Mas.1416 Profit Planning and Cvp Analysis

MAS.M 1416 PROFIT PLANNING AND CVP ANALYSIS STRAIGHT PROBLEMS 1. BASIC CVP RELATIONSHIPS. Ariel Company produces a product that has the following data per annum: Unit sales price Unit variable costs Total fixed costs Units sold

P400 per unit P260 per unit P7.0 MILLION 70,000 units

Required: a. Unit contribution margin, contribution margin ratio, and variable cost ratio. b. Breakeven point in units and in pesos. c. Margin of safety in units, in pesos, and margin of safety ratio. d. Amount of profit using the margin of safety analysis. e. Net profit ratio. f. If sales increase by P450,000, how much would you expect profit to increase? g. Degree of operating leverage? Answer: a. UCM= 140, CMR= 35%, VCR=65% b. BEPU=50,000, BEPP= 20M c. MSU=20,000 units, MSP=8M, MSR=28,57% d. 2,800,000 e. 10% f. 1,575,000 g. 3.5times 2. SALES WITH PROFIT. ABC Corporation presently sells product SIMPLE LANG with the following related data: Unit contribution margin P80 Variable cost ratio 75% Total fixed costs P8 million Tax rate 40% Required: The sales in units and in pesos be if: A. Profit before tax is P3 million. B. Profit after tax is P3 million. C. Profit ratio before tax is 10% of sales. D. Profit ratio after tax is 7.2% Answer:

E. Unit profit margin before tax is P8. F. Unit profit margin after tax is P9. G. Profit ratio before tax is 10% of CM.

Item a. b. c. d. e. f. g.

Sales in units 137,500 162,500 166,667 192,308 111,111 123,077 111,111

Sales in pesos 44,000,000 52,000,000 53,333,333 61,538,462 35,555,556 39,384,650 35,555,556

3. CVP SENSITIVITY ANALYSIS. Dynamics Corporation manufactures and sells a single product that has a retail price of P250; unit variable cost of P175, and total fixed costs of P1,050,000. It expects to sell 25,000 units in the next period. Required: a. The CMR, BEP in units, and profit as expected in the coming period. b. The new CMR, BEP in units, profit, MSU, and DOL for the coming period if: 1. unit sales price increases by 10%. 2. unit variable costs decrease by 20%. 3. total fixed costs increase to P1,820,000. 4. the number of units sold increases to 52,000. 5. unit sales price decreases by Pl0, unit variable cost decreases by 10%, and total fixed costs increase by P100,000. Answer: No. a. b. B2.

CMR 30% 36.36% 44% 30% 30% 34%

BEPU 14,000 10,500 9,545 24,267 14,000 13,939

Profit 825,000 1450,000 1,700,000 55,000 2,850,000 912,500

MSU 11,000 14,500 15,455 733 38,000 11,061

DOL 2.27 1.72 1.62 34.10 2.27 2.26

4. MULTI-PRODUCT SALES. Cebu Corporation produces three products, D, E and F, with the following related data: D

E

F

Total

Unit sales price Unit variable costs Sales In units Production in units

P200 100 30,000 29,000

P 50 20 50,000 53,000

Total fixed costs, Tax rate

P120 90 20,000 18,000

100,000 100,000 P 6.00M 40%

Required: Compute the following and round your rates up to two decimal places: a. Using the sales mix ratio based in pesos: 1. Average contribution margin ratio. 2. Composite BEPP and allocation of CBEPP. 3. Sales required to realize a combined profit before tax of P1.5 million. 4. Sales required to realize a combined profit after tax of P1.0 million b. Using the sales mix ratio based in units: 1. Average unit contribution margin. 2. Composite BEPU and allocation of CBEPU. Solution Guide: Item A

B

Required 1.Average CMR 2.Composite BEPP Allocation of CBEPP

3.Sales with PBT 4.Sales with PAT 1.Average UCM 2.Composite BEPU Allocation of the CBEPU

Answers 12,823,480 D 7,058,800 E 2,941,200 F 2,823,480 16,029,412 16,385,621 51 117,647 D 35,294 E 58,824 F 23,529

