CHAPTER 1: Relationships and Parts

Lesson 1: Decimals and Fractions

Place Value of Decimals

- The position of a digit in a decimal determines the place value of the digit.
- Look at the place value chart on the left.
- Each digit of 1234567.987654 has a different place value corresponding to its position.
- To write decimals into words, we only identify the place value of the last digit.

Example:
90,250.25 —------------------------- Ninety thousand two hundred fifty and twenty-five hundredths.

Rounding off numbers

- Rounding off numbers is done to decrease the number of decimal places.
General Rule: Looking at the next number on the right.
● If the next number on the right is 5 or above, round off
● If the next number on the right is below 5, retain the number

Example:
1. Round the number 125.543 to the nearest hundredth
Answer: 125.54
2. Round the number 125.543 to the nearest tens.
Answer: 130
Converting fractions from mixed to improper and conversely
Suppose 3 1/2 is to be converted to an improper fraction.
Answer: 3 1/2 = (2 𝑥 3) +1/2 = 6+1/2 = 7/2
Convert 7/2 to a mixed number
Divide the numerator 7 by the denominator 2 and carry the remainder as the new denominator. Answer:
7/2 = 7 ÷ 2 = 3 ½

Simplifying Fractions
When the numerator and denominator have no common factors except 1, a fraction is already in its
lowest term. Extracting the GCF (greatest common factor) is the key in this process. Example: 15/20 =
15÷5/20÷5 = ¾

Fundamental Operations on Decimals

Addition and Subtraction

- To perform the operation of addition and subtraction, align the decimal points vertically along with
all the corresponding digits. If there is any gap in the decimal part, fill in with zero.

a. 0.085 + 0.18 + 0.1255

Solution:
0.0850
+ 0.1800
0.1255
= 0.3905

b. 35.752 – 8.8
Solution:
35.752
- 8.800
= 26.952

Multiplication
- To multiply two decimals, multiply them as whole numbers as if there are no decimal points. The
decimal places in the product is equivalent to the total number of decimal places of the factors.

Find the product of 81.5 x 0.75

81.5
x 0.75
4075
5705
= 61.125

Division
 - To solve problems involving division with decimals, the divisor has to be considered. The decimal
places depends on how many times the decimal point of the divisor has been moved to the right.
Divide 0.245 by 0.7
0.7 ⟌0.245
7.⟌2.45
0.35
7.⟌2.45
21
35
35
= 0
Fraction
A fraction is one or more of the equal parts into which a whole is divided (a ratio of two numbers)
Parts of a fractions:
▪ Numerator is the number of equal parts being taken into consideration.
▪ Denominator is the number of equal parts into which the whole is divided

Basic Types of Fractions

✓ Proper Fraction: A fraction whose numerator is less than its denominator
✓ Improper Fraction: A fraction whose numerator is greater or equal to its denominator ✓ Mixed
Number: Consists of a whole number and a proper fraction (is used to describe a quantity greater than 1)

Fractions in Simplest Form

- To reduce a fraction in lowest terms or to express it in simplest form, divide both the numerator
and the denominator by their GCF (greatest common factor)
Example: 8/10 = 8/2 / 10/2 = 4/5

Fundamental Operations on Fractions

Adding
➢ Adding similar fractions (fractions with the same denominators)
➢ Adding dissimilar fractions (fractions with different denominators)
➢ Adding mixed numbers (fractions with whole numbers)

Subtracting
➢ Subtracting similar fractions (fractions with the same denominators)
➢ Subtracting dissimilar fractions (fractions with different denominators)
➢ Subtracting mixed numbers

Multiplication
➢ Multiply the numerators together and then the denominators together.
➢ Multiplying whole number and a fraction
➢ Multiplying mixed numbers
Division
➢ Multiply the first fraction by the reciprocal of the second fraction.
➢ Dividing a fraction by a whole number

Rules of signs on operations of decimals and fractions

✓ For addition, the sign of the final answer depends on which one has the higher value.
✓ For subtraction, change the sign of the subtrahend and perform the operation of addition; the sign
depends on which one has the higher value.
✓ For multiplication and division, similar signs yield to positive and different signs yield to negative.

