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CHAPTER 4: COST VOLUME PROFIT ANALYSIS

Problem 1
Candace Company’s projected profit for the coming year is as follows:

TOTAL PER UNIT

Sales ₱ 600,000 ₱ 60
Variable Cost 360,000 36.00
Contribution Margin 240,000 ₱ 24
Fixed Cost 192,000
Operating Income ₱ 48,000

Required:
1. Compute the variable cost ratio
Variable Cost Ratio = Variable Cost
Net Revenue
Variable Cost Ratio = 360,000
600,000
Variable Cost Ratio = 60%

2. Compute the contribution ratio

Contribution Margin Ratio = CM PER UNIT
SALES PRICE PER UNIT
Contribution Margin Ratio = SP-VC
SP PER UNIT
Contribution Margin Ratio = 60-36
60
Contribution Margin Ratio = 40%

3. Compute the break-even point in units

BEP (units) = Total Fixed Cost

SP - VC per unit
BEP (units) = 192,000
60-36
BEP (units) = 8000 units

4. Compute the break-even sales in pesos

BEP (pesos) = Total Fixed Cost

Contribution Margin Ratio
BEP (pesos) = 192,000
40%
BEP (pesos) = ₱ 480,000
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CHAPTER 4: COST VOLUME PROFIT ANALYSIS
Problem 2
Monet Company plans to sell 10,000 motorcycle helmets at P1,000 each in the coming year. Variable
cost is P700 which includes direct materials, direct labor, variable factory overhead, variable selling,
and variable administrative. Total fixed cost equals P148,500 which includes fixed factory overhead,
and fixed administrative expenses.

Required:
1. Compute the break-even point in number of elements

BEP (units) = Total Fixed Cost

SP - VC per unit
BEP (units) = 148,500
1000-700
BEP (units) = 495 units

2. Compute for the break-even sales

BEP (pesos) = BEP in units x Selling price/unit

BEP (pesos) = 495 *1000
BEP (pesos) = 495,000

3. Check your answer by preparing a contribution margin statement based on the break-even
sales
Monet Company
Contribution Income Statement
Total Sales Per Unit CM Ratio
Sales 10,000,000 1,000 100.00%
Less: Variable Expenses 7,000,000 700 70.00%
Contribution Margin 3,000,000 300 30.00%
Less: Fixed Expenses 148,500
Net Operating Income 2,851,500

50.50% 49.50%
70 34.65
30 14.85
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CHAPTER 4: COST VOLUME PROFIT ANALYSIS
Problem 3
Reno sells a product for P1,050 with a variable cost of P630. Total fixed cost amounted to P630,000.

1. Compute for contribution margin per unit

Contribution Margin/Unit = Selling Price - Variable Cost

Contribution Margin/Unit = 1050-630
Contribution Margin/Unit = ₱ 420

2. Compute for contribution margin ratio

Contribution Margin Ratio = CM PER UNIT

SALES PRICE PER UNIT
Contribution Margin Ratio = ₱ 420
1,050
Contribution Margin Ratio = 40%

3. Compute for the break-even point in units and in pesos

BEP (units) = Total Fixed Cost

CM PER UNIT
BEP (units) = 630,000
420
BEP (units) = 1500 units

BEP (pesos) = Total Fixed Cost

Contribution Margin Ratio
BEP (pesos) = 630,000
40%
BEP (pesos) = ₱ 1,575,000

4. If Reno wants to earn P94,500, how many units must the company sell?

Profit = CM * Q - Fixed Expense

94,500 = 420 * Q - 630,000
420*Q = 94,500 + 630,000
Q= 94,500 + 630,000
420
Q= 1725 units
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CHAPTER 4: COST VOLUME PROFIT ANALYSIS
Problem 4
Green Meadows makes three types of portable coolers. The company’s total fixed cost P1,080,000.
Selling prices, variable costs, and sales percentages of each type of cooler follows:
SELLING VARIABLE SALES
MODEL
PRICE COST MIX
X100 ₱ 8,800 ₱ 7,600 30%
X950 14,800 12,000 50%
C 800 24,000 20,000 20%