5. APPLYING THE BASIC CVP RELATIONSHIPS. Charmaine Corporation provided you its condensed income statement as presented on the left side (values in millions): (in PhP) Sales Costs and expenses Net profit

2009 400 300 100

2010 600 420 180

Required: a. Contribution margin ratio. b. Breakeven pesos. c. If sales are expected to increase by 25% in 2011, what is the percentage increase in profit? d. If total fixed costs and expenses are expected to increase by 25%, what would be the new peso breakeven point in 2011? Answer: a. 40% b. 150M

c. 0.3333 d. 300M

6. OPERATING LEVERAGE. Flash Disk Corporation discloses the following data relative to its product in 2010: CM (40,000 units x P50) Total FCE CMR

P2,000,000 1,500,000 40%

Required: a. Degree of operating leverage. b. What would be the percentage increase in EBIT if sales are expected to increase by 20% in 2011? c. What would be the percentage change in EBIT if sales are expected to increase by 30% in 2011? Answer: a. 4 times

b. 80%

c. 120%

7.0 INDIFFERENCE POINT. Manila Company has decided to introduce a new product. The new product can be manufactured by either a fully-automated process or a semi-automated process. The manufacturing process will not affect the quality of the product. The estimated unit manufacturing costs by the two methods follow: Fully

Semi-

Automated

Automated

Materials

P 5.00

P 6.00

Direct labour

6.00

7.00

Variable factory overhead

3.00

4.00

Directly traceable incremental fixed overhead is expected to be P 2,400,000 if the fullyautomated is chosen. Allocated fixed costs and expenses are P1 million and P2 million for fullautomated and semi-automated, respectively. The company’s market Research Department has recommended an introductory unit sales price of P40. Regardless of the manufacturing process chosen, the incremental marketing expenses are estimated to be 500,000 per year plus P2 for each unit sold. Required: a. The estimated breakeven point for the new product in annual units of sales if the company uses the: 1. fully-automated manufacturing process. 2. semi-automated manufacturing process. b. The annual sales units at which the choice between the two manufacturing processes would not make a difference, if 1. the unit sales price is P50 for either process; 2 the unit sales price is P55 for fully automated process and P50 for semi automated process c. The annual sales in pesos in which the profit for either of the alternatives would be the same. Answer: a.1. 100,000 units a.2. 62,000 units b.1. 366,000

b.2. 137,250 c. 14,640,000

MULTIPLE CHOICE QUESTIONS 1. At breakeven fixed cost is always A. Less than contribution margin. B. Equal to contribution margin. C. More than variable cast. D. More than the contribution margin.

2. 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 breakeven 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 cost per unit for each additional unit sold. D. Sales price per unit for each additional unit sold. 3. The term “relevant range” as used in cost accounting means the range over which A. cost relationships are valid B. production may vary C. costs may fluctuate D. relevant costs are incurred 4. Cost-volume-profit analysis assumes that over the relevant range total. A. Revenues are linear. B. Variable costs are nonlinear. C. Costs are unchanged. D. Fixed costs are nonlinear. 5. Breakeven analysis assumes linearity over the relevant range with respect to

A. B. C. D.

Total costs

Total revenue

Yes Yes No No

No Yes Yes No

6. An assembly plant accumulates its variable and fixed manufacturing overhead costs in a single cost pool, which is then applied to work-in-process using a single application base. The assembly plant management wants to estimate the magnitude of the total manufacturing overhead costs for different volume levels of the application activity base using a flexible budget formula. If there is an increase in the application activity base that is within the relevant range of