Rewriting fractions to decimals and conversely

Writing Decimals to Fractions

➢ When converting a decimal into a fraction, simply use the decimal digits as the numerator of the
fraction and use the decimal places to determine the denominator. If there is one number after the
decimal point, use 10. If there are 2 use 100, soon and so forth.
Simplify the fraction into its lowest term if possible

Writing Fractions to Decimals

➢ Fractions can be written as decimal numbers and vise versa. To convert a fraction to a decimal, simply
divide the numerator by the denominator.

Lesson 2: Percent

What is a percent?
In mathematics, a percentage is a number or ratio that represents a fraction of 100. It is often denoted by
the symbol "%" or simply as "percent“. For example: 35% is equivalent to the decimal 0.35, or the fraction
35/100.

Converting Percent to Decimal or Fraction

• To convert percent to decimal, remove the percent symbol and divide it by 100, or simply move the
decimal point two places to the left.
Example: 10% = 0.10 125% = 1.25
• To convert percent to fraction, simply drop the percent symbol and multiply the number by 1 100 and
simplify into its lowest term.
Example: 35% = 35/100 = 7/20

Converting Decimal to Percent

• To convert decimal to percent, multiply the decimal by 100, or simply move the decimal
point two places to the right and then affix the percent symbol.
Examples:
2.34 = 2.34 x 100 = 234%
1.25 = 1.25 x 100 = 125%
Converting Fraction to Percent
• To convert fraction to percent, first convert the fraction into decimal by dividing the numerator by its
denominator, and then convert the decimal to percent by moving two decimal places to the right and affix
the percent symbol.
Example:
7/20 = 0.35 x 100 = 35%

Base, Percentage, and Rate

• To solve problems involving percent, one must identify which details are given and which is required -
the percent which is called the rate, the base amount is the base, and the amount is the percentage.
Remember the following formula:
➢ Percentage = 𝐵𝑎𝑠𝑒 𝑥 𝑅𝑎𝑡𝑒 (𝑖𝑛 𝑑𝑒𝑐𝑖𝑚𝑎𝑙)
➢ Base = 𝑷𝒆𝒓𝒄𝒆𝒏𝒕𝒂𝒈𝒆/𝑹𝒂𝒕𝒆 (𝒊𝒏 𝒅𝒆𝒄𝒊𝒎𝒂𝒍)
➢ Rate = 𝑷𝒆𝒓𝒄𝒆𝒏𝒕𝒂𝒈𝒆/𝑩𝒂𝒔𝒆 𝒙 𝟏𝟎𝟎%

Summary:
Decimals and Fractions
✓ Decimals and fractions are parts of a whole. A decimal is written in numerical notation where's decimal
point separates the whole number from the decimal part. A fraction is written in the form 𝑥/𝑦, where y is
not equal to 0.
✓ The x is called the numerator and y is the denominator. The 𝑥/𝑦 in the fraction also means x divided by
y.
✓ A fraction is in the lowest term when the numerator and the denominator have no common factors
except 1.
Operations on Decimals
✓ To perform addition and subtraction, align the decimal points vertically in a column before proceeding
to the normal operations on addition and subtraction.
✓ To multiply two decimals, multiply them as whole numbers as if there is no decimal points. The decimal
place in the product is equivalent to the total number of decimal places of the factors.
✓ To divide decimals, move the decimal point in the divisor to the right to make it a whole number. Move
the decimal point in the dividend with the same number of places to the right. Align the decimal point in
the quotient exactly above the decimal point in the dividend and proceed to division.
✓ To add or subtract fractions, the denominators must be the same before proceeding to addition or
subtraction.
✓ Dissimilar fractions should be made similar by finding the least common denominator (LCD). The
numerators are added or subtracted and the LCD will be retained.
✓ To perform multiplication of fractions, multiply the numerator together and the denominators together.
Reduce the answer to the lowest term.
✓ To divide fractions, multiply the first fraction by the reciprocal of the second fraction.
Conversion Rules
✓ A percent expresses a quantity that is a part of 100.
✓ To convert decimals to fractions; use the decimal digits as the numerator and use the decimal places
to determine the denominator. Then reduce the answer to lowest term.
✓ To convert fractions to decimals, divide the numerator by the denominator.
✓ To convert percent to decimal, remove the percent symbol and divide it by 100.
✓ To convert decimal to percent, multiply the decimal by 100 and affix the percent symbol.
✓ To convert a fraction to percent, convert the fraction to decimal by dividing the numerator by its
denominator, multiply the decimal by 100 and affix the percent symbol.
✓ In solving business problems, use the formula:
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 = 𝐵𝑎𝑠𝑒 𝑥 𝑅𝑎𝑡𝑒
𝐵𝑎𝑠𝑒 = 𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒/𝑅𝑎𝑡𝑒 (𝑖𝑛 𝑑𝑒𝑐𝑖𝑚𝑎𝑙𝑠)
𝑅𝑎𝑡𝑒 = 𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒/𝐵𝑎𝑠𝑒 𝑥 100%

