MANAGEMENT ADVISORY SERVICES CPA Review School of the Philippines Preweek Quizzer

COST-VOLUME-PROFIT ANALYSIS Glareless Company estimates that its direct labor costs will increase 8 percent next
Breakeven Point year. How many units will Glareless have to sell next year to reach breakeven?
5. Scrambled Brain Company has fixed costs of P90,000. At a sales volume of P300,000, A. 97,500 units C. 83,572 units
return on sales is 10%; at a P500,000 volume, return on sales is 22%. What is the B. 101,740 units D. 86,250 units
break-even volume? 8. Madel Company manufactures a single electronic product called Walastik. Walastik
A. P120,000 C. P225,000* sells for P900 per unit. In 2000, the following variable costs were incurred to produce
B. P200,000 D. P450,000 each     Walastik device.
Direct labor P180
6. Bush Electronics, Inc. had the following sales results for 2004: Direct materials 240
TV sets CD player Radios Factory overhead 105
Peso sales component ratio 0.30 0.30 0.40 Selling costs 75
Contribution margin ratio 0.40 0.40 0.60 Total variable costs P600
Bush Electronics, Inc. had fixed costs of P2,400,000. Madel is subject to 40 percent income tax rate, and annual fixed costs are P6,600,000.
The break-even sales in pesos for Bush Electronics, Inc. are: Except for an operating loss incurred in the year of incorporation, the firm has been
TV sets CD player Radios profitable over the last five years.
A. P1,800,000 P1,800,000 P3,600,000 In 2001, a significant change in Madel’s production technology caused a 10% increase
B P1,800,000 P1,800,000 P1,600,000 in annual fixed costs and a 20% unit cost increase in the direct labor component as a
C. P1,500,000 P1,500,000 P2,000,000 result of higher skilled direct labor. However, this change permitted the replacement of
D. P1,531,915 P1,531,915 P2,042,553 a costly imported component with a local component. The effect was to reduce unit
material costs by 25%. There has been no change in the Walastik selling price.
The annual sales units required for Madel to breakeven are:
7. Glareless Company manufactures and sells sunglasses. Price and cost data are as
follows: A. B. C. D.
Selling price per pair of sunglasses P25.00 2000 22,000 22,000 14,000 14,000
Variable costs per pair of sunglasses: 2001 20,840 22,407 22,407 20,840
Raw materials P11.00
Direct labor 5.00 Profit Planning
Manufacturing overhead 2.50 9. Signal Co. manufactures a single product. For 2000, the company had sales of
Selling expenses 1.30 P90,000, variable costs of P50,000, and fixed costs of P30,000. Signal expects its cost
Total variable costs per unit P19.80 structure and sales price per unit to remain the same in 2001, however total sales are
Annual fixed costs: expected to jump by 20%. If the 2001 projections are realized, net income in 2001
Manufacturing overhead P192,000 should exceed net income in 2000 by
Selling and administrative 276,000 A. 100% C. 20%
Total fixed costs P468,000 B. 80% D. 50%
Forecasted annual sales volume (120,000 pairs) P3,000,000
Income tax rate 40% 10. Six-Two Convenience Store currently opens only Monday through Saturday. Six-Two
is considering opening on Sundays. The annual incremental fixed costs of Sunday
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openings are estimated at P39,000. Six-Two’s gross margin on sales is 25 percent. 11. Gorilla, Co. provides two products, M and W. M accounts for 60 percent of total sales,
Six-Two estimates that 60 percent of its Sunday sales to customers would be made on variable cost as a percentage of selling price are 60% for M and 85% for W. Total fixed
other days if the stores were not open on Sundays. The one-day volume of Sunday costs are P225,000. If fixed costs will increase by 30 percent, what amount of peso
sales that would be necessary for Six-Two to attain the same weekly operating income sales would be necessary to generate an operating profit of P48,000?
as the current six-day week is A. P1,350,000 C. P1,135,000
A. P6,000 C. P7,500 B. P486,425 D. P910,000
B. P5,000 D. P4,500
12. Mount Park, Inc. had the following economic information for the year 2002:
Sales(50,000 units @ P20) P1,000,000
Variable manufacturing costs 400,000
Fixed costs 250,000
Income tax rate 40 percent
Mount Park budgets its 2003 sales at 60,000 units or P1,200,000. The company
anticipates increased competition; hence, an additional P75,000 advertising costs is
budgeted in order to maintain its sales target for 2003.
What is the amount of peso sales needed for 2003 in order to equal the after-tax
income in 2002?
A. P1,125,000 C. P1,187,500
B. P1,325,000 D. P1,387,500