activity for the assembly plant, which one of the following relationship regarding variable and fixed costs is correct? A. The variable cost per unit is constant, and the total fixed costs decrease. B. The variable cost per unit is constant, and the total fixed costs increase. C. The variable cost per unit and the total fixed costs remain constant. D. The variable cost per unit increases, and the total fixed costs remain constant. 7. One of the major assumptions limiting the reliability of breakeven analysis is that A. Efficiency and productivity will continually increase. B. Total variable costs will remain unchanged over the relevant range. C. Total fixed costs will remain unchanged over the relevant range. D. The cost of production factors varies with changes in technology. (cma) 8. When an organization is operating above the breakeven point, the degree or amount that revenues may decline before losses are incurred is the A. Residual income rate. B. Marginal rate of return C Margin of safety. D. Target (hurdle) rate of return 9. Total unit costs are A. Relevant for cost-volume-profit analysis B. Independent of the cost system used to generate them. C. Irrelevant in marginal analysis. D. Needed for determining product contribution. Breakeven point 10. A company manufactures a single product. Estimated cost data regarding this product and other information for the product and the companies are as follows: Sales price per unit Total variable production cost per unit

P40 P22

Sales commission (on sales) Fixed costs and expenses: Manufacturing overhead General and administrative Effective income tax rate

5% P5,598,720 P3,732,480 40%

The number of units the company must sell in the coming year in order to reach its breakeven point is A. 388,800 units.

C. 583,200 units.

B. 518,400 units.

D. 972,000 units.

11. Mother’s Co. reported the following for the year just ended: Budgeted sales Break-even sales Budgeted contribution margin Cash flow break-even

P 3,000,000 2,100,000 1,800,000 600,000

The company’s margin of safety is A. 900,000

C. P1,200,000

B. P2,400,000

D. P1,500,000

12. A company is concerned about its operating performance, as summarized below: Revenues (P12.50 per unit)

P300,000

Variable costs

P180,000

Operating loss

(40,000)

How many additional units should have been sold in order for the company to break even in 2013? A. 32,000 B. 24,000

C. 16,000 D. 8,000

13. For the period just ended Chanda Inc. generated the following operating results in percentages

Sales

100%

Cost of sales Variable

50%

Fixed

10%

Gross profit

60% 40%

Operating expense Variable

20%

Fixed

15%

Operating income

35% 5%

Total sales amounted to P3.0 million, at what level is break-even sales? A. P3,750,000 B. P1,850,000

C. P1,875,000 D. P2,500,000

14. The following information pertains to Nova Company’s cost-volume-profit relationships: Breakeven point in units sold

1,000

Variable costs per unit

P 500

Total fixed costs

P150,000

How much will be contributed to profit before income taxes by the 1,001st unit sold? A.P650

C. P150

B. P500

D. P 0

Data for questions 15 and 16 are as follows: Tropical Stuff Toys manufactures and sells dolls. operating results for the last quarter: Stuff toys sold

19,375

Breakeven point in number of toys

15,500

Breakeven point in peso sales

P 65,875

Total fixed costs

P 47,275

15. What was Tropical’s variable cost per doll? A. P 4.25

C. P 1.20

B.P3.05

D. P 0.96

16 What was the margin of safety percentage for the last quarter of Tropical? (rounded to the nearest percent) A. 20%

C. 28%

B. 25%

D. 72%

17. Mann Corp. has a contribution margin ratio of .26. It aims to have a net income of P320,00 with a sales volume of P2 million. Its total fixed costs amount to A. P200,000

C. P230,777

B. P83,200

D. P520,000

18. Asian Corporation, a manufacturing company, is operating at 90% capacity. Since there is no other use of the 10% idle capacity, an offer for a new order at P8.20 per unit requiring 15% capacity is being considered. If the order will be accepted, the required 5% additional capacity will be sub-contracted at the cost of P7.80 per unit. The variable cost per unit of production of Asian Corporation follows: Materials

P 4.00

Labour

1.75

Variable overhead

1.75 P 7.50

What is the expected contribution margin per unit on the new order? A. P0.40

C. P0.60

B. P0.50

D.P0.55

19. Which of the following will decrease the breakeven point? Decrease in Increase in Increase in Selling Price Direct Labor Fixed Cost A. Yes

Yes

Yes

B. Yes

No

Yes

C.

