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# Cost- Volume- Profit Analysis

1.
2.
3.
4.
5.
6.
7.
8.
9.
10.

A
B
C
B
A
C
D
B
A
D

11.
12.
13.
14.
15.
16.
17.
18.
19.
20.

D
A
D
C
D
D
B
D
C
A

21.
22.
23.
24.
25.
26.
27.
28.
29.
30.

D
D
B
A
D
A
C
C
B
B

31.
32.
33.
34.
35.
36.
37.
38.
39.
40.

A
D
C
C
A
A
C
C
D
B

A
A
C
B
C
C
C
B
B
A
A
A
B
A

61.
62.
63.
64.
65.
66.
67.
68.
69.
70.
71.
72.
73.
74.

A
B
C
B
C
B
A
D
B
C
A
C
C
A

41.
42.
43.
44.
45.
46.
47.
48.
49.
50.

C
C
A
D
B
B
C
D
D
D

51.
52.
53.
54.
55.
56.
57.
58.
59.
60.

C
D
B
C
B
C
A
C
C
A

61.
62.
63.
64.
65.
66.
67.
68.
69.

A
C
D
D
D
A
D
A
B

101.
102.
103.
104.
105.
106.
107.
108.
109.
110.
111.
112.
113.
114.

B
A
A
A
A
A
D
D
B
C
B
B
B
A

121.
122.
123.
124.
125.
126.
127.
128.
129.
130.
131.
132.
133.
134.

A
D
A
B
A
B
B
B
A
C
B
C
D
C

1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.

B
C
A
B
A
A
A
A
A
A
B
C
C
A

21.
22.
23.
24.
25.
26.
27.
28.
29.
30.
31.
32.
33.
34.

C
C
A
B
A
A
B
B
A
B
B
B
D
A

41.
42.
43.
44.
45.
46.
47.
48.
49.
50.
51.
52.
53.
54.

167

81.
82.
83.
84.
85.
86.
87.
88.
89.
90.
91.
92.
93.
94.

A
C
A
C
A
D
A
A
D
A
C
B
C
A

## Cost- Volume- Profit Analysis

15. B
35.
16. A
36.
17. A
37.
18. C
38.
19. A
39.
20. C
40.
Solutions:
1.

B
A
C
B
D
A

55.
56.
57.
58.
59.
60.

B
D
A
B
A
B

75.
76.
77.
78.
79.
80.

A
D
B
A
A
B

95.
96.
97.
98.
99.
100.

A
D
C
B
B
A

115.
116.
117.
118.
119.
120.

B
C
A
B
C
B

135. A
136. B
137. D

Contribution Margin = Fixed costs
= P15,000
(Contribution Margin/Unit Sales) + Variable cost per unit
= Desired Minimum Sales Price
(P15,000 3,000) + (P7,500 3,000)

2.

7.50

Unit contribution margin (P50 - P30)

P 20.00

## Additional profit (500 x P20)

P10,000

After the break-even level, the amount of profit equals the unit
contribution margin multiplied by the number of units sold in
excess of break-even units.
The candidates should remember that the profit increases by the
amount of contribution margin brought by additional units sold.
3.

Cost of dinner
Favors and program

P 70.00
30.00
168

## Cost- Volume- Profit Analysis

Fixed costs
(15,000 + 7,000 + 48,000 + 10,000)/250

320.00

Cost to be charged

P420.00

4.

5.

## The number of units required to earn the target profit is equal to

the sum of fixed expenses and the target profit divided by the unit
contribution margin. The number of units required to earn the
target net profit is:
(P78,000 + P42,000) P12
10,000

6.

Selling Price
Less: Variable Manufacturing Cost
10% Commission

P 60
( 30)
( 6)

## Unit Contribution Margin

P 24

Current break-even:
Pesos: (P32,000 0.40)
Units: [P32,000 P6)
Contribution margin per unit: P15 x 0.40

P80,000
5,333
P 6.00

(P32,000 x 0.3) P6

1,600

Alternative solution:
New breakeven units (P32,000 x 1.3) P6
Less current breakeven units

6,933
5,333

1,600

169

## Cost- Volume- Profit Analysis

7.

