Problem 3 (adapted)

Cagayan Company sells three products. Planned results for next year are as follows:

A B C
Unit Selling Price P10 P8 P4
Unit Variable Costs P4 P6 P1
Contribution Margin P6 P2 P3
Sales Mix in pesos 25% 25% 50%
Total Fixed Costs P500,000

Required:
1. Compute the weighted contribution margin percentage.

A B C Total
Contribution Margin 60% 25% 75%
Percentage
Sales Mixed in Pesos 25% 25% 50%
Weighted Average 15% 6.25% 37.5% 58.75%

*CM = Unit Selling Price – Unit Variable Costs

*CMP = Contribution Margin x Unit Selling Price
*WA = CMP x Sales Mixed in Pesos

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2. Compute the sales in pesos required to earn a P100,000 profit.

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*TFC + Desired Profit / WCMP
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[(P500,000 + P100,000) / 58.75% or 0.5875] = P1,021,277
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3. Supposed now that the sales mix, in units, is 25%, 25%, 50%. Determine the weighted contribution
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margin per unit.

A B C Total
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Contribution Margin Per Unit P6.00 P2.00 P3.00

Sales Mixed in Pesos 25% 25% 50%
aC s
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Weighted Average P1.50 P0.50 P1.50 P3.50

*CMPU = Contribution Margin x Unit Selling Price
*WA = CMP x Sales Mixed in Pesos
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4. Determine the total unit sales needed to earn a P100,000 profit.

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*TFC + Desired Profit / WCMP

(P500,000 + P100,000) / 3.50 = P171,429

Problem 1 (adapted)
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Abigail Corporation is a distributor of a sun umbrella used at resort hotels. Data concerning the next
month’s budget appear below:
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Selling Price P25 per unit

Variable expense P15 per unit
Fixed expense P8,500 per month
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Unit sales 1,000 units per month

Required:
1. Compute the company’s margin of safety. P3,750
Profit = Unit CM x Q – Fixed Expenses
P0 = (P25 – P15) x Q – P8,500
P0 = (P10) x Q – P8,500
P10Q = P8,500
Q = P8,500 / P10
Q = 850 units or at P25 per units = P21,250

Sales (at the budgeted volume of 1,000 units) = P25,000

Less break-even sales (at 1,214 units) = 30,350
Margin of safety in pesos = P3,750

2. Compute the company’s margin of safety as a percentage of its sales. 15%

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 Margin of safety in pesos / Sales = Margin of safety percentage
3,750 / 25,000 = 0.15 or 15%

Problem 2 (adapted)
Victoria Company sells a single product. The company’s sales and expenses for a recent month follow:

Total Per Unit

Sales P600,000 P40
Less: variable expenses P420,000 P28
Contribution margin P180,000 P12
Fixed expense P150,000
Net operating income P 30,000
*Number of units of Sales = 600,000 / 40 = 15,000 units
Required:
1. What is the monthly break-even point in units sold and in sales pesos? 12,500 units
BEP in Units = Fixed Costs / Contribution Per Unit
= 150,000 / P12
= 12,500 units

BEP in Pesos = BEP in Units x Selling Price Per Unit

= 12,500 units x P40

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= P 500,000
2. Without resorting to computations, what is the total contribution margin at the break-even point?

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The total contribution margin at BEP will be equal to the fixed expense worth P150,000.

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3. How many units would have to be sold each month to earn a minimum target profit of P18,000? Use
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the contribution method. Verify your answer by preparing a contribution income statement at the target
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level of sales. 14,000 units

Required Sales at Desired Profit = [Fixed Costs + Desired Profit] / Contribution Margin per Unit
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= [P150,000 + P 18,000] / P12

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= 14,000 units
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Contribution Income Statement for Sales of 14,000 Units

Particulars Total (Pesos) Per Units
Sales P560,000 P40
Less: Variable Expenses P392,000 P18
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Contribution Margin P168,000 P12

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Less: Fixed Expense P150,000

Net Operating Income P18,000
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4. Refer to the original data. Compute the company’s margin of safety in both peso and percentage
terms.
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Margin of Safety = Total Sales – Sales at BEP

Particulars Sales Units Sales (In peso)

Total Sales 15,000 600,000
sh

Break-even Sales 12,500 500,000

Margin of Safety 2,500 100,000

Margin of Safety (In %) = {[Current Sales – Break-even Sales] / Current Sales Level} x 100
Margin of Safety (In %) = {[P600,000 – P500,000] / P600,000} x 100
Margin of Safety (In %) = 16.6666 or 16.67%

5. What is the company’s CM ratio? 0.167

CM Ratio = {[Total Sales Revenue – Variable Costs] / Total Sales Revenue

CM Ratio = {[P600,000 – P500,000] / P600,000}
Company’s CM Ration = 0.1666 or 0.167

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 6. If monthly sales increase by P80,000 and there is no change in fixed expenses, by how much would
you expect monthly net operating income to increase? P54,000

Particulars Total (Pesos)

Sales P680,000
Less: Variable Expenses P476,000 [P420,000 / P600,000] x P680,000
Contribution Margin P204,000
Less: Fixed Expense P150,000
Net Operating Income P54,000

Problem 3 (adapted)
Davao Company sells its only product at P30 per unit. Variable costs are P22 per unit and fixed costs are
P100,000 per month.
Required:
1. Suppose Davao is selling 20,000 units per month at P30. What is its margin of safety (a) in units and (b)
in pesos?
Selling Price (P 30) - Variable Cost (P 22) = CMPU (P8)
Fixed Cost (P100,000) / CMPU (P8) = 12,500 units
BEP in units (12,500 units) x Selling Price (P30) = Break-even sales of 375,000

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Current Sales in units (20,000) – BEP in units (12,500) = Margin of safety in units (7,500)
Current Sales in pesos (600,000) – Break-even sales (375,000) = Margin of safety in pesos (P225,000)

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2. Suppose Davao is selling 20,000 units per month at P30. What is the degree of operating leverage?
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Current Sales P600,000 (20,000 units x P30)

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Less: Variable Cost P440,000 (20,000 units x P22)

Contribution Margin P160,000
Less: Fixed Cost P100,000
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Operating Profit P60,000

aC s
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Contribution Margin P160,000 (20,000 units x P8)

Divided by Operating Profit P60,000
Degree of operating leverage 2.6666666667 or 2.6667
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3. Davao currently pays its salespeople salaries that total to P40,000 per month, but no commissions.
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The vice president for sales is considering a plan whereby the salespeople would receive a 5 percent
commission, but their salaries would fall to a total of P25,000 per month (a drop of P15,000). At what
sales level is the company indifferent between the two compensation plans?
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Profit Sales A = (30x – 22x – P40,000) Let x = the number of units to be sold
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Profit Sales B = (30x – 23.5x – P25,000) (P30 x 5%) = 1.5 + P22 (VC) = 23.5

(30x – 22x – P40,000) = (30x – 23.5x – P25,000)

(8x – P40,000) = (6.5x – P40,000)
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(8x – 6.5x) = (P40,000 – 25,000)

1.5x = P15,000
X = P15,000 / 1.5
X = 10,000 units

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