No

No

No

Yes

No

D. No

20. Which of the following will result in raising the breakeven point? A. A decrease in the variable cost per unit. B. An increase in the semi-variable cost per unit C. An increase in the contribution margin per unit. D. A decrease in income tax rates. 21. The contribution margin ratio always increases when the A. Breakeven point increases. B. Breakeven point decreases. C. Variable costs as a percentage of net sales decrease. D. Variable costs as a percentage of net sales increase. 22. In a profit volume graph, the cost/volume/profit relationships are represented. The vertical axis is the profit in pesos and the horizontal axis is the volume in units. The diagonal line is the contribution margin line. The point at which are contribution margin line intersects the zero profit line is the point: A. At which the volume level is zero. B. At which the total costs equal the total sales. C. At which sales increase. D. At which total variable costs equal total sales. 23. When using the graph method, if unit outputs exceed the break-even point, A. Expenses are extremely high relative to revenues. B: There is loss because the total cost line exceeds the total revenue line. C. Total sales exceed total cost. D. There is profit since the total cost line exceeds the total revenue line. 24. The most important use of the cost-volume-profit graph is to show A. The breakeven point. B. The cost/margin ratio at various levels of sale activity. C. The relationships-among volume, cost, revenues, over wide ranges of activity. D. The determination of cross over point.

25. Marston Enterprises sells three chemicals: petrol, septine and tridol. Petrol is the company’s most profitable product; tridol is the least profitable. Which one of the following events will definitely decrease the firm’s overall breakeven point for the upcoming accounting period? A .The installation of a new computer-controlled machinery and subsequent layoff of assembly line workers. B. A decrease in tridol’s selling price. C. An increase in anticipated sales of petrol relative to sales of septine and tridol. D. An increase in petrol’s raw material cost. Sales with profit Questions 26 through 27 are based on the following information: Tribal Corporation is developing a new product, surge protectors for high-voltage electrical flows. The cost information below relates to the product. Direct materials

P3.25

Direct labour

4.00

Distribution

0.75

The company will also be absorbing P120,000 of additional fixed costs associated with this new product. A corporate fixed charge of P20,000 currently absorbed by other products will be allocated to the new product. 26. If the selling price is P14 per unit, the breakeven point in units (rounded to the nearest hundred) for the for surge protectors is: A. 8,600 units

C. 15,000 units

B. 10,000 units

D. 20,000 units

27. How many surge protectors (rounded to the nearest hundred) must Tribal sell at a selling price of P14 per unit to gain P30,000 additional operating income before taxes? A. 10,700 units

C. 25,000 unit

B. 20,000 units

D. 25,300 units

28. How many surge protectors (rounded to the nearest hundred) must Tribal sell at a selling price of P14 per unit to increase after tax income by P30,000? Tribal’s effective rate is 40%. A. 10,700 units

C. 25,000 units

B. 20,000 units

D. 28,300 units

29. Anna Co would like to market a new product at a selling price of P15 per unit. Fixed costs for this product are P1,000,000 for less than 500,000 units of output and P1,500,000 for 500 ,000 or more units of output. The contribution margin percentage is 20%. How many units of this product must be sold to earn a target operating income of P1 million? A. 754,900

C 825,530

B. 833,334

D. 785,320

30. LC & Company has sales of P400,00 with variable costs of P300,000, fixed costs of P120,000 and an operating loss of P20,000. By how much would LC need to increase its sales in order to achieve a target operating income of 10% of sales7 A. P400,000

C. P500,000

B. P462,000

D. P800,000

31. In using cost-volume-profit analysis to calculate an expected sales level expressed in units, which of the following should be subtracted from fixed costs in the numerator? A. Predicted operating loss.