13. Larz Company produces a single product. It sold 25,000 units last year with the
following results:
Sales P625,000
Variable costs P375,000
Fixed costs 150,000 525,000
Net income before taxes P100,000
Income taxes 40,000
Net income P 60,000
In an attempt to improve its product in the coming year, Larz is considering replacing a
component part in its product that has a cost of P2.50 with a new and better part
costing P4.50 per unit. A new machine will also be needed to increase plant capacity.
The machine would cost P18,000 with a useful life of 6 years and no salvage value.
The company uses straight-line depreciation on all plant assets.
If Larz wishes to maintain the same contribution margin ratio after implementing the
changes, what selling price per unit of product must it charge next year to cover the
increased material costs?
A. P27.00 C. P32.50
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B. P25.00 D. P28.33 Point of Indifference

14. Ravine Ski Company recently expanded its manufacturing capacity to allow it to
produce up to 15,000 pairs of cross-country skis of either the mountaineering model or
the touring model. The sales department assures management that it can sell between
9,000 and 13,000 pairs (units) of either product this year. Because the models are very
similar, Ravine Ski will produce only one of the two models. The information below was
compiled by the accounting department.
Mountaineering Touring
Selling price per unit P880.00 P800.00
Variable costs per unit P528.00 P528.00
Fixed costs will total P3,696,000 if the mountaineering model is produced but will be
only P3,168,000 if the touring model is produced. Ravine Ski is subject to a 40%
income tax rate.
The total sales revenue at which Ravine Ski Company would make the same profit or
loss regardless of the ski model it decided to produce is
A. P8,800,000 C. P9,240,000
B. P4,224,000 D. P6,864,000

15. Valley of Fire Corporation has one department that produces three replacement parts
for the company. However, only one part can be produced in any month because of
the adjustments that must be made to the equipment. The department can produce up
to 15,000 units of any one of the three parts in each month. The company expresses
the monthly after tax cost/volume/profit relationships for each part using an equation
method. The format of the equations and the equation for each replacement part are
given below:
(ATR) X ((SP – VC) x (U) – FC)
ATR = after-tax rate VC = variable cost FC = fixed costs
SP = selling price U = units
Part Part Equations
AL45 .6 ((P4.00 – P1.25) (U) – P33,400)
BT65 .6 ((P4.05 – P2.55) (U) – P15,000)
GM17 .6 ((P4.10 - P2.00) (U) - P22,365)
The production and unit sales volume level at which Valley will be indifferent as to
whether Part BT62 or GM17 is produced is
A. 7,365 C. 10,380
B. 4,092 D. 12,275
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16. BM Motors, Inc. employs 40 sales personnel to market its line of luxury automobiles.
The average car sells for P1,200,000 and a 6% commission is paid to the salesperson.
BM Motors is considering a change to a commission arrangement that would pay each
salesperson a salary of P24,000 per month plus a commission of 2% of the sales made
by that salesperson.
The amount of total car sales at which BM Motors would be indifferent as to which plan
to select is
A. P22,500,000 C. P24,000,000
B. P30,000,000 D. P12,000,000

17. Zapatero, Inc. operates a chain of shoe stores around the country. The stores carry
many styles of shoes that are all sold at the same price. To encourage sales personnel
to be aggressive in their sales efforts, the company pays a substantial sales
commission on each pair of shoes sold. Sales personnel also receive a small basic
salary.
The following cost and revenue data relate to Store 9 and are typical of the company’s
many sales outlets:
Selling price P800
Variable expenses:
Invoice costs P360
Sales commission 140
P500
Fixed expenses per year:
Rent P1,600,000
Advertising 3,000,000
Salaries 1,400,000
Total P6,000,000
The company is considering eliminating sales commissions entirely in its stores and
increasing fixed salaries by P2,142,000 annually.
If this change is made, what will be the number of pairs of shoes to be sold by Store 9
to be indifferent to commission basis?
A. 25,300 C. 18,505
B. 15,300 D. 21,000

Sensitivity Analysis

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MANAGEMENT ADVISORY SERVICES CPA Review School of the Philippines Preweek Quizzer