CHAPTER 2: Buying and Selling

Buying and Selling

Lesson 1A - Determinants of and Changes in the Selling Price

Cost
● The amount of money sacrificed to pay for service or buy merchandise, raw materials, pay
laborers, and overheads associated in conducting business.
● The price a merchandising business or retailer pays for a product.
● Refers to the purchase price of an article
Example: If a trader bought a product for 100 pesos, this is the cost of the product as far as the
trader is concerned.

TOTAL COST= number of units x unit cost

Example: A merchandiser bought 150 units of merchandise with a unit cost of ₱
75 each, find the total cost.

𝑇𝑜𝑡𝑎𝑙 𝑐𝑜𝑠𝑡 = 150 𝑢𝑛𝑖𝑡𝑠 𝑥 ₱75 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡

= ₱11,250.00
The selling price is ₱ 75 which is the cost price also

Buying goods is with the intention of reselling them. However, if the goods are bought for personal
use or for consumption of the merchandising company, those goods bought are not qualified as
merchandise for sale.

Merchandise- are goods bought and sold

Inventory- is any unsold merchandise not included in the cost of goods sold. Any inventory left
from the previous period is forwarded to the succeeding year as beginning inventory.

Example:
 In 2020,FLT Corporation left an inventory amounting to ₱ 120,000. In 2021, the company purchased
₱ 180,000. At the 2021, the unsold unit has a cost of ₱ 75,000. How much is the cost of goods sold?

● Beginning inventory ₱ 120,000

Add: Purchases 180,000
● Total goods for sale ₱ 300,000
○ Less: Ending inventory 75,000
● Cost of goods sold ₱ 225

A manufacturing company has to produce goods with the intention of reselling them. The
manufacturing company may become a wholesaler or a retailer or both. To produce the goods the
manufacturer incurs the following costs: raw materials, labor cost, and factory overhead.

● Manufacturer- a person or company that makes goods for sale

● Direct raw materials- materials that can be conveniently traced to the vehicle. (steel, tires,
glass)
● Direct labor- salaries of personnel working directly to manufacture the vehicle.
● Factory overhead- costs that cannot be conveniently traced to direct raw materials and
direct labor.
○ Indirect materials- lubricants, paints, screws, and other materials to support the
production process.
○ Indirect labor- salaries of supervisors, managers, janitors, and security guards
working in the vicinity of the manufacturing plant.
○ Other costs- depreciation expense of machines and equipment used in the
production,

Expenses
● The amount of cash sacrificed other than those mentioned in costs such as administrative
expenses or selling expenses.
● Selling expenses are those incurred in storing, advertising, packaging, delivery of goods to
customers, sales salaries, etc.
● Administrative expenses are expenses needed in the general administration of the office
(unpaid credit sales, office supplies expenses, office salaries)
● Operating expenses are expenses a business incurs through its normal business operation.
● The costs and expenses are both considered in determining the selling price.

Revenues
● The cost and expenses incurred are all for the purpose of
getting revenues.
● The income that a business has from its normal business
activities, usually from the sale of goods and services to
customers.
● Represent the inflow of cash or other assets from clients and
customers for services rendered or goods sold.
 HOW TO DETERMINE REVENUES
● If the company is a merchandising or manufacturing firm, the
revenue is the gross sales.
● If it is a service company, the revenue is the service revenue or
professional revenue.
● For service companies, revenues are received in exchange for the
cost of service rendered. (i.e., service companies are barbershop,
tailoring shop, dental and medical clinic, and professional fees of
lawyers, accountants, and architects)

Net Income
● The final amount of profit or loss after all expenses are included.
● Net income results when the total revenue earned is greater than the amount of the cost and
expenses.
● Net loss results when the total revenue earned is less than the amount of cost and expenses.