C. Unit contribution margin.

B. Predicted operating profit.

D. Variable costs.

Multiple product sales Items 32 and 33 are based on the following information. The data below pertain to two types of products manufactured by Korn Corporation: Per Unit Sales price

Variable costs

Product Y

P 120

P70

Product Z

500

200

Fixed costs total P300,000 annually. The expected mix in units is 60% for product Y and 40% for product Z. 32. How much is Korn’s breakeven sales in units? A. 857

C. 2,000

B. 1,111

D. 2,459

33. How much is Korn’s breakeven sales in pesos? A. P300,000

C. P475,000

B. P420,000

D. P544,000

34. Chemicals, Inc. formulates and sells three major chemicals: C1, C2, and C3. It sells to industrial users who use and buy these chemicals in the following ratio: these (3) measures of C1 for one (1) measure of C3, two (2) of C2 for one(1) measure of C1. The company makes the following contribution margin per measure: C1

P30

C2

P45

C3

P90

Fixed costs amounted to 1.8 million. At break-even point, the volume of C3 to be sold would be A. 12,000

C. 24,000

B. 36,000

D. 4,000

35. Considering the company as a whole, the number of composite units to breakeven is A. 31,500

C. 8,250

B. 4,500

D. 9,900

36. If the company had an operating income of P22,000, the unit sales must have been Product X

Product Y

Product X

Product Y

A.

5,000

12,500

C.

23,800

59,500

B.

13,000

32,500

D.

28,600

71,500

37. Bush Electronics, Inc. had the following sales results for 2010: TV Sets

CD Player

Radios

Peso sales component ratio

0.30

0.30

0.40

Contribution margin ratio

0.40

0.40

0.60

Bush electronics, Inc had fixed costs of P2,400,000. The break-even sales in pesos for Bush Electronics, Inc.are: TV sets

CD Player

Radios

A. P1,800,000

P1,800,000

P3,600,000

B. P1,800,000

P1,800,000

P1,600,000

C. P1,500,000

P1,500,000

P2,000,000

D. P1,531,915

P1,531,915

P2,042,553

.

38. Mason enterprises has prepared the following budget for the month of July: Selling Price Variable Cost Per Unit

Per Unit

Unit Sales

Product A

P10.00

P4.00

15,000

Product B

15.00

8.00

20,000

Product C

18.00

9.00

5,000

Assuming that total fixed costs will be P150,000 and the mix remains constant, the breakeven point rounded to the next higher whole unity will be A. 20,455 units. B. 21,429 units. C. 21,819 units. D. 6,818 units. (cma) CVP Sensitivity Analysis Items 39 and 40 are based on the following information: Laguna Marketing Company is expected an increase of fixed costs by P78,750 upon moving their place of business to the downtown area. Likewise, it is anticipating that the selling price per unit and the variable expenses will not change. At the present, the sales volume necessary to breakeven is P750,000 but with the expected increase in final sales, the sales volume necessary to breakeven would go up to P975,000. Based on these projections, 39. What is the profit volume ratio of Laguna Marketing? A. 35%

C. 45%

B. 40%

D. answer not given

40. What would be the total fixed costs of Laguna Marketing after the increase of P78,750? A. P341,250

C. P2,183,750

B. P262,500

D. P300,000

41. Variable cost per unit is P3.50. Contribution margin is 30%. Breakeven sales is P1 million. To sell an additional, 50,000 units at the same price and contribution margin, how much will fixed costs increase to have a gross margin equal to 10% of the sales value of the additional cost of 50,000 units to be sold? A. P 67,500

C. P 57,500

B. P50,000

D.P 125,000

42. Birney Company is planning its advertising campaign for 2013 and has prepared the following budget data based on a zero advertising expenditures:

Normal plant capacity

200,000 units

Sales

150,000 units

Selling price

P25 per unit

Variable manufacturing costs

P 15 per unit

Fixed costs: Manufacturing

P 800,000

Selling and administration

P 700,000

An advertising agency claims that an aggressive advertising campaign would enable Birney to increase its unit sales by 20%. What is the maximum amount that Birney can pay for advertising and obtain an operating profit of P200,000. A. P 100,000

C. P300,000

B. P200,000

D. P550,000

Questions 43 and 44 are based on the following information. Delphi Company has developed a new project that will be marketed for the first time during the next fiscal year. Although the marketing Department estimates that 35,000 units could be sold at P36 per unit. Delphi management has allocated only enough manufacturing capacity to produce a maximum of 25,000 units of the new product annually. The fixed costs associated with the new product are budgeted at P450,000 for the year, which includes P60,000 for depreciation on new manufacturing equipment. Data associated with each unit of product are presented below. Delphi is subject to a 40% income tax rate. Variable Costs Direct material

