ACCOUNTANCY & BUSINESS EDUCATION DEPARTMENT

PRELIMINARY EXAMINATION
STRATEGIC COST MANAGEMENT

NAME: ______________________________________________ SCORE: _________________ RATING: ____________

YEAR/COURSE: ___________________________________

GENERAL RULES:
 Use BLACK or BLUE pen. Using a pencil for writing final answers is not allowed.
 Use BASIC CALCULATOR.
 Write your final answer at the answer sheet indicated in the first page. Your solutions must be written in your worksheet.
 Strictly, NO ERASURES in the answer sheet.
 “NO ADMISSION SLIP, NO EXAMINATION” is strictly followed.
 You have exactly three (3) hours to finish the examination. GOOD LUCK & GOD BLESS FUTURE CPAs!
________________________________________________________________________________________________________________
THEORETICAL QUESTIONS
1. To which function of management is CVP analysis most applicable?
A. Planning B. Organizing C. Directing D. Controlling

2. The systematic examination of the relationships among selling prices, volume of sales and production, costs, and profits is termed:
A. contribution margin analysis C. budgetary analysis
B. cost-volume-profit analysis D. gross profit analysis

3. The term contribution margin is best defined as the:

A. difference between fixed costs and variable costs.
B. difference between revenue and fixed costs.
C. amount available to cover fixed costs and profit.
D. amount available to cover variable costs.

4. Cost-volume-profit analysis allows management to determine the relative profitability of a product by

A. Highlighting potential bottlenecks in the production process.
B. Determining the contribution margin per unit and projected profits at various levels of production.
C. Assigning costs to a product in a manner that maximizes the contribution margin.
D. Keeping fixed costs to an absolute minimum.

5. At the break-even point:

A. net income will increase by the unit contribution margin for each additional item sold above break-even.
B. the total contribution margin changes from negative to positive
C. fixed costs are greater than contribution margin
D. the contribution margin ratio begins to increase

6. In cost-volume-profit analysis, the greatest profit will be earned at

A. One hundred percent at normal productive capacity.
B. The production point with the lowest marginal cost.
C. The production point at which average total revenue exceeds average marginal cost.
D. The point at which marginal cost and marginal revenue are equal.

7. Which of the following is not an assumption underlying C-V-P analysis?

A. The behavior of total revenue is linear.
B. Unit variable expenses remain unchanged as activity varies.
C. Inventory levels at the beginning and end of the period are the same.
D. The number of units produced exceeds the number of units sold.

8. Which of the following assumptions is inherent to C-V-P analysis?

A. In manufacturing firms, the beginning and ending inventory levels are the same.
B. In a multi-product organization, the sales mix varies over time.
C. The behavior of total revenue is curvilinear.
D. The relevant range is not a consideration.
SUBJECT: Strategic Cost Management DATE OF EXAMINATION: ________________________________
DAY: F/S TIME: 10:30 AM – 12:00 PM TIME OF EXAMINATION: ________________________________

Prepared by: RICHARD VINCE M. DEPUNO, CPA Noted by: Mr. BOY CARLO R. ROMERO, CPA, CTT
Page 1
9. A company increased the selling price for its product from P1.00 to P1.10 a unit when total fixed costs increased from P400,000 to
P480,000 and variable cost per unit remained unchanged. How would these changes affect the breakeven point?
A. The breakeven point in units would be increased.
B. The breakeven point in units would be decreased.
C. The breakeven point in units would remain unchanged.
D. The effect cannot be determined from the information given.

10. On January 1, 2007, Kissable Company increased its direct labor wage rates. All other budgeted costs and revenues were unchanged.
How did this increase affect Kissable Company’s budgeted break-even point and budgeted margin of safety?
A. B. C. D.
Budgeted Break-even Point Increase Increase Decrease Decrease
Expected Margin of Safety Increase Decrease Decrease Increase

11. As the variable cost increases but the selling price remains constant, the
A. Degree of operating leverage declines C. Breakeven point goes down
B. Margin of safety stays constant D. Contribution margin ratio goes up

12. A very high degree of operating leverage (DOL) indicates that a firm:
A. has high fixed costs. C. has high variable costs.
B. has a high net income. D. is operating close to its breakeven point.

13. With the aid of computer software, managers can vary assumptions regarding selling prices, costs, and volume and can immediately see
the effects of each change on the break-even point and profit. Such an analysis is called
A. “What if” or sensitivity analysis. C. Computer aided analysis.
B. Vary the data analysis. D. Data gathering.

14. If a company raises its target peso profit, its

A. break-even point rises.
B. fixed costs increase.
C. required total contribution margin increases.
D. selling price rises.