Finding net income/less:

For service company:
Net income/ loss = Gross Revenue - Operating expenses
For merchandising company:
Net income/ loss = Sales - cost of goods sold - operating expenses
For manufacturing company:
Net income/ loss = Sales- cost of goods manufactured/ sold - operating expenses

The Selling Price

● Price at which a product or service is sold to the buyer.
● When manufacturer or merchandisers sells goods, the selling price should always be greater than
the costs of goods.

Markup or Mark-on
● Amount added to cost to arrive at the original selling price.
● The difference between the original selling price of a good or service and cost.
● It is often expressed as a percentage over the cost.
● A markup is added to the total cost incurred by the producer of goods or services in order to cover
the costs of doing business and create a profit.

Finding the selling prices and cost ratio:

Selling price = Cost + Markup
𝐶𝑜𝑠𝑡
Cost ratio =
𝑆𝑒𝑙𝑙𝑖𝑛𝑔 𝑝𝑟𝑖𝑐𝑒
Markup rate as a percentage of cost or percentage of sales:
Markup is expressed as a percentage of cost or a percentage of sales. Ifthe markup is percentage of
cost, then the cost is the 100%. If the markup is percentage sales, then the selling price is the 100%
Markup rate as a percentage of sales
Markup rate as a percentage sales:
𝑀𝑎𝑟𝑘𝑢𝑝
Markup rate on sales = 𝑆𝑒𝑙𝑙𝑖𝑛𝑔 𝑃𝑟𝑖𝑐𝑒
Markup = (selling price) (markup rate on sales)
𝑀𝑎𝑟𝑘𝑢𝑝
Selling price = 𝑀𝑎𝑟𝑘𝑢𝑝 𝑟𝑎𝑡𝑒 𝑜𝑛 𝑠𝑎𝑙𝑒𝑠

RELATIONSHIPS BETWEEN MARKUP BASED ON COST AND SALES

To compare markup based on cost and based on sales, the markup rate based on sales is
always lower than the markup rate based on cost.

Regardless of this difference, the equivalent value of the markup

based on sales to markup rate based on cost and vice versa may always be determined.

Computations for the Markup rate based on sales

- Using the markup based on cost

𝑚𝑎𝑟𝑘𝑢𝑝 𝑟𝑎𝑡𝑒 𝑏𝑎𝑠𝑒𝑑 𝑜𝑛 𝑐𝑜𝑠𝑡

Markup rate on sales = 1+ 𝑚𝑎𝑟𝑘𝑢𝑝 𝑟𝑎𝑡𝑒 𝑏𝑎𝑠𝑒𝑑 𝑜𝑛 𝑐𝑜𝑠𝑡

Computations for the markup rate based on cost

- Using the markup rate on selling price

𝑚𝑎𝑟𝑘𝑢𝑝 𝑟𝑎𝑡𝑒 𝑏𝑎𝑠𝑒𝑑 𝑜𝑛 𝑠𝑎𝑙𝑒

Mark-up rate on cost = 1− 𝑚𝑎𝑟𝑘𝑢𝑝 𝑟𝑎𝑡𝑒 𝑏𝑎𝑠𝑒𝑑 𝑜𝑛 𝑠𝑎𝑙𝑒

Comparison between markup on sales and markup on cost

Markup on sales = Markup on cost

Mark-up V.S Margin

● Markup is an addition to the cost of the good bought or manufacturer to get the selling price
Markup = Selling Price - Cost to buy/ produce
● Margin is difference between sales and cost of goods sold
Margin = Units sold x Markup
Gross margin/ profit = Sales - Cost of goods sold
 Lesson 1B: Other Factors to Determine Selling Price

Other factors that determines selling price:

- Selling prices of a merchandise fluctuate depending on the seasonality of the products.
- If fruits are out-of-season, the original mark-up is increased, but when it is in season, the mark-up
is lower.
Example:

Cost P 50.00

Initial mark-up 10.00

Additional mark-up 15.00

Mark-up Cancellation 10.00

Mark-down 8.00

Mark-down cancellation 5.00

Cost
- Refers to the purchase price of an article
Example: If a trader bought a product for 50 pesos, this is the cost of the product as far as the trader is
concerned
Cost P 50.00