P 7.00

Direct labor

3.50

Manufacturing overhead

4.00

Total variable manufacturing cost Selling price Total variable cost

14.50 1.50 P16.00

43. The maximum after tax profit that can be earned by Delphi Company from sales of the new product during the next fiscal year is A. P 30,000 B. P 50,000 C. P110,000 D. P 66,000 (cma)

44. Delphi Company’s management has stipulated that it will not approve the continued manufacture of the new product after the next fiscal year unless the after-tax profit is at least P75,000 the fiscal year. The unit selling price to achieve this target profit must be at least A. P37.00

C. P34.60

B. P36.60

D. P39.00 (cma)

45. A company has revenues of P500,000, variable costs of P300,000, 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 breakeven point in pesos? A. P 88,000

C. P110,000

B. P100,000

D P125,000

46. 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 Variable cost per unit Fixed costs

P 60 22 504,000

Management plans to improve the quality of its sole product by (1) replacing a component that costs P3.50 with a higher-grade unit that costs P5.50 and (2) acquiring a P180,000 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 P172,800 in the upcoming period, it must sell A. 19,300 units.

C. 22,500 units.

B. 21,316 units.

D. 27,000 units.

47. Singsing, Inc. manufactures and sells key rings embossed with college names and slogans. Last year the key rings sold for P75 each, and the variable costs to manufacture them were P22.50 per unit. The company needed to sell 20,000 key rings to break-even. The nest income last year was P50,400. The company expects the following for the coming year: • The selling price of the key rings will be P90. • Variable manufacturing costs per unit will increase by one-third. • Fixed cost will increase by 10%. • The income tax rate will remain unchanged. For the company to break-even the coming year, the company should sell A. 21,600

C. 21,250

B. 2,600

D. 19,250

48. Total production costs for Jordan, lnc. are budgeted at P2,300,000 for 50,000 units of budgeted output and P2,800,000 for 60,000 units of budgeted output. Because of the need for additional facilities, budgeted fixed costs for 60,000 units are 25 percent more than budgeted fixed costs for 50,000 units. How much is Jordan’s budgeted variable cost per unit of output?

A. P 7.50

C. P30.00

B. P16.00

D. P62.50

49. Dana sells a single product at P20 per unit. The firm’s most recent income statement revealed unit sales of 100,000, variable costs of P800,000, and fixed costs of P400.000. If a P4 drop in selling price will boost unit sales volume by20%, the company will experience: A. no change in profit because a 20% drop in sales price is balanced by a 20% increase in volume. B. an P80,000 drop in profitability. C. a P240,000 drop in profitability. D. a P400,000 drop in profitability. Questions 50 and 51-are based on the following information: Presented below are the results of operations of Softtouch Products, Inc., for 2011: Sales (150,000 units)

P 600,000

Cost of goods sold: Fixed

P 150,000

Variable

300,000 Total

450,000 150,000

Selling and administrative: Fixed

39,000

Variable

45,000 Income before taxes

84,000 P 66,000

The company is concerned about the expected increase in fixed manufacturing costs by 50% if it will buy a new equipment with a higher production capacity. However, study shows that production is expected to increase by 40% while variable manufacturing costs will decrease from P2.00 to P1.50 per unit. The total fixed selling and administrative expenses and variable selling and administrative expenses will remain the same .The selling price per unit will also remain the same. The company has been operating at full capacity. If the company will buy the new equipment 50. What would be the breakeven point in terms of units? A. 120,000

C. 176,000

B. 66,000

D.105,000

51. What is the maximum expected income before income tax? A. P198,000

C. P306,000

B. P216,000

D. P 288,000

52. Orange Company’s controller developed the following variable-costing income statement for 2012:

Per unit Revenues (150,000 units at P30)