15. Manok Na Pula Company sells three products: A, B and C. Product A's unit contribution margin is higher than Product B's which is higher
than Products C's. Which one of the following events is most likely to increase the company's overall break-even point?
A. The installation of new automated equipment and subsequent lay-off of factory workers.
B. A decrease in Product C's selling price.
C. An increase in the overall market demand for Product B.
D. A change in the relative market demand for the products, with the increase favoring Product A relative to Product B & Product C.

16. Which of the following is not a benefit of using sensitivity analysis?

A. More people can see the impact of their ideas on the project.
B. The use of a spreadsheet program increases the accuracy of the projections.
C. What will happen is not known in advance so a variety of options can be explored prior to making a decision.
D. A well-written spreadsheet will allow for a variety of questions to be answered in a minimal amount of time.

17. A Cost-Volume-Profit graph contains an "Area of Loss" and an "Area of Profitability". Which of the following best explains the difference
between the two points on the graph?
A. The area of loss represents the difference between Sales and Variable Cost.
B. The area of loss begins with the concept that fixed costs have to be recovered prior to sales contributing to profit.
C. The area of profit represents the difference between Sales and Variable Cost.
D. The area of profit begins with the concept that no company would have any level of sales below the break-even point.

18. Which of the following best describes the impact of selling more units?
A. The increase in sales volume increases total variable cost.
B. The increase in sales volume means an increase in total fixed cost.
C. The increase in sales increases contribution margin, causing net income to decrease.
D. The increase in sales increases contribution margin per unit causing the break-even point to decrease.

19. Which of the following is a true statement about sales mix?

A. Profits may decline with an increase in total peso of sales if the sales mix shifts to sell more of the high contribution margin
product.
B. Profits may decline with an increase in total peso of sales if the sales mix shifts to sell more of the lower contribution margin
product.
C. Profits will remain constant with an increase in total peso of sales if the total sales in units remain constant.
D. Profits will remain constant with a decrease in total peso of sales if the sales mix also remains constant.

SUBJECT: Strategic Cost Management Page 2

20. Which of the following is an incorrect statement?
A. The contribution income statement that is prepared for internal users is better than the traditional income statement as a
management tool to predict the results of increases or decreases in sales volume, variable costs, and fixed costs.
B. The greater the proportion of fixed costs in a firm's cost structure, the smaller will be the impact on profit from a given percentage
change in sales revenue.
C. In an economic recession, the highly automated company with high fixed costs will be less able to adapt to lower consumer
demand than will a firm with a more labor-intensive production process.
D. A major difference between income statements prepared under the traditional format and those prepared under the contribution
format is that expenses under the traditional format are shown by function, while the expenses shown under the contribution
format are shown by function and cost behavior.

APPLICATION

For items 21-25:

Killer Bride Company is a small but growing manufacturer of telecommunications equipment. The company has no sales force of its own;
rather, it relies completely on independent sales agents to market its products. These agents are paid a commission of 15% of selling price
for all items sold.

Daniela, Killer Bride’s controller, has just prepared the company’s budgeted income statement for next year. The statement follows:

Killer Bride Company

Budgeted Income Statement
For the Year Ended December 31
Sales P16,000,000
Manufacturing costs:
Variable P7,200,000
Fixed overhead 2,340,000 9,540,000
Gross margin 6,460,000
Selling and administrative costs:
Commissions to agents 2,400,000
Fixed marketing costs* 120,000
Fixed administrative costs 1,800,000 4,320,000
Net operating income 2,140,000
Less fixed interest cost 540,000
Income before income taxes 1,600,000
Less income tax (30%) 480,000
Net income P1,120,000
*Primarily depreciation on storage facilities

As Daniela handed the statement to Camila, Killer Bride’s president, she commented, “I went ahead and used the agents’ 15% commission
rate in completing these statements, but we’ve just learned that they refuse to handle our products next year unless we increase the
commission rate to 20%.”

“That’s the last straw,” Camila replied angrily. “Those agents have been demanding more and more, and this time they’ve gone too far. How
can they possibly defend a 20% commission rate?”

“They claim that after paying for advertising, travel, and the other costs of promotion, there’s nothing left over for profit,” replied Daniela.

“I say it’s just plain robbery,” retorted Camila. “And I also say it’s time we dumped those guys and got our own sales force. Can you get your
people to work up some cost figures for us to look at?”

“We’ve already worked them up,” said Daniela. “Several companies we know about pay a 7.5% commission to their own salespeople, along
with a small salary. Of course, we would have to handle all promotion costs, too. We figure our fixed costs would increase by P2,400,000 per
year, but that would be more than offset by the P3,200,000 (20% x P16,000,000) that we would avoid on agents’ commissions.”

The breakdown of the P2,400,000 cost figure follows:

Salaries:
Sales manager P 100,000
Salespersons 600,000
Travel and entertainment 400,000
Advertising 1,300,000
Total P 2,400,000

“Super,” replied Camila. “And I note that the P2,400,000 is just what we’re paying the agents under the old 15% commission rate.”