1. What is the company’s break-even point in units and pesos?

SELLING VARIABLE TOTAL FIXED
MODEL CM/UNIT CMR BEP (UNITS) BEP (PESOS)
PRICE COST COST
X100 ₱ 8,800 ₱ 7,600 ₱ 1,200 ₱ 1,080,000 13.64% ₱ 900 ₱ 7,920,000
X950 14,800 12,000 2,800 1,080,000 18.92% 386 ₱ 5,708,571
C 800 24,000 20,000 4,000 1,080,000 16.67% 270 ₱ 6,480,000

Weighted cm per unit

X100 X950 C 800
Contribution margin/unit ₱ 1,200 ₱ 2,800 ₱ 4,000
Multiply by sales mix ratio 30% 50% 20%
Weighted contribution margin per unit ₱ 360 ₱ 1,400 ₱ 800
Weighted contribution margin ratio 4.09% 9.46% 3.33%
BEP (units) = Total Fixed Cost 16.88%
Weighted CM per unit
MODEL sales in unit
BEP (units) = 1,080,000
360+1,400+800 X100 127
BEP (units) = 1,080,000 X950 211
₱ 2,560 C 800 84
BEP (units) = 422 units

BEP (pesos) = Total Fixed Cost

Weighted Contribution Margin Ratio
MODEL sales in unit
BEP (pesos) = 1,080,000
16.88% X100 244
BEP (pesos) = ######### X950 406
C 800 163
2. If the company has a target of 1M how many units of each type of cooler must be sold
Sales with profit = total fixed cost + desired profit
weighted contribution margin per unit
Sales with profit = 1,080,000 + 1,000,000 = ₱2,080,000
₱ 2,560 ₱ 2,560
Sales with profit = ₱ 813
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CHAPTER 4: COST VOLUME PROFIT ANALYSIS
Problem 5
Alonzo owns a barber where he employs five barbers and pays each a base rate of P2,000 per month.
One of the barbers acts as manager and receives an extra P3,000 per month. In addition to those base
rate, each barber is paid a commission of P20 per haircut. A barber can do an average of 6 haircuts a
day. The barber shop is open 24 days a month. Other costs incurred are as follows:
Advertising 1,000 per month
Rent 4,000 per month
Barber Supplies 400 per month
Utilities 1,750 per month and
25 per haircut
Magazines 250 per month
Cleaning Supplies 15 per haircut

Currently, Alonzo charges P100 per haircut

Required:
1. Compute the break-even point in
a. Number of haircuts and in
BEP (units) = Total Fixed Cost
SP - VC per unit
BEP (units) = 20,400
100-(20+25+15)
BEP (units) = 510 haircuts

b. Total pesos
BEP (pesos) = BEP in units x Selling price/haircut
BEP (pesos) = 510 *100
BEP (pesos) = #########

2. In March, 1400 haircuts were given. Compute the net income

Revenue ₱140,000.00
Less: Total Variable Cost 84000
Contribution Margin 56,000.00
Less: Total Fixed Cost 20,400
Net Income ₱ 35,600.00
3. Alonzo wants a net income of P25,000, compute the number of haircuts that must be given
Revenue ₱ 113,500
Less: Total Variable Cost 68,100
Contribution Margin ₱ 45,400
Less: Total Fixed Cost 20,400
Net Income ₱ 25,000.00
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CHAPTER 4: COST VOLUME PROFIT ANALYSIS

Profit = CM * Q - Fixed Expense

25,000 = 40 * Q - 20,400
40*Q = 25,000 + 20,400
Q= 25,000 + 20,400
40
Q= 1135 units

4. If Alonzo wants a net income of P40,000, and 1,500 haircuts were given, how much must be the
amount charged per haircut