P4,500,000

P30

Direct materials

1,050,000

P7

Direct labour

1,500,000

10

Mfg. overhead

300,000

2

Selling & marketing

300.000

2

(3,150,000)

21

P1350,000

P9

P 600,000

4

300,000

2

(900,000)

6

P 450.000

P3

Variable costs:

Contribution margin Fixed costs: Mfg. overhead Selling & marketing Operating income

Orange Company based its 2013 budget on the assumption that fixed costs, unit sales, and the sales price would remain as they were in 2012, but with operating income being reduced to P300,000. By July of 2013, the controller was able to predict the unit sales would increase over 2012 levels by 10%. Based on the 2012 budget and the new information, the predicted 2013 operating income would be A. P300,000

C. P420,000

B. P330,000

D. P585,000

53. During 2011, Thor Lab supplied hospital with a comprehensive diagnostic kit for P120. At a volume of 80,000 kits, Thor had fixed costs of P 1 million and operating income before income taxes of P200,000. Because of an adverse legal decision, Thor’s 2012 liability insurance increased by P1.2 million over 2011. Assuming the volume and other costs are unchanged, what should the 2012 price be if Thor is to make the same P200,000 operating income before taxes A. P120.00

C. P150.00

B. P135.00

D. P240.00

Operating Leverage Questions 54 and 55 are based on the following data: Hope Company sells a product with a unit sales of P50 and a unit variable cost of P30. It needs to sell 40,000 units to breakeven. It expects to sell p0,000 units in the coming period from a previous of 75,000 units. 54. Hope’s degree of operating leverage is A. 1.875 B. 1.800

C. 2.143 D. 1.250

55. The percentage change in EBIT in the coming period as compared to the last period is A. 42.86%

C. 37.50%

B. 36.00%

D. 25.00%

56. Love Corp. is operationally a high leveraged company, that is, it has a high fixed costs and low variable costs. As such, small changes in sales volume result in A. Proportionate change in net income B. Large changes in net income C. Negligible change in net income D. No change in net income 57. the percentage change in earnings before interest and taxes associated with the percentage change in revenues is the degree of A. Operating Leverage

C. Breakeven Leverage

B. Financial Leverage

D. Combined Leverage

58. You are analyzing Becker Corporation and Newton Corporation and have concluded that Becker has a higher operating leverage factor than Newton. Which one of the following choices correctly depicts (1) the relative use of fixed costs (as opposed to variable costs) for the two companies and (2)the percentage change in income caused by a change in sales? Relative Use of Fixed Costs as Opposed to Variable Costs a

Percentage Change in Income Caused by Change in Sales

A. Greater for Becker

Greater for Becker

B. Greater for Becker

Lower for Becker

C. Greater for Becker

Equal for both

D. Lower for Becker

Greater for Becker

59. LEVERAGE Company changed its cost structure by increasing fixed costs and decreasing its per-unit variable costs. The change A. Increases risk and increases potential profit B. Increases risk and decreases potential profit C. Decreases risk and decreases potential profit D Decreases risk and increases potential profit Indifference point 60. The indifference point is the level of volume at which a company A. earns the same profit under different operating schemes. B. earns no profit. C. earns its target profit.

D. any of the above. 61. Two companies are expected to have annual sales of 1 million decks of playing cards next year. Estimates for next year are presented below: Company 1

Company2

Selling price per deck

P3.00

P 3.00

Cost of paper per deck

.62

.65

Printing ink per deck

.13

.15

Labor per deck

.75

1.25

Variable overhead per deck

.30

.35

P960,000

P252,000

Fixed costs

Given these data, which of the following responses is correct? Volume in Units at which BEPU Company

BEPU for

Profits of Company 1

1

Company 2

and Company 2 are equal

A.

800,000

420,000

1,180,000

B.

800,000

420,000

1,000,000

C.

533,334

105,000

1,000,000

D.

