MAC2: Strategic Cost Management
CVP Analysis
Illustrative Problem
After reviewing its cost structure (variable costs of P9 per unit and monthly fixed costs of P120,000) and potential market,
NEVERTHELESS Company established what it considered to be a reasonable selling price. The company expected to sell
54,000 units per month and planned its monthly results as follows:
Sales P810,000
Variable costs 486,000
Contribution margin 324,000
Fixed costs 120,000
Income before taxes 204,000
Income taxes 81,600
Net income P122,400
1. What is the contribution margin ratio?
2. What is the break-even point in units?
3. All other factors remaining unchanged, how much increase in profit would NEVERTHELESS expect if the number of
units sold is 60,000?
4. If the company determined that a particular advertising campaign had a high probability of increasing sales by 5,000
units, how much could it pay for such a campaign without reducing its planned monthly profits?
5. A plan includes an increase in advertising cost of P45,000. What is the minimum increase in unit sales to compensate
for the increase in advertising cost?
6. If the company wants a P56,000 before-tax profit, how many units must it sell?
7. If the company wants a 15% before-tax return on sales, what level of sales in pesos, does it need?
8. If the company wants a P45,000 after-tax profit, how many units must it sell?
9. If the company wants an after-tax return on sales of 12%, how many units must it sell?
10. If the company wants an after-tax profit of P90,000 on its expected sales volume of 54,000 units, what price must it
charge?
11. If the company wants a before-tax return on sales of 15% on its expected sales volume of 54,000 units, what price must
it charge?
12. The company is considering offering its sales people a 5% commission on sales. What would be the total peso sales
required in order to implement the commission plan and still earn the planned pre-tax income of P204,000?
13. What is the margin of safety in peso sales and the margin of safety ratio at the expected sales of 54,000 units?
14. Assuming that the cost structure remains unchanged but the volume of sales is expected to increase to 65,000 units,
what is the new margin of safety ratio and the amount of profit?
15. What is the degree of operating leverage based on the expected level of sales?
16. Assuming that the cost structure and the selling price remain constant, what is the percentage of change in profit and
the new expected profit if the company can sell 64,800 units?
17. The operations manager believes variable cost will increase to P9.60 per unit. The sales manager believes increasing
the selling price may not be a good decision. What is the new break-even point in units?
18. The operations manager believes variable cost will increase to P9.75 per unit. The sales manager believes the selling
price can be increased. What is the new selling price that will give the same contribution margin ratio?
19. In the following month, the company expects that the amount of fixed cost would increase by P20,400. What is the
required increase in sales units in order to maintain the projected monthly profit?
20. A study by the marketing personnel discloses that if a decent amount of advertising budget is increased, sales would
increased by 8,000 units. Computed the reasonable amount of increase in monthly advertising budget that will increase
the monthly profit by P16,000.