The amount of contribution margin per unit is constant within a
relevant range. The amount of profit is increased by the amount
of unit contribution margin.
Contribution margin per unit:
fixed cost breakeven unit sales
50,000 5,000 P10.00
At breakeven point, the profit is zero. Therefore, the profit at a
level of 5,001 units will be P10 which is the amount of
contribution provided by the unit (one unit) in excess of
breakeven point.

8.

CMR

= Fixed cost/Sales
= 100,000/800,000 = 12.50%

## Profit = (1,200,000 800,000)0.125

P50,000
The amount of sales that provides profit should be the sales
revenues above the break even sales.
Alternative solution:
Total contribution margin 1,200,000 x 0.125
Fixed costs
Profit

P150,000
100,000
P 50,000

170

## Cost- Volume- Profit Analysis

9.

Current unit contribution margin (P32 P24)
Current break-even units (P400,000 P8)
New unit contribution margin (P40 - P24)
New break-even units (400,000 16)
Net decrease in breakeven units
(50,000 25,000)

10.

P8
50,000
P16
25,000
25,000

CM per unit: 220,000 / (100,000 80,000)

11.00

Fixed costs:

P880,000

80,000 x 11

## The contribution margin per unit is linear or constant per unit.

Therefore: TCM Units = UCM

11.

TCM Sales = CMR
Change in TCM: (600,000*0.2) (360,000*0.1)
CMR: Increase in TCM Increase in Sales
84,000 240,000
Breakeven sales

12.

90,300 0.35

171

84,000
35%
258,000

## Before-tax profit 24,000 0.6

Total contribution margin

40,000
200,000
240,000

## Selling price = UVC + UCM

Selling Price = 6 + (240,000 40,000)
13.

12.00

The company's degree of operating leverage is determined as follows:
Degree of operating leverage = Contribution margin Net income
Degree of operating leverage = P600,000 P240,000 = 2.50

14.

Increase in sales
Less variable costs and expenses
0.90 x 125,000
Less additional tax 0.40 x 12,500

15.

125,000
112,500
12,500
5,000
7,500

= (40,000 + 8,000) (80-60)
= 2,400 units

172

## Cost- Volume- Profit Analysis

16.

Total peso sales required
800,000*
Less prior sales

400,000

400,000

## *Peso sales required to earn profit stated as percentage of sales

(ROS):
S = [FC + (ROSS)] CMR
(CMR S) = [FC + (ROSS)]
(CMR S) - (ROSS) = FC
(CMR ROS) S = FC
S = FC (CMR ROS)
17.

Contribution margin 50,000 x (5-3.50)
Less: Additional profit (250,000 x 0.10)
Selling price

18.

= P3.50 0.70

75,000
25,000
50,000
P5.00

A shorter calculation of finding the amount of sales is to divide
breakeven sales by (1 MSR)
Sales = P600,000 (1 0.2)
P750,000

173

## Profit margin = Contribution margin ratio x margin of safety ratio.

Profit margin = 20% x 40%
8%
Sales = Profit Profit margin
Sales (60,000 0.08)
19.

P750,000

Peso sales = FC/(CMR - ROS)
= P210,000/(0.40 - 0.10)

P700,000

CMR = 40%
A long computation of required sales uses the following equation:
S = P210,000 + 0.10S
0.40
0.40S = P210,000 + 0.10S
0.40S - 0.10S = P210,000
S = P210,000/(0.40 0.10)
S = P700,000
20.

Current number of units required to earn the target net profit:
[(P200,000 + P70,000) P9]

30,000

## After the automated machine is placed into service,

the number of units required to earn the target
net profit will be:
((P250,000 + P70,000) P12)
26,667
Change in units: 30,000 - 26,667 = 3,333 decrease in unit sales
174

## Cost- Volume- Profit Analysis

21.

CMR= 100% - (3.9 6.0) = 35%
BES = 1,400,000 .35

22.

4,000,000

New break-even point:
P874,000 P23
Current break-even point in units:
P770,500 P23
Increase in units: 38,000 - 33,500
Alternative solution: (P103,500 P23)

23.

38,000
33,500
4,500
4,500

The estimated cost of goods sold
= P565,000 + 0.35S*
*Sum of all percentages for variable production costs
= P565,000 + (P2,000,000 x 0.35)
= P1,265,000

24.

