OUR LADY OF THE PILLAR COLLEGE - CAUAYAN

Cauayan City, Isabela

Exercises in Cost – Volume – Profit Analysis

Ex. 1.
Lane Company has prepared the following cost-volume-profit graph:

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Instructions
For the items listed below, enter to the left of the item, the letter in the graph which best corresponds to the item.
____ 1. Activity base
____ 2. Break-even point
____ 3. Dollars
____ 4. Fixed costs
____ 5. Loss
____ 6. Profit
____ 7. Revenues
____ 8. Total costs
____ 9. Variable costs

Exercise No. 2
For two years, William Dibson has been the manager of the production department of a company manufacturing
toys made of plastic-coated cardboard. One of the toys is a paper doll, whose "clothes" are made of acetate, and stay
on the doll with static electricity. The company's sales were mainly to large educational institutions until last year,
when the dolls were sold for the first time to a large discount retailer. The dolls were sold out immediately, and
enough orders were received to keep the department at full capacity for the immediate future.

The fixed costs for the department are $50,000, with $1 per unit variable costs. A paper doll and one set of clothes
sell for $3. The maximum volume is 80,000 units. With the increased volume, Mr. Dibson is considering two
options to improve profitability. One would reduce variable costs to $0.75, and the other would reduce fixed costs
to $35,000.

Required:
Given the fact that sales are increasing, make a short (one paragraph) recommendation to Mr. Dibson about which
option he should choose. Support your recommendation with a calculation showing him how profitability will
change with each option.

Exercise No. 3
The following is Arkadia Corporation's contribution format income statement for last month:

Sales............................................... $1,200,000
Variable expenses..........................     800,000
Contribution margin....................... 400,000
Fixed expenses...............................     300,000
Net operating income..................... $  100,000

The company has no beginning or ending inventories and produced and sold 20,000 units during the month.

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 Required:

a. What is the company's contribution margin ratio?

b. What is the company's break-even in units?
c. If sales increase by 100 units, by how much should net operating income increase?
d. How many units would the company have to sell to attain target profits of $125,000?
e. What is the company's margin of safety in dollars?
f. What is the company's degree of operating leverage?

Exercise No. 4
Spencer Company's most recent monthly contribution format income statement is given below:
Sales................................... $60,000
Variable expenses..............  45,000
Contribution margin........... 15,000
Fixed expenses...................  18,000
Net operating loss.............. ($3,000)

The company sells its only product for $10 per unit. There were no beginning or ending inventories.

Required:
a. What are total sales in dollars at the break-even point?
b. What are total variable expenses at the break-even point?
c. What is the company's contribution margin ratio?
d. If unit sales were increased by 10% and fixed expenses were reduced by $2,000, what would be the
company's expected net operating income? (Prepare a new income statement.)

Exercise No. 5
Alley Company makes student book bags that sell for $20 each. For the coming year, management expects fixed
costs to be $240,000. Variable costs are $15 per unit.

Instructions
(a) Compute break-even sales in dollars using the mathematical equation.
(b) Compute break-even sales using the contribution margin ratio.
(c) Compute margin of safety ratio assuming actual sales are $1,200,000.
(d) Compute the sales required to earn net income of $120,000, using the mathematical equation.

Exercise No. 6
Naks! Company manufactures and sells a single product. The company’s pertinent financial data for a recent
month follow:
Unit sales price (SP) P 20
Unit variable costs (VCu) 14
Total fixed costs (FxC) P 75,000
Units sold (u) 15,000 units

Required:
a. Prepare the variable (marginal) income statement of the company showing columns for
units, unit prices, amount, and percentage (%) for relevant analysis.
b. What is the monthly break – even – point in units sold (BESu) and in sales pesos (BES)?
c. Without resorting to computations, what is the total contribution margin (CM) at the
break – even point (BEP)?
d. What is the margin of safety (MS)?
e. Is it possible that total sales (S) can be computed given only the following factors?
i. Margin of Safety (MS), Contribution Margin (CM), and Profit (P)
ii. Margin of Safety (MS), Contribution Margin (CM), and Profit Ratio (PR)
f. Based on the above problem, how much is total sales (S) if profit (P) is expressed as
(assume a tax rate of 32%):
i. Profit before tax of P 150,000
ii. Profit after tax (NP) of P 132,600
iii. Profit is 10% of sales, before tax
iv. Profit is P 4 per unit, before tax
v. Profit is 17% of sales, after tax
vi. Profit is 30% of contribution margin ratio (CMR), before tax
vii. Profit is 30% of contribution margin ratio (CMR), after tax

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Exercise No. 7
Yeah! Company produces compact discs and currently sells 10,000 units annually to producers of sound
reproduction systems. Hah Ching, president of the company, has asked you to assist her in developing the
information he needs to formulate a reasonable product strategy for next year. You are satisfied that volume is the
primary factor affecting costs and expenses and have separated the mixed costs into their fixed and variable
segments. Beginning and ending inventories remain at a level of 1,000 units.