533,334

105,000

1,180,000

62. The following data relate to Homer Company which sells a single product: Unit selling price

P 20.00

Purchase cost per unit

11.00

Sales commission, 10% of selling price Monthly fixed costs

2.00 80,000

The firm’s salespersons would like to change their compensation from a 10 percent commission to a 5 percent commission plus P20,000 per month in salary. They now receive only commissions. At what sales volume would the two compensation plans be indifferent? A. 12,500

C. 22,222

B. 20,000

D. 22,860

1. 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 P25 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 breakeven point in terms of dollar sales volume and will have the dollar profit potential once the indifference point in dollar sales volume is exceeded.

ListA

List B

A. Lower

Lesser

B. Lower

Greater

C. Higher

Lesser

D. Higher

Greater (cia)

Miscellaneous Questions 63 through 64 are based on the following data: Plastic Company produces toys and other items for use in beach and resort areas. A small, inflatable toy has come onto the market that the company is anxious to produce and sell. Enough capacity exists in the company’s plant to produce 16,000 units of the toy each month. Variable costs to manufacture and sell one unit would be P12.50, and fixed costs associated with the toy would total P350,000 per month. The company’s Marketing Department predicts that demand for the new toy will exceed the 16,000 units that the company is able to produce. Additional manufacturing space can be rented from another company at a fixed cost of P10,000 per month. Variable costs in the rented facility would total P14 per unit, due to somewhat less efficient operations than in the main plant. The new toy will sell for P30 per unit. The breakeven units for the new toy would be: A. 20,000

C. 21,000

B. 18,000

D. 22,500

63. How many units should the company need to sell in order to earn a before-tax profit of P150,000? A. 9,143

C. 31,875

B. 30,375

D. 35,000

64. If the sales manager receives a bonus of P1.00 for each unit sold in excess of the break-even point, how many units must be sold each month to earn a return of 25% on the monthly investment in fixed costs? A. 23,344

C. 29,833

B. 27,000

D. 30,000

65. Assuming that Plastic Company will just rent a manufacturing space for a month in order to produce special order for 8,000 toys. What is the minimum selling price acceptable to Plastic Company for the special sale? A. P14.00

C. P22.00

8. P15.25

D. P24.00

Items 66 and 67 are based on the following information: Yakal Company shows the following budgeted data for the year 2011: Estimated sales Estimated costs:

18,000 units

Amount

Per unit

P54,000

P3.00

Materials

8,100

45

Fixed overhead

13,500

.75

Administrative expense

16,200

.90

P91.800

P5.10

Direct labor

Total

Selling expenses are expected to be 20% of sales and profit before tax is to amount to P1.50 per unit 66. In order to attain the company’s goal for 2011 the selling price per unit must be set at: A. P5.00

D. P9.75

B. P6.60

E. None of these

C. P8.25 67. The company’s break-even point in units assuming that overhead and administrative expenses are fixed but that other expenses are fully variable is equal to A. 4,286 units

D. 18,000 units

B. 5,143 units

E. None of these

C. 9,428 units Items 68 through 71 are based on the following information: The owners of Bougavilla Supermarket have been looking for ways to improve sales at the store. One of the proposal is to have a weekly raffle with a total price of P6,000 per week. For every P20 worth of goods purchased, the customer shall received a numbered ticket for the raffle. The variable cost to print and distribute the tickets has been estimated at one peso (P1.00). Promotions and other fixed costs in connection with the raffle, likewise, have been estimated at P5,000 per week. The current weekly operating results of Bougavilla are given below: Sales

P600,000

Variable costs

450,000

Fixed costs for the week

80,000

68. What is the sales revenue required to break-even without the raffle? A. P320,000

D. P600,000

B. P364.000

E. None of these

C. P455,000 69. How much is the margin of safety in relation to no. 68? A. P150,000

D. P145,000

B. P280,000

E. None of these

C. P70,000 70. What is the sales revenue required to breakeven with the raffle? A. P320,000

D. P765,000

B. P455,000

E. None of these

C. P600,000 71. If the raffle can increase sates to P1,000,000 per week, how much will be added to profit? A. P109,000

D. P39,000

B. P159,000

E. None of these

C. P179,000