Peso sales required to earn 10% of sales;
FC/(CMR ROS)
175

## Cost- Volume- Profit Analysis

= P36,000/(0.30-0.10)
= 180,000
25.

26.

## Revised contribution margin 20,000 x 1.15 x (7-1)

Fixed cost (105,000 + 19,200)
Revised profit
Prior profit
Decrease in profit

138,000
124,200
13,800
35,000
21,200

## Margin of Safety = Budgeted sales Breakeven sales

Margin of Safety: P400,000 P40,000
P360,000
27.

DOL at P90,000 sales:
Sales
Variable costs
Total Contribution margin
Fixed costs
Profit
DOL

90,000
50,000
40,000
30,000
10,000

= TCM/OP
= 40,000/10,000

4 times

## % increase in sales x DOL = % increase in profit

4 x 20% = 80%
28.

2006 DOL = 275,000/75,000

176

3.67

## Percentage Increase in profit, 2007 = 3.67 x 30%

2007 Profit = 75,000 +(75,000 x 1.10)

29.

P157,500

Peso sales 12,000/(0.40 0.1)
P40,000
Unit sales P40,000/10
4,000
Increased units 4,000 x 1.25
5,000
Revised contribution margin 5,000 x (9 6)
Less fixed cost
Revised profit

30.

P15,000
12,000
P 3,000

Projected cost of sales:
P800,000 + (P3,000,000 x 0.65)

31.

P2,750,000

Unit CM = Change in Profit Change in Sales
= 200,000 (100,000 75,000)
=8
Fixed costs = Breakeven units x UCM
75,000 x 8 =
600,000

32.

110%

Unit cost:
Materials (P36,000 24,000)
Labor (P54,000 24,000)
177

P1.50
2.25

## Variable selling expense

Variable unit cost
Required profit (2,250 1,500)
Required minimum selling price
33.

0.35
P4.10
1.50
P5.60

Composite ratio:
X: 640,000 (720,000 + 640,000)
Y: 720,000 (720,000 + 640,000)

47.059%
52.941%

## Weighted-Average Contribution Margin:

(.52941 .60) + (.47059 .40)

0.505882

## Breakeven sales in pesos:

(505,881 0.505882)

P1,000,000

## Ys peso sales at breakeven P1M x 0.47059

34.

Sales (500,000 x 1.10)
Variable cost
Contribution margin

550,000
300,000
250,000

## CMR = 250 550 = 45.45%

Original fixed costs:
500,000 300,000 150,000 = 50,000
New fixed cost = 50,000 x 0.80 = 40,000
Breakeven sales = 40,000/0.4545 = P88,000
178

P 470,590

## Cost- Volume- Profit Analysis

35.

36.

Before-tax profit (24,000 0.6)
Total contribution margin

P 40,000
200,000
P240,000

## Contribution margin per unit (P240,000 40,000)

Variable cost per unit
Selling price

P 6.00
6.00
P12.00

DOL

37.

= CM/OP
= 275,000/75,000
= 3.67 times

Peso sales : FC (CMR - Profit Margin)
= P210,000 (0.55 - 0.15)
= P525,000
CMR

38.

## = 100% - 45% = 55%

CMR: Change in Fixed Costs Change in Breakeven Sales
78,750 (975,000 750,000)
0.35

179

750,000 x 0.35

262,500

## The increase in fixed costs of P78,750 equals the increase in

contribution margin in order to continue at breakeven sales.
39.

40.

UCM

= (70,000 x 1.20)+(40,000 x 3)
70,000 40,000
= P6.80

FC

## = Units(UCM profit per unit)

= 70,000(6.80 1.20)
= P392,000

BEU

= 392,000/6.80
= 57,647

Margin of safety in peso sales = Budgeted sales Breakeven sales
Margin of safety = P1M P.7M

41.

2006 Sales
Required 2007 peso sales

42.

P300,000

180

1,000,000
125,000
1,125,000

## Revised WACM (0.5 x 1.50) + (0.5 x 2)

Original WACM (0.4 x 1.50) + (0.6 x 2)
Revised Breakeven units
12,600/1.75
Original Breakeven units
12,600/1.80

1.75
1.80
7,200
7,000

## Increase in breakeven units

43.