18. If fixed costs increase while variable cost per unit remains constant, the contribution Management is unhappy with the results and plans to make some changes for next
margin will be year. If management implements a new marketing program, fixed costs are expected
A. lower C. unchanged to increase by P19,200 and variable costs to increase by P1 per unit. Unit sales are
B. higher D. unpredictable expected to increase by 15 percent. What is the effect on income if the foregoing
changes are implemented?
19. Firm D and Firm S are competitors within the same industry. Firm D produces its A. Decrease of P21,200 C. Increase of P13,800
product using large amounts of direct labor. Firm S has replaced direct labor with B. Increase of P1,800 D. Increase of P14,800
investment in machinery. Projected sales for both firms are fifteen percent less than in
the prior year. Which statement regarding projected profits is true? 23. Candyman Company is a wholesale distributor of candy. The company services
A. Firm D will lose more profit than Firm S. grocery, convenience, and drug stores in Metro Manila. Small but steady growth in
B. Firm S will lose more profit than Firm D. sales has been achieved by the company over the past few years while candy prices
C. Firm D and Firm S will lose the same amount of profit. have been increasing. The company is formulating its plans for the coming fiscal year.
D. Neither Firm D nor Firm S will lose profit. Presented below are the data used to project the current year’s after-tax net income of
P110,400.
20. Last month, Zamora Company had an income of P0.75 per unit with sales of 60,000 Manufacturers of candy have announced that they will increase prices of their products
units. During the current month when the unit sales are expected to be only 45,000, an average of 15% in the coming year due to increases in raw material (sugar, cocoa,
there is a loss of P1.25 per unit. Both the variable cost per unit and total fixed costs peanuts, etc.) and labor costs. Candyman Company expects that all other costs will
remain constant. The fixed costs amounted to remain at the same rates or levels as the current year. Candyman is subject to 40
A. P80,000 C. P247,500 percent tax rate.
B. P360,000 D. P210,000 Average selling price P4.00 per box
Average variable costs
21. The Liberal Marketing Co., is expecting an increase of fixed costs by P78,750 upon Cost of candy P2.00 per box
moving their place of business to the downtown area. Likewise it is anticipating that Selling expenses 0.40 per box
the selling price per unit and the variable expenses will not change. At present, the Total P2.40 per box
sales volume necessary to breakeven is P750,000 but with the expected increase in Annual fixed costs
fixed costs, the sales volume necessary to breakeven would go up to P975,000. Selling P169,000
Based on these projections, what were the total fixed costs before the increase of Administrative 280,000
P78,750? Total P440,000
A. P341,250 C. P183,750 Expected annual sales volume (390,000 boxes) P1,560,000
B. P262,500 D. P300,000 If net income after taxes is to remain the same after the cost of candy increases but no
increase in the sales price is made, how many boxes of candy must Candyman sell?
22. Machan Co.’s year-end income statement is as follows: A. 480,000 C. 27,600
Sales (20,000 units) P360,000 B. 400,000 D. 29,300
Variable costs 220,000
Contribution margin P140,000 Margin of Safety
Fixed costs 105,000
Net income P 35,000
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24. Claremont Company had is a manufacturer of its only one product line. It had sales of Degree of Operating Leverage
P400,000 for 2002 with a contribution margin ratio of 20 percent. Its margin of safety 26. A very high operating leverage indicates that a firm
ratio was 10 percent. What are the company’s fixed costs? A. has high fixed costs
A. P72,000 C. P288,000 B. has a high net income
B. P80,000 D. P320,000 C. has high variable costs
D. is operating close to its breakeven point
25. Lemery Corporation had sales of P120,000 for the month of May. It has a margin of
safety ratio of 25 percent, and after-tax return on sales of 6 percent. The company 27. The Didang Company has an operating leverage of 2. Sales for 2001 are P2,000,000
assumes its sales constant every month. If the tax rate is 40 percent, how much is the with a contribution margin of P1,000,000. Sales are expected to be P3,000,000 in
monthly fixed costs? 2002. Net income for 2002 can be expected to increase by what amount over 2001?
A. P36,000 C. P432,000 A. P250,000 C. P500,000
B. P90,000 D. P360,000 B. 200 percent D. 40 percent