SUBJECT: Strategic Cost Management Page 3

“It’s even better than that,” explained Daniela. “We can actually save P75,000 a year because that’s what we’re having to pay the auditing
firm now to check out the agents’ reports. So our overall administrative costs would be less.”

“Pull all of these numbers together and we’ll show them to the executive committee tomorrow,” said Camila. “With the approval of the
committee, we can move on the matter immediately.”

21. What is the breakeven point in pesos for next year assuming that the agents’ commission rate remains unchanged at 15%?
22. What is the breakeven point in pesos for next year assuming that the agents’ commission rate is increased to 20%?
23. What is the breakeven point in pesos for next if the company employs its own sales force?
24. Assume that Killer Bride Company decides to continue selling through agents and pays the 20% commission rate. The volume of sales
that would be required to generate the same net income as contained in the budgeted income statement for next year would be:
25. The volume of sales at which net income would be equal regardless of whether Killer Bride Company sells through agents at a 20%
commission rate or employs its own sales force:

26. Starla Company produces a product that sells for P60. The variable manufacturing costs are P30 per unit. The fixed manufacturing cost is
P10 per unit based on the current level of activity, and fixed selling and administrative costs are P8 per unit. A selling commission of 10% of
the selling price is paid on each unit sold. The contribution margin per unit is:

27. Ang Probinsyano Ornaments sells lawn ornaments for P15 each. Seal's contribution margin ratio is 40%. Fixed costs are P32,000. Should
fixed costs increase 30%, how many additional units will Seal have to produce and sell in order to generate the same net profit as under the
current conditions?

28. At a break-even point of 5,000 units sold, variable expenses were P10,000 and fixed expenses were P50,000. The profit from the 5,001st
unit would be?

29. Nang Ngumiti Ang Langit Company has fixed costs of P100,000 and breakeven sales of P800,000. Based on this relationship, what is its
projected profit at P1,200,000 sales?

30. In 2006 Sandugo Company had a net loss of P8,000. The company sells one product with a selling price of P80 and a variable cost per
unit of P60. In 2007, the company would like to earn a before-tax profit of P40,000. How many additional units must the company sell in
2007 than it sold in 2006? Assume that the tax rate is 40 percent.

31. Kadenang Tanso Company has sales of P400,000 with variable costs of P300,000, fixed costs of P120,000, and an operating loss of
P20,000. How much increase in sales would Bulusan need to make in order to achieve a target operating income of 10% of sales?

32. The following data apply to Showtime Corporation for the year 2006:
Total variable cost per unit P3.50
Contribution margin/sales 30%
Breakeven sales (present volume) P1,000,000

Showtime wants to sell an additional 50,000 units at the same selling price and contribution margin per unit. By how much can fixed costs
increase to generate a gross margin equal to 10% of the sales value of the additional 50,000 units to be sold?

33. MMK Company had a margin of safety ratio of 20%, variable costs of 60% of sales, fixed costs of P240,000, a break-even point of
P600,000, and an operating income of P60,000 for the current year. What are the current year's sales?

For items 34-35:

The following questions are based on the following data pertaining to two types of products manufactured by Ipaglaban Mwah Corporation:

Sales price per unit Variable costs per unit

Product Y $120 $ 70
Product Z $500 $200

Fixed costs total $300,000 annually. The expected mix in units is 60 percent for Product Y and 40 percent for Product Z.

34. What is Ipaglaban Mwah’s Corporation break-even point in units?

35. What is Ipalaban Mwah’s break-even point in dollars?

For items 36-40:

Rated K Company produces and sells two products: A and B in the ratio of 3A to 5B. Selling prices for A and B are, respectively, $1,200 and
$240; respective variable costs are $480 and $160. The company's fixed costs are $1,800,000 per year.

Compute the volume of sales in units of each product needed to:

36. break even.
37. earn $800,000 of income before income taxes.

SUBJECT: Strategic Cost Management Page 4

38. earn $800,000 of income after income taxes, assuming a 30 percent tax rate.
39. earn 12 percent on sales revenue in before-tax income.
40. earn 12 percent on sales revenue in after-tax income, assuming a 30 percent tax rate.

41. Below is the income statement for May Bukas Pa Co. for 2007:
Sales P400,000
Variable costs (125,000)
Contribution margin P275,000
Fixed costs ( 200,000)
Profit before tax P 75,000
What is the degree of operating leverage for May Bukas Pa Co. for 2007?

42. Banana Sundae, Inc. sells loose biscuits for P5 per unit. The fixed costs are P210,000 and the variable costs are 45% of the selling price.
What would be the amount of sales if Banana Sundae, Inc. were to realize a profit of 15% of sales?