200

WACM = (30 x 0.6) + (60 x 0.4)
Breakeven units: 630,000/42
Breakdown:
Product Standard
Product Deluxe

44.

P42
15,000

15,000 x 0.6
15,000 x 0.4

9,000
6,000

WACM = (4/7 x 0.40)+(3/7 x 0.93 = P0.62857
BE units = 7,600/0.62857 = 12,091
Baubles = 12,091 x 4/7 = 6,909
Trinkets = 12,091 x 3/7 = 5,182

45.

Total sales revenue per composite sales:
(12 x P5.25) + (10 x P7.50) + (6 x P12.25)
Total variable cost per composite sales:
(12 x P4.85) + (10 x P6.95) + (6 x P10.35)
Total contribution margin per composite sales
(P211.50 - P189.80)
181

P211.50
P189.80
P 21.70

P75,950 P21.70

3,500

## Note: Total breakeven units: 3,500 x 28 = 98,000

46.

WACMR = (.6 x .4) + (.4 x .15)
Fixed Costs = 225000 x 1.3
Sales (292500 + 48000) .3

47.

UCM

60,000 45,000
= 6.75

48.

P360,000

BEV =

49.

30%
P 292,500
P1,135,000

600,000
16 12

P150,000

CMR

M/S Ratio
= (0.06 0.6) .25
= 40%

## FC = (120,000 x .40) (120,000 x .10) = P36,000

Annual FC = 36,000 x 12

P432,000

182

50.

Profit
Profit
Fixed
Fixed

51.

## Margin = 20% x 10% = 2%

= 400,000 x 2% = 8,000
Costs = CM - Profit
Costs = (400,000 x 20%) 8,000

Revised UCM = 25 19.80 (5 x 0.08)
BEU = 468,000/4.80

52.

P72,000

P4.80
97,500

The Company projected zero profit based on zero advertising
expenditure.
Additional CM (30,000 units @ 10)
P300,000
Less: Required profit
200,000
P100,000

53.

Cash-flow breakeven: 270,000 (100-60)

54.

6,750

CMR

BES

## = Before-tax return on sales/MSR

= (0.06 0.60) 0.25

0.40 or 40%

= 320,000 0.40

P 800,000

183

## Cost- Volume- Profit Analysis

Sales
55.

= 800,000 0.75

P1,066,667

The easier calculation of sales value of 60,000 units is to divide
the total annual costs by total cost ratio of 85% (100% - 15%).

56.

Sales required

= P1,912,500/0.85

P2,250,000

## Unit selling price

= 2,250,000/60,000

P37.50

Indifference Point = Change in Fixed Cost Change in Variable
Cost
Increase in fixed cost: 2 @ 15,000
P30,000
Decrease in variable cost (15% - 7.5%) 80
P6
Indifference point: 30,000 6

57.

WACM = (0.25 x 5)+(0.75 x 7)
= 6.50
BEU

58.

= 975,000/6.50
= 150,000

184

5,000 units

## The additional fixed costs of P1,200,000 should be fully covered

contribution margin) through an increase in selling price.
Increased price
59.

P120 +(1.20M/80,000)

Breakeven point:
Old policy: P80,000/7
New policy: P100,000/8
Increase in Breakeven point

60.

P 135

11,429
12,500
1,071

WACMR = (.4 x .2) + (.5 x.3) + (.4 x.5) = 0.43
BES = 1,290,000 .43 = P3,000,000

61.

Contribution margin
Fixed costs
Operating profit

P7,200,000
3,600,000
P3,600,000

## DOL: 7.2/3.6 = 2 times

62.

The indifference point refers to the level of sales that would give
equal profit or total costs for the two alternatives

185

## 11.30x + 60,000 = 8.90x + 82,500

2.40x = 22,500
x = 9,375
63.

Variable cost ratio

= 2.25/7.50 = 30%

## Variable cost next year = 2.25 x 1.3333 = 3

Selling price required = 3/0.30 = P10
64.

65.