Following are the current year data assembled for your analysis:
Sales price per unit……………………………………….P 100
Variable costs per unit:
Materials……………………P 10
Labor………………………. 20
Factory overhead &
operating expenses… 30 60
Fixed costs 390,000

Required:
a. Break – even point in units, pesos, and percentage form.
b. The company’s profit or loss at the present sales level.
c. Number of units that must be sold to earn profit before tax that is twice as much as the present
profit.
d. Assuming the company pays the corporate income tax rate, how much peso sales must be
generated to earn profit after tax of P 17,000?
e. How many units must be sold if the company wants to double its present profit per unit?
f. How much peso – sales must be generated to earn profit of 20% of such sales?
g. What is the company’s margin of safety in terms of units and in pesos?
h. What is the company’s margin of safety ratio?

Exercise No. 8
Kat – Kat Company makes a product that sells for P 30 per unit. Variable costs are P 12 per unit, and fixed costs
total P 360,000 annually.

Required:
1. What is the products CM ratio?
2. Use the CM ratio to determine the break – even point in sales pesos.
3. The company estimates that sales will increase by P 50,000 during the coming year due to increased
demand. By how much should net income increase?
4. Assume that the company sold 12,000 units last year. The sales manager is convinced that a 10%
reduction in the selling price, combined with a P 40,000 increase in advertising expenditures, would
cause annual sales in units to increase by 50%. Prepare two contribution income statements, one
showing the results of the last year’s operations and one showing what the result of operations would
be if these changes were made. Would you recommend that the company do as the sales manager
suggests?
5. Assume again that the company sold 12,000 units last year. The president feels that it would be
unwise to change the selling price. Instead, he wants to increase the sales commission by P 4 per
unit. He thinks that this move, combined with some increase in advertising, would cause the annual
sales to double. By how much could advertising be increased with profits remaining unchanged?

COMPLETION STATEMENTS
1. Knowledge of cost behavior is important in ______________________ analysis.
2. A _________________ cost remains constant per unit at every level of activity.
3. Unit fixed costs __________________ with the changes in the level of activity.
4. Total fixed costs are ___________ over various levels of activities, whereas total variable costs
__________________ directly and ________________ with changes in the activity level.
5. An assumption of CVP analysis is that variable and fixed costs have a _______________ relationship with
an activity base.
6. The range over which a company expects to operate is referred to as the _____________ range.
7. A cost that has both variable and fixed elements is referred to as a _________________ cost.

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 8. The amount of revenue remaining after deducting total variable costs is called the
_________________________.
9. A _______________ income statement classifies costs as variable or fixed and computes a contribution
margin.
10. The _______________ point is when total revenues equal total costs.
11. _________________ divided by the contribution margin ratio will give the amount of _________________
to break even.
12. The difference between actual or expected sales and break-even sales is called the
__________________________.

MATCHING
Match the items in the two columns below by entering the appropriate code letter in the space provided.

A. Activity index F. Mixed costs

B. Variable costs G. Break-even point
C. Fixed costs H. Contribution margin
D. High-low method I. Margin of safety
E. Relevant range J. Contribution margin ratio

____ 1. The amount of revenue remaining after deducting variable costs.

____ 2. Costs that contain both a variable and a fixed element.

____ 3. The percentage of sales dollars available to cover fixed costs and produce income.

____ 4. Identifies the activity which causes changes in the behavior of costs.

____ 5. The difference between actual or expected sales and sales at the break-even point.

____ 6. Costs that vary in total directly and proportionately with changes in the activity level.

____ 7. The level of activity at which total revenues equal total costs.

____ 8. The range over which the company expects to operate during the year.

____ 9. Costs that remain the same in total regardless of changes in the activity level.

____ 10. A method that uses the total costs incurred at the high and low levels of activity.