Initial Mark-up
- Refers to the amount added to cost to arrive at the original selling price.
- Difference between the original selling price and the cost
Example: If he marked up the merchandise he bought for 50 pesos and added an amount of 10 pesos.
Cost P 50.00

Initial mark-up 10.00

Selling price 60.00

Original Retail
- The selling price where the goods were first offered for sale.
Example: If he marked the merchandise he bought for 50 pesos to sell at 60 pesos.
Cost P 50.00
 Initial mark-up 10.00

Selling price/ Original Retail 60.00

Additional Markup or Mark on

- An increase in the retail price above its original selling price.
- Refers to the amount added to the original selling price to arrive at a new selling price.
Example: If the trader decides to increase his selling price from 60 to 75 pesos.
Selling Price P 60.00

Add: Additional markup 15.00

New selling price P 75.00

Markup Cancellation
- Refers to the decrease in the new selling price that does not decrease it below the original price.
Example: If the trader saw that his new selling price is 75 pesos is not appealing to customers, he may
decide to lower his price.
Selling Price P 75.00

Less: Mark-up cancellation 10.00

New selling price P 65.00

Net Additional Markup or Net Markup

- Difference between the original selling price and the new selling price after the mark-up
cancellation
New Selling price (after markup cancellation) P 65.00

Less: Original selling price 60.00

Net Mark-up 5.00

.
Markdown
- Decrease in selling price lower than the original sales price.
- The net mark-up must be canceled first to arrive at the original selling price before a mark-down is
applied.
Example: If the trader reduces his selling price from 65 pesos to 52 pesos, the 8 pesos reduction in
selling price is called markdown.
New Selling price (after markup cancellation) P 65.00

Less: Mark-up cancellation 5.00

Mark-down 8.00
 New Selling Price P 52.00

Mark-down Cancellation
- Increase in selling price but not higher than the original selling price
- An additional to the selling price
Example: If selling price of 52 pesos is increased by 5 pesos as a markdown cancellation, but the new
selling price is not higher than the original selling price.
Selling price P 52.00

Add: Mark-down cancellation 5.00

New selling price P 57.00

Net Mark-down
- The difference between the selling price after mark-down cancellation and the selling price after
mark-down.
Selling price (after mark-up cancellation) P 57.00

Less: Selling price (after mark-down) 52.00

Net Mark-dowm P 5.00

Maintained Mark-up
- Difference between the cost of good and the selling price of the item after considering mark-up,
mark-down, and its cancellation.

Selling price (after all the changes) P 57.00

Less: Cost 50.00

Maintained Mark-up P 7.00

 Lesson 1C: Trade, Cash Discounts
Trade Discount
- A reduction from list price granted to buyers
- Spot discounts from sales which are not recorded in the books of the seller
- Offered to volume buyers, valued clients, and new costumers
- Deducted from the list or catalog price to arrive at the invoice price (actual amount charged to the
buyer and may be subject to cash discount)
- Given either on a one-time basis or at a series

Single Discount
- Computing for a discount makes use of our basic percentage formula P= BR where the base is
the list price, the rate is the discount rate, and the percentage is the discount rate, and the
percentage is the discount.
Example: Compute the discount for an item with a list price of ₱1,250 subject to a 15% discount. What is
the net invoice price?
Solution: Discount = List Price x Discount Rate
= (1,250)(15%) = 187.50
Net invoice price= List Price - Discount
= 1,250 - 187.50 = 1,062.50

Down Payment with Trade Discount

● Down payment is the initial payment of the buyer for the purchase made.
● Down payment is computed either before or after the trade discount is given.
● Usually, trade discount is considered the first before down payment.

Cash Discounts
- Are recorded in the accounting records either as sales discounts in the book of the seller or
purchase discounts in the books of the buyers.
- Given to customers to encourage early payment on purchases that are on account.
 - deductions from the receivables, provided that the customer paid the obligation within the
discount period. (length of time within which the cash discount if offered)
𝑎
- In 𝑏 the numerator represent the rate of cash discount while the denominator signifies
the number of days
- recorded as purchase discount by the buyer and sales discount by the seller. (purchase discount
is deducted from purchases to arrive at net purchases and sales discount is deducted from sales
to arrive at net sales revenue)

Down payment with Trade Discount

- For purchases that are not paid in full at the time of purchase, like credit purchase, wholesalers
require a downpayment.
Down payment- is the initial payment of the buyer for the purchase made.
- The down payment is computed either before or after the trade discount is given.
- However. In most cases, a trade discount is considered first before a down payment.