Total Fixed Cost
Operating Profit
Total Contribution Margin

P154,000
26,000
P180,000

Selling price
Contribution margin per unit
(180,000 12,000)
Unit variable cost

P 20
15
P 5

Fixed costs
Operating profit
Contribution margin

600,000
120,000
720,000

186

1.80

## Cost- Volume- Profit Analysis

Selling price
66.

(1.80 0.40)

P4.50

Contribution margin per machine hour: Contribution margin per
unit x No. of units produced per machine hours

67.

Product A

P20 x 6

P120

Product B

P16 x 8

P128

440,000 + (110,400/0.61) = 480,000
4 2.70
Revised variable cost: P2.40 + (P2.00 x 0.15)

68.

VC Ratio 375,00/625,000 = 60%
VC / unit 375,000/25,000 = P15
New VC = 15 + (4.50 2.50)= P17
SP = 17/0.6 = P28.33

69.

187

P2.70

## The level of sales that would give equal costs:

0.06S = (40 x 24,000)+ 0.02S
0.04S = 960,000
S = 24M
70.

31,200/52 = 600
600/0.25 = 2,400
Total Sundays sales (where 2,400 represents 25%):
2,400/0.25 =9,600

Alternative solution:
600 = 0.25 x 0.25S
600 = 0.0625S
S = 9,600
71.

New BES = 873,600/140 = 6,240
New FC = 840,000 x 1.04 = 873,600
New CM = 250 100 (100 x 0.10) = 140
Old BES = 840,000/150 = 5,600
Increase in BEU = 6,240 5,600 = 640

188

## Cost- Volume- Profit Analysis

72.

Composite CM = 40 + (2 x 20)
= 80
Composite BE = 910,000/80
= 11,375

73.

Required new sales

## = 2005 sales + (P112,500/CMR)

= P5M +(P112,500/0.45)
P5.25M

## CMR = (250 137.50)/250

74.

45%

Breakeven units = 807,840 5.30

152,423

## New CM/unit = 20 14.70 = 5.30

New variable cost: (14 + (14 x.5 x 0.10) = 14.70
New FC = 792,000 + (792,000 x.20x.10) = 807,840
75.

Indifference point

189

## Increase in Variable Cost

= 80,000/0.05
= P1.60M
76.

Processing hours per unit:
XY 7:
0.75/1 = 0.75 or 45 minutes
BD 4:
0.20/1 = 0.20 or 12 minutes

## Additional contribution margin using 100,000 hours:

XY 7:
100,000/0.75 x P1 = P133,333
BD 4:
100,000/0.20 x P0.50 = P250,000
77.

Units sold to earn P1M:
(1,000,000 + 1,000,000) / 5.25 = 380,952
The use of P1M fixed costs will require 380,952 units which are
within the first range.

78.

Fixed costs

= 807,840

## UCM = 20 14 (14 x 0.50 x 0.10)= 5.30

Computation = 807,840/5.30

79.

190

## Cost of one 4foot piece of metal 4 x 13.60

Less proceeds from sale of scrap 6.4 / 16 x 8
Net cost of one 4- foot piece of metal

54.40
3.20
51.20

P2.00

Large 4 x 4oz
Small 4 x 2.4oz
Scrap
Total oz
80.

81.

## Material cost per unit

Large: 4 x P2 x 1.8
Small 2.4 x P2 x 1.75

16.00
9.60
6.40
32.00

P14.40
P 8.40

Unit CM
Large: 29.00 (8.5 x 1.8)
Small: 14.00 ( 5.1 x 1.75)

= 13.70
= 5.075

## WACM = (13.70 + 5.075) 2 = 9.3875

Breakeven point
= 860,000/9.3875
= 91,611
82.

CM /unit 405,000 1,800
BEV = 247,500 225

83.

225
1,100 units

Operating Profit: (2,100 x 225) 247,500 = P225,000
191

## Aftertax profit: 225,000 x 60% = 135,000

84.

Contribution margin
Regular sales 1,500 x 225
Special sale 1500 x 175
Total Contribution
Fixed costs
Taxable income
Income tax
Net income

85.

337,500
262,500
600,000
247,500
352,500
141,000
211,500

61,500 200 = 307.5 tons

86.