43. The Love Thy Woman Corporation is expecting an increase of fixed costs by P78,750 upon moving their place of business to the
downtown area. The company anticipates that the selling price per unit and the variable expenses will not change. At present, the sales
volume necessary to breakeven is P750,000 but with the expected increase in fixed costs, the sales volume necessary to breakeven would
go up to P975,000. Based on these projections, what were the total fixed costs before the increase of P78,750?

44. Doble Kara, Inc. owns and operates a chain of food centers. The management is considering installing machines that will make popcorn
on the premises. These machines are available in two different sizes with the following details:

Economy Regular
Annual capacity 20,000 50,000
Costs: Annual machine rental P60,000.00 P82,500.00
Popcorn cost per box 3.90 3.90
Cost of each box 0.80 0.80
Other variable cost per box 6.60 4.20
The level of output in boxes at which the Economy and the Regular would earn the same profit (loss) is:

45. The ASAP Natin ‘To Corporation manufactures and sells T-shirts imprinted with college names and slogans. Last year, the shirts sold for
P7.50 each, and the variable cost to manufacture them was P2.25 per unit. The company needed to sell 20,000 shirts to break even. The
net income last year was P5,040. Harper’s expectations for the coming year include the following:
 The sales price of the T-shirts will be P9
 Variable cost to manufacture will increase by one-third
 Fixed costs will increase by 10%
 The income tax rate of 40% will be unchanged
The selling price that would maintain the same contribution margin rate as last year is:

46. Gandang Gabi Vice, Inc. employs 40 sales personnel to market its line of economy automobiles. The average car sells for P1,200,000
and a 6% commission is paid to the salesperson. Gandang Gabi Vice 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 the two expense structures would be indifferent is:

For items 47-50:

Jessica Soho Ski Company recently expanded its manufacturing capacity to allow it to product 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, Jessica Soho Ski will produce only one of the two models. The
following data were compiled by the accounting department.
Mountaineering Touring
Selling price per unit P88.00 80.00
Variable cost per unit 52.80 52.80
Fixed costs will total P369,600 if the mountaineering model is produced but will be only P316,800 if the touring model is produced. Jessica
Soho Ski Company is subject to a 40% income tax rate.

47. If Jessica Soho Ski Company desires an after-tax net income of P24,000, how many pairs of touring model skis will the company have to
sell?
48. The total sales revenue at which Jessica Soho Ski Company would make the same profit or loss regardless of the ski model it decided to
produce is:
49. How much would the variable cost per unit of the touring model have to change before it had the same breakeven point in units as the
mountaineering model?
50. If the variable cost per unit of touring skis decreases by 10%, and the total fixed cost of touring skis increases by 10%, the new breakeven
point will be:

SUBJECT: Strategic Cost Management Page 5

For items 51-54:
Lola Flora 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.

51. The breakeven units for the new toy would be:
52. How many units should the company need to sell in order to earn a before-tax profit of P150,000?
53. 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?
54. Assuming that Lola Flora Company will just rent a manufacturing space for a month in order to produce special order for 8,000 toys. What
is the acceptable minimum selling price to Lola Flora Company for the special sale?

For items 55-59:

Hephep Hooray Company’s income statement for last month is given below:
Sales (15,000 units @ P30) P450,000
Less: variable expenses 315,000
Contribution margin 135,000
Less: fixed expenses 90,000
Net income P 45,000

The industry in which Hephep Hooray Company operates is quite sensitive to cyclical movements in the economy. Thus, profits vary
considerably from year to year according to general economic conditions. The company has a large amount of unused capacity and is
studying ways of improving profits.

A new equipment has come onto the market that would allow Hephep Hooray Company to automate a portion of its operations. Variable costs
would be reduced by P9 per unit. However, fixed costs would increase to a total of P225,000 each month.

55. How much income for the month would the company earn if the new equipment is purchased?
56. How many units are required as increase or decrease in breakeven point if the new equipment is purchased?
57. The degree of operating leverage during the month where the new equipment is used is:
58. Refer to the original data. Rather than purchase a new equipment, the president is thinking about changing the company’s marketing
method. Under the new method, sales would increase by 20% each month and net income would increase by one third. Fixed costs could be
slashed to only P48,000 per month. Compute the break-even point for the company after the change in marketing method.
59. Assuming that during the month following the month new equipment has been started in use, the unit sales increased by 4,500 units. The
variable expenses per unit and the monthly fixed costs as affected by the acquisition of the new equipment are expected to remain constant.
What is the expected profit of the company for that month?

60. Boom Tarat Tarat Company had the following economic data for 2007:
Net sales P400,000
Contribution margin 160,000
Margin of safety 40,000
What is Boom Tarat Tarat’s breakeven point in 2007?

A simple act of caring creates an endless

ripple.
TO GOD BE THE HIGHEST GLORY!!!

SUBJECT: Strategic Cost Management Page 6