How to Compute for the Gross Balance Payable to the Supplier

- In many cases, the buyer has several purchases on different dates from the same supplier.
To monitor the balances payable to the same supplier, a subsidiary ledger is used.
Subsidiary ledger- accounts all the payables to the same supplier
● The more suppliers the company has, the more subsidiary ledgers are prepared.
● Thus, for each supplier, the company maintains subsidiary ledgers.

Lesson 2: Cost Volume Profit Analysis and Break-even Point

Terminologies:
Profit- is what remains of the selling price (sales) after all costs and expenses has been
deducted.
Cost- means the cost of the product sold or services rendered.
Expenses- refer to the operating expenses (administrative and selling expenses) and financial
expenses (interest and other finance charges)
Loss- occurs when the cost and expenses exceed the selling price or sales.
Income statement for a trading firm

- A trading or merchandising firm buys goods that it sells. The account used to report the selling
price of the merchandise is sales.
- Gross sales refers to the gross sales. Sales discounts and sales returns and allowances are
deducted from the gross sales to arrive at the net sales.
- How much the seller buys the item is the cost of the item, It is termed cost of goods or cost of
sales.
- An income statement is the financial statement that shows the result of operation if it earns a profit
or incurs a loss for a given period of time.

● The cost of sales is the purchase price and other expenses incurred in buying the products that
the business has to sell including the freight-in or transportation of goods it buys for resale.
● Operating expenses are expenses incurred to run the business.
● Other income includes interest income and other incidental income the firm earns like rental
income if it has a property that rents out.
● Other expense includes interest expense or finance charges financial institutions charge firms for
their services.
● Gross profit is at times referred to as gross margin.
● Operating profit/ loss is a profit-less operating expense.
● Net profit/loss is operating profit plus other income less other expense.
Cost Volume Profit (CVP) Analysis
● Refers to identifying the possible effects of the changes in revenue as brought about by changes
in volume, selling price, and cost.
● Helps the manager focus on the interactions among the selling price of the product, the volume of
activity, variable cost per unit, and total fixed costs.

Cost-Volume-Profit analysis helps the managers to:

➢ Decide on the products to produce or sell
➢ Establish the pricing policy needed to be competitive
➢ Employ a more effective marketing strategy
➢ Prepare a reasonable budget in the short-term and to some to an extent, long-term
➢ Maximize profit by determining the optimal level and mix of output to be produced

Limitations of CVP Analysis

✓ All cost should be classified as either variable or fixed
✓ Variable costs change at a linear rate as long as within the relevant range
✓ Fixed costs are constant within the relevant range
✓ Selling prices do not change as sales volume change
✓ Productive efficiency is constant
✓ Inventory levels remain constant
✓ Production is equal to sales
✓ Volume* is the only relevant factor that affects the cost

Variable Cost (VC)

● The cost per unit is constant and it varies in direct proportion to the changes in volume of
production as long as it is within the relevant range
● Expenses such as direct materials, direct labor, variable overhead, variable selling, and
administrative cost
Computing Total Variable Cost and Cost Ratio
Total Variable Cost= (variable cost per unit)(unit sold/produced)
𝑣𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝑐𝑜𝑠𝑡 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡
Variable Cost ratio= 𝑠𝑒𝑙𝑙𝑖𝑛𝑔 𝑝𝑟𝑖𝑐𝑒 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡

Fixed Cost (FC)

- This cost remains the same in total regardless of changes in the activity level.
- Total fixed cost is unchanged but fixed cost per unit varies inversely with the activity as long as it
is within the relevant range.
- As the volume of production increases, the fixed cost per unit decreases

Contribution Margin (CM)

➔ Is the difference between the total sales and total variable costs.
➔ It absorbs the total fixed cost to arrive at net income or a net loss.
➔ Helps to determine how much income is added for every additional unit sold.
➔ Helps managers assess the impact of changes in the selling price, cost, or volume, on the profit.
Contribution Margin using Income Statement Approach