New SP = 500 x .90
New VC 275 + 40
New CM

450
315
135

100%
70%
30%

Sales required:]
(Fixed costs + Before Tax profit) CMR
247,500 + (94,500 60)
87.

192

P1,350,000

## Unit sales required:

(316,800 + 40,000) 27.20 = 13,118 pairs
Unit Contribution Margin, Touring:
80.00 52.80
P27.20
88.

Indifference point in peso sales:
0.4S P369,600 = 0.34S P316,800
0.06S = 52,800
S = P880,000

89.

Breakeven sales, Mountaineering:
369,600 35.20
=
10,500
Required contribution margin Touring
316,800 10,500
=
30.17
Present contribution margin Touring
27.20
Required decrease in variable cost per unit
2.97

90.

New breakeven point: 348,480 32.48
New UCM, Touring: 27.20 + (52.80 x 0.1)
New Fixed costs: 316,800 x 1.1

91.

10,730
= 32.48
= 348,480

The indifference point in number of pairs is 6,600. Inasmuch
that the expected level is 12,000 units, it is better to sell
Mountaineering because it has high leverage than the touring
model. Once the indifference point is exceeded, the one with
193

## the higher contribution margin (leverage) has the advantage over

the one with the lower contribution margin.
92.

Fixed Costs:
Marketing
Interest
Total

2,340,000
120,000
1,800,000
540,000
4,800,000

## Contribution margin ratio:

1 - [(7,200,000 + 2,400,000)/16M] = 40%
Breakeven next year with no change in commission:
4,800,000 0.4 = P12,000,000
93.

If the commission rate is increased by 5%, the contribution
margin is decreased by 5% or a new contribution margin ratio of
35%
Breakeven sales next year.
4,800,000 / 0.35

94.

P13,714,286

Fixed cost under 15% commission plan
Increase in Fixed cost
Decrease in audit fee
Increased fixed costs

194

4,800,000
2,400,000
( 75,000)
7,125,000

## The commission rate of 7.5%, instead of 15% will raise the

contribution margin ratio to 47.5% (40% + 7.5%).
Revised breakeven sales 7,125,000 / .475 = P 15M
95.

Required sales, with 20% commission
and profit target of P1,120,000:
(P4,800,000 + 1,600,000) .35 = 18,285,714

96.

The question asked for is the indifference point. The peso sales
required to produce equal income can be easily calculated by
dividing the net increase in fixed costs by the increase in
contribution margin ratio:
Difference in CMR = 35% - 47.5 = 12.5%
Increase in fixed costs = 2,400,000 75,000

P2,325,000

## Indifference Point: 2,325,000 0.125

P18.6M

Alternative Solution:
.355 4,800,000 = .475S 7,125,000
.125S = 2,325,000
S = P18,6M
97.

Billing charge per patient day
Variable cost per patient day
Contribution margin
Number of patient days for the year:
195

P650
150
P500

98.

P10,676,250/650

16,425

## Variable cost per patient day:

P2,463,65016,425

P150

Fixed costs for bed capacity
Salary, supervisory nurse
Total

P4,190,000
720,000
P4,910,000

## Number of patient days required to cover fixed costs

for bed capacity and salaries of supervisory nurse
4,910,000 500
99.

9,820

In solving for the breakeven level where there are step fixed
costs, the logical approach is to test the validity of the ranges of
activities.
First Range:
Fixed costs based on capacity
Salaries:
Aides 21 x 50,000
1,050,000
Nurses 11 x 130,000
1,430,000
Supervisor 4 x 180,000
720,000
Total
Breakeven calculation: 7,390,000 500

196

4,190,000

3,200,000
7,390,000
14,780

## The calculated breakeven point of 14,780 is invalid because the

number falls under the second range wherein the amount of
fixed costs that had been used are not relevant to that range.
Second Range (Final calculation):
Total fixed cost, lowest range
1 aide
1 nurse
Total
Breakeven in patient days:
7,570,000 500

7,390,000
50,000
130,000
7,570,000
15,140

## Additional revenues if 20 beds are rented:

90 days @ 17 patient days x 650

994,500

Increase in variable cost should be calculated
based on additional patient days for 90 days at
P150 per patient day.
17 beds x 90 days x P150