Situational
Questions 28 thru 34 are based on the following information:
Calamba Hospital operates a general hospital but rents space and beds to separate entities
for specialized treatment such as pediatrics, maternity, psychiatric, etc. Calamba charges
each separate entity for common services to its patients like meals and laundry and for all
administrative services such as billings, collections, etc. All uncollectible accounts are
charged directly to the entity. Space and bed rentals are fixed for the year.
For the entire year ended June 30, the Pediatrics Department at Calamba Hospital charged
each patient an average of P65 per day, had a capacity of 60 beds, operated 24 hours per
day for 365 days, and had revenue of P1,138,800.
Expenses charged by the hospital to the Pediatrics Department for the year ended June 30
were:
Basis of Allocation
Patient Days Bed Capacity
Dietary P 42,952
Janitorial P 12,800
Laundry 28,000
Lab, other than direct charges to patients 47,800
Pharmacy 33,800
Repairs and maintenance 5,200 7,140
General administrative services 131,760
Rent 275,320
Billings and collections 40,000
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Bad debt expense 47,000 B. 11,500 D. 10,500

Other 18,048 .
P262,800 P453,000 31. The number of patient days needed to cover total costs is
The only personnel directly employed by the Pediatrics Department are supervising nurses, A. 14,200 C. 15,820
nurses, and aides. The hospital has minimum personnel requirements based on total B. 15,200 D. 14,220
annual patient days. Hospital requirements beginning at the minimum, expected level of
operation follow: 32. If the Pediatrics Department rented an additional 20 beds and all other factors remain
the same as in the past year, what would be the increase in revenue?
Annual Patient Days Aides Nurses Supervising Nurses
A. P99,450 C. P105,450
10,000 – 14,000 21 11 4
B. P87,750 D. P89,750
14,001 – 17,000 22 12 4
17,001 – 23,725 22 13 4
33. Continuing to consider the 20 additional rented beds, the increase in total variable cost
23,726 – 25,550 25 14 5
applied per patient day is
25,551 – 27,375 26 14 5
A. P22,935 C. P22,965
27,376 – 29,200 29 16 6
B. P22,950 D. P23,935
The staffing levels above represent full-time equivalents, and it should be assumed that the
Pediatrics Department always employs only the minimum number of required full-time 34. What is the increased fixed cost applied for bed capacity, given the increased number
equivalent personnel. of beds?
Annual salaries for each class of employee follow: supervising nurses, P18,000; nurses, A. P151,000 C. P147,000
P13,000; and aides, P5,000. Salary expense for the year ended June 30 for supervising B. P173,950 D. P152,000
nurses, nurses, and aides was P72,000, P169,000, and P110,000, respectively.
The Pediatrics Department operated at 100% capacity during 111 days of the past year. It Questions 35 thru 37 are based on the following information.
is estimated that during 90 of these capacity days, the demand average 17 patients more Ms. Casserole started a pizza restaurant in 1998. For this purpose a building was rented
than capacity and even went as high as 20 patients more on some days. The hospital has for P400 per month. Two women were hired to work full time at the restaurant and six
an additional 20 beds available for rent for the coming fiscal year. college students were hired to work 30 hours per week delivering pizza. This level of
employment has been consistent. An outside accountant was hired for tax and
28. The variable expense per patient day is bookkeeping purposes, for which Ms. Casserole pays P300 per month. The necessary
A. P15.08 C. P15.00 restaurant equipment and delivery cars were purchased with cash. Ms. Casserole has
B. P12.50 D. P50.00 noticed that expenses for utilities and supplies have been rather constant. Ms. Casserole
increased her business between 1998 and 2001. Profits have more than doubled since
29. The contribution margin per patient day is 1998. Ms. Casserole does not understand why profits have increased faster than volume.
A. P49.92 C. P50.00 A projected income statement for the year ended December 31, 2002, prepared by the
B. P52.50 D. P52.00 accountant, is shown below:
30. How many patient days are necessary to cover fixed costs for bed capacity and for Sales P95,000
supervisory nurses? Cost of food sold P28,500
A. 9,500 C. 12,500
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Wages & fringe benefits:

Restaurant help 8,150
Delivery help 17,300
Rent 4,800
Accounting services 3,600
Depreciation:
Delivery equipment 5,000
Restaurant equipment 3,000
Utilities 2,325
Supplies 1,200 73,875
Net income before taxes P21,125
Income taxes (40%) 8,450
Net income P12,675
Note: The average pizza sells for P2.50.

35. What is the tax shield on the noncash fixed costs?

A. P3,200 C. P3,400
B. P14,950 D. P5,400

36. What is the breakeven point in number of pizzas that must be sold?
A. 25,929 C. 18,150
B. 23,569 D. 42,114

37. What is the cash flow breakeven point in number of pizzas that must be sold?
A. 19,529 C. 12,990
B. 21,284 D. 10,773

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