operating leverage. Locker Company manufactures and sells electronic door lockers for
P600 each. Variable costs are P420 per unit, and fixed costs total P4,500,000 per year. The
company currently sells 40,000 units a year.
Required:
1. Compute the degree of operating leverage at the present level of sales.
2. If 48,000 units are sold next year, what is the:
a. Expected increase in net income next year
b. Percentage change in net income

PROBLEM 10

BEP, Indifference point. Kimbrell Company has decided to introduce a new product. The new
product can be manufactured by either a capital-intensive method or a labor-intensive method.
The manufacturing method will not affect the quality of the product. The estimated unit
manufacturing costs by the tow methods follow:

Capital Intensive Labor Intensive

Materials P 5.00 P 5.60
Direct Labor 6.00 7.20
Variable Factory Overhead 3.00 4.80
Directly traceable incremental fixed factory overhead is expected to be P2,440,000 if the
capital-intensive method is chosen and P1,320,000 if the labor-intensive method is chosen.
Kimbrell’s Market Research Department has recommended an introductory unit sales price
of P30. Regardless of the manufacturing method chosen, the incremental marketing
expenses are estimated to be P500,000 per year plus P2 for each unit sold.
Required:
1. Calculate the estimated breakeven point for the new product in annual units of sales
if Kimbrell Company uses the:
a. Capital-intensive manufacturing method
b. Labor-intensive manufacturing method
 2. Determine the annual unit sales volume at which the choice between the two
manufacturing methods would not make a difference.

SOURCE: MANAGEMENT ADVISORY SERVICES BY FRANKLIN AGAMATA 2007 EDITION