P229,500

The increase in fixed cost based on bed capacity:
P4,190,250 60 x 20

P1,396,750

197

## Tax shield in non cash expenses

40% x 800,000
= P320,000
Breakeven in number of pizzas (traditional)
4,537,500/(250 75) = 25,929
Units sold: P9,500,000/250 = 38,000

## Unit variable cost (cost of food)

2,850,000 38,000 = P75.00

## Fixed cost = 7,387,500 2,850,000

P4,537,500

Cash Flow Breakeven:
3,417,500 175

19,529

## Total fixed cost:

Less: Noncash fixed cost
Tax shield on noncash
Fixed costs
Fixed cash flow

P4,537,500
( 800,000)
( 320,000)
P3,417,500

Breakeven sales based on 20% commission:
P100,000 0.20
P500,000
198

## Contribution margin ratio:

(10M 8M) 10M

20%

Breakeven sales if the company employs its own salesmen:
(P350,000 0.35)
P1,000,000
The new contribution margin ratio is (20% + 15%)

35%

## Fixed costs are expected to be P350,000

(100,000 + 90,000 + 160,000)
The required peso sales to earn net income of P1,330,000 if the
commission is raised to 25%:
(P100,000 + P1,900,000) 0.15

P13,333,333

The indifference point, the level of sales where the alternatives
will have equal profits:
.15S- 100,000 = .35S 350,000
2S = 250,000
S = P1,250,000
199

## The problem illustrates a calculation of breakeven point for a

company with a step variable and step fixed cost.
Contribution Margin per Unit:
60,000 or less (P30 P12.50)
Units above 60,000 (P30 P14.00)
Total contribution margin from the first
60,000 (60,000 x P17.50)

P17.50
P16.00

P280,000

## Let X = Number of units above 16,000

0 = 280,000 + 16X -360,000
X = 80,000 16
X = 5,000 units
Breakeven units: 16,000 + 5,000

21,000

Alternative Solution:
Total fixed costs
Less Contribution margin from 60,000 units
Remaining fixed costs to be covered by
additional units, each with CM of P16

P360,000
280,000

21,000

200

P 80,000

## Cost- Volume- Profit Analysis

The units that will generate the desired profit of P150,000 for
the company, contributes P16 each. These units are the excess
of 21,000 units to breakeven.
Unit sales required:
21,000 + (150,000 P16)

30,375

The bonus plan of P1.00 per unit on sales made in excess of
breakeven point (21,000 units) will necessarily decrease the
contribution margin to P15.
The desired profit based on fixed cost:
25% x P360,000
Units required: 21,000 + (P90,000 15)

P90,000
27,000

In determining the minimum selling price for the 8,000 units
should consider the increased variable cost per unit and the
additional fixed cost. Any cost and losses on the first 16,000
units are irrelevant:
Variable cost per unit
P14.00
Additional fixed cost per unit (10,000 8,000)
1.25
Minimum selling price
P15.25
The net income for the month if the new equipment is acquired:
Contribution margin based on the present
system
P135,000
Add increase in contribution margin due to
decrease in variable cost (15,000 x 9)
135,000
201

## Increased contribution margin

Less Increased fixed costs

270,000
225,000

Net income

P 45,000

(12,500 10,000)

2,500 units

10,000 units

## Breakeven, proposed (P225,000 P18)

12,500 units

The degree of operating leverage (DOL)
during the month that the new
equipment would be used: (270,000 45,000)

6X

## (Please see solution for No. 94)

Breakeven units if there is a change in marketing method:
P48,000 6

8,000 units

## Contribution margin per unit:

(Fixed cost + profit) Units sold
(P48,000 + P60,000) 18,000 units

202

P6.00

## The percentage increase in profit can be calculated by

multiplying the degree of operating leverage (DOL) by the
percentage increase in sales during the second month.
The sales increased by 30% (P4,500 P15,000) and therefore
the profit percentage increased by 180% (6 x 30%).
The expected profit during the next month would be:
P45,000 + (P45,000 x 1.8)

P126,000

Breakeven Units:
Fixed Costs Unit Contribution Margin
P6,000,000 300

20,000 pairs

Contribution margin (P18,000 x 300)
Less Fixed costs
Net loss

P5,400,000
6,000,000
P( 600,000)

