Original CP $=100$
Profit $= y-100$.
New, CP $=120$.
New, SP, $y' = 120 + 0.2y' + (y-100) – 2.5$ because profit remains the same and not the profit percentage
$\implies y' = \frac{y+20}{0.8} – 2.5 = 1.125 y$
So, CP must increase by $12.5\%$ to retain the same profit.