40000/1500 haircuts = 26.67 per haircut

Variable cost per haircut = 60 per haircut
Selling price required = 86.67 per haircut
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CHAPTER 4: COST VOLUME PROFIT ANALYSIS
Problem 6
Guiller Company’s projected profit for the coming year follows

TOTAL PER UNIT

Sales ₱ 2,480,000 ₱ 20.00
Variable Costs 1,488,000 12.00
Contribution Margin 992,000 ₱ 8.00
Fixed Cost 626,400
Operating Income ₱ 365,600

Required:
1. Compute the break-even point in units

BEP (units) = Total Fixed Cost

CM PER UNIT
BEP (units) = 626,400
8
BEP (units) = 78300 units

2. Compute the break-even point in pesos

BEP (pesos) = Total Fixed Cost

Contribution Margin Ratio
BEP (pesos) = 626,400
40%
BEP (pesos) = ₱ 1,566,000

3. Compute the contribution margin ratio

Contribution Margin Ratio = CM PER UNIT

SALES PRICE PER UNIT
Contribution Margin Ratio = ₱ 8
20
Contribution Margin Ratio = 40%

4. Using the projected sales for the incoming year, compute the margin of safety and margin of
safety ratio.

Margin of Safety = Current Sales - BEP Sales

Margin of Safety = 124000 -78300
Margin of Safety = 45700 units
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CHAPTER 4: COST VOLUME PROFIT ANALYSIS

Margin of Safety in pesos = 45700 *20

Margin of Safety in pesos = ₱ 914,000

Margin of Safety Ratio = Margin of Safety

Total Sales
Margin of Safety Ratio = ₱ 914,000
₱ 2,480,000
Margin of Safety Ratio = 36.85%
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CHAPTER 4: COST VOLUME PROFIT ANALYSIS
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CHAPTER 4: COST VOLUME PROFIT ANALYSIS
Problem 7
Statement of Comprehensive Income for Brooklyn Company for the current year is
per unit CM Ratio
Sales ₱ 750,000 50 ₱ 500,000 100%
Variable Cost 600,000 40 ₱ 400,000 80%
Contribution Margin 150,000 10 ₱ 100,000 20%
Fixed Cost 100,000 100,000
Operating Income ₱ 50,000 ₱ -
₱ 1.25
Required:
1. Compute the break-even point
BEP (units) Total
= Fixed Cost BEP (units) = Total Fixed Cost
CM SP-VC
BEP (units) = 100,000 BEP (units) = 100,000
150,000 10
BEP (units) = 0.67 units BEP (units) = 10,000.00 UNITS

BEP (pesos) = Total Fixed Cost

Contribution Margin Ratio 150,000/750,000
BEP (pesos) = 100,000
20%
BEP (pesos) = ₱ 500,000

2. Compute the margin of safety

Margin of Safety = Current Sales - BEP Sales
Margin of Safety = ₱ 750,000 -₱ 500,000
Margin of Safety = ₱ 250,000

3. Compute the margin of safety ratio

Margin of Safety Ratio = Margin of Safety
Total Sales
Margin of Safety Ratio = ₱ 250,000
₱ 750,000
Margin of Safety Ratio = 33.33%

4. Compute the degree of operating leverage

Degree of operating leverage = Contribution Margin

Net Income
Degree of operating leverage = 150,000
₱ 50,000
Degree of operating leverage = 3
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CHAPTER 4: COST VOLUME PROFIT ANALYSIS
5. Suppose the company experiences a 30% increase in revenues, compute for the
percentage change in profits
actual sales increased sales
Sales ₱ 750,000 ₱ 975,000
Less: Variable Cost 600,000 ₱ 600,000
Contribution Margin 150,000 ₱ 375,000
Less: Fixed Cost 100,000 100,000
Net Operating Income ₱ 50,000 ₱ 275,000

%change in sales 30%

degree of operating leverage 3
x percent increase in profit 90%
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CHAPTER 4: COST VOLUME PROFIT ANALYSIS