The breakeven level for the sales outlet is expected to rise
because of additional commission, a variable cost item, and
such a commission is being paid for all pairs of shoes sold.
Breakeven in pairs of shoes:
6,000,000 (300 75)

203

26,667 pairs

## Though an additional commission is paid on pairs of shoes sold,

the breakeven point is not affected and shall remain at 20,000
because the additional commission applies only to number of
pairs of shoes sold in excess of breakeven level.
The profit contribution by the 5,000 pairs is based on reduced
contribution margin per pair.
Profit: 5,000 x (300 50)

P1,250,000

Alternative Solution:
Sales (25,000 x P800)
Variable costs (24,000 x P500)
Total contribution margin
Fixed costs
Profit

P20,000,000
12,750,000
7,250,000
600,000
P 1,250,000

Because the breakeven level is unchanged, the calculation of the
number of pairs to earn P900,000 is simple. The amount of the
desired profit will be contributed by the number of pairs of
shoes in excess of breakeven, each contributing P250.
20,000 +(P900,000 250)

23,600 pairs

300X P6,000,000
140X
X

= 440X P8,142,000
= P2,142,000
= 15,300 pairs

Breakeven peso sales: P1,800,000 0.3
204

P6,000,000

## CMR = P1,755,000 P5,850,000

30%

P800,000 x 0.30
Increase in profit

P240,000
160,000
P 80,000

Sales 39,000 x P270
Variable cost 39,000 x P210
Contribution margin
Fixed cost
Net loss

P10,530,000
8,190,000
2, 340,000
2,400,000
P(
60,000)

Original unit contribution margin
(1,755,000 19,500)
Less increase in packaging cost
New Unit contribution margin

P90.00
7.50
P82.50

## Unit sales required:

(P1,800,000 + P97,500) P82.50

23,000

205

## Breakeven units, Automated

(P1,800,000 + P720,000) (P90 + P30)
P2,520,000 90
Breakeven units, Present
(P1,800,000 90)
Increase in breakeven units

21,000
20,000
1,000

The computation of the indifference point for the two processes
can be determined by dividing the increase in fixed costs by the
decrease in variable cost per unit because the selling price was
unchanged.
Indifference Point: P720,000 30

24,000

If the level of sales is higher than the indifference point, the one
with higher leverage, i.e., higher fixed costs and lower unit
variable cost, will provide higher income.
The automated
process has the higher leverage and therefore, it has higher
income:
Difference in income: (26,000 24,000)30

P60,000

Breakeven units = Fixed costs Unit contribution margin
P100,000 (P400 P200)
500 units
206

## Cost- Volume- Profit Analysis

Step 1: Compute before-tax profit:
P240,000 (1.0 0.4)

P400,000

## Units sales required to earn before-tax profit:

(P100,000 + P400,0000) P200

2,500 units

Alternative Solution:
Profit = Sales Variable costs Fixed costs
P400,000 = P400X P200X P100,000
P500,000 = P200X
X = 2,500 units
Revenue
(350 x P400) + (2,700 x P360)
Variable costs (3,050 x P200)
Contribution margin
Fixed expenses
Operating income
Income tax
Net income

P1,112,000
610,000
502,000
100,000
P 402,000
160,800
P 241,200

Revenue (350 x P400) + (2,200 x P370)
Variable costs (350 x P200) + (2,200 x P175)
Contribution margin
Fixed expenses
Operating income
Income tax
Net income
207

P 954,000
455,000
499,000
100,000
399,000
159,600
P 239,400

## Cost- Volume- Profit Analysis

Revenue (350 x P400) + (2,000 x P380)
Variable costs (2,350 x P200)
Contribution margin
Fixed costs
Operating profit
Income tax
Net income

P 900,000
470,000
P 430,000
90,000
340,000
136,000
P 204,000

Before tax profit objective (240,000 0.6)
Fixed costs
Total contribution margin required
Less contribution margin made on units sold
January May (350 x 200)

P400,000
100,000
500,000

P430,000

## Additional contribution margin from 2,500 units

(2,500 x P175)
Less additional contribution margin required to
meet profit objective