Sales (volume x selling price per unit) P xxx

Less: Variable cost (volume x variable cost per unit) xxx

Contribution margin P xxx

Less: Fixed cost xxx

Net income before tax P xxx

Formula on Contribution Margin (CM)

● To compute CM and Net Income before tax:
Contribution Magin= sales- variable cost
Net income before Tax= contribution margin - fixed cost
● In problem-solving, CM per unit and CM ratio are usually used:

𝐶𝑀 𝑖𝑛 𝑎𝑚𝑜𝑢𝑛𝑡 𝑜𝑟 𝑠𝑎𝑙𝑒𝑠
CM per unit = 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑢𝑛𝑖𝑡𝑠
CM per unit = selling price - variable cost per unit
● To compute for CM ratio
𝐶𝑀 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡
CM ratio = 𝑠𝑒𝑙𝑙𝑖𝑛𝑔 𝑝𝑟𝑖𝑐𝑒

Cost Volume Profit Graph

I. The relationship among cost, volume, and profit can be illustrated in the graph which shows the
effects on profit brought by the changes in cost, selling price, and volume.
II. The x-axis represents the number of units sold while the y-axis represents the cost.

How to construct the graph:

1. Solve:
✓ Total Variable Cost = (VC per unit)*(units sold)
✓ Total Cost = total VC + fixed cost
✓ Sales or Total Sales = (selling price per unit)*(units sold)
2. Construct the x and y axes
3. Plot the graph
a. Draw the horizontal line representing the total fixed cost.
 b. Draw a diagonal line for the variable cost starting at zero sales. (direct relationship with the
units)
c. Draw the total cost line starting at the fixed cost line at zero sales (total cost = fixed cost at zero
sales)
d. Draw the sales line diagonally starting from activity zero level going to the right. (sales is
directly related to the units sold)

Break-even point

Why break-even point is important?

● It is important for a merchandiser to target for its minimum sales in units.
● Helps determine the impact of an increase or decrease in fixed cost, price on the profit

Break-even point
- This is the point where a business neither makes a profit nor a loss.
- It is a point where the total revenues and the total cost and expenses are equal.
- At the break-even point, a business’ revenue is equal to its total costs. There is no profit or loss at
the break-even point, the revenue will equal total cost. To determine the number of units be sold
to break even:
Sales= Variable Cost + Fixed Costs

If we let x represent the number of units to break-even, substituting in the formula:

𝑷𝒙 = 𝒗𝒙 + 𝑭C
Where:
● P is the unit price
● x is the number of units
● v is the variable cost per unit
● FC is the total fixed cost
Sales with Desired Profit Tax
Finding the desired profit is done by adding the desired profit before tax to the fixed cost.
To compute sales with desired profit before tax:

Lesson 3: Interest and Annuities

● In business, capital is very important. However, not all business owners always have enough
capital to sustain their business.
● More often than not, they have to borrow money to use in the business. In this lesson, interest
plays an important role.
● Borrowers need to pay interest on the money that they borrow.

Simple Interest and Simple Discount

Interest
➢ cost of borrowing or return for lending money.
➢ a major source of income for financial institutions.
➢ maybe paid monthly, quarterly, semi-annually, or annually.
➢ maybe paid in advance (discounted) or at the end of the term together with the principal.

Factors in Computing Interest

✓ Principal – amount loaned by the borrower and is the basis when computing interest.
✓ Interest rate – the rate used to compute the interest. It is the cost of using money expressed as a
percentage of the principal for a given period of time. (usually per year).
✓ Time – the number of days, months, or years for which the principal amount is borrowed. It is the term
of the period of the loan.

Simple interest
● an interest computed on the original principal for any time period or length of time money is
borrowed or lent.
● the principal or initial amount of money earns interest. If someone borrowed money, the interest is
computed based on the principal.

Formula:
I = Prt
Where:
I – interest (amount paid for the use of money)
P – principal (the amount borrowed or invested)
r – rate (percent of interest being charged)
t – time (number of periods for which the money will be borrowed or invested)

Example: Suppose an amount of ₱1,000 is invested at 12% simple interest for four years, the interest will
be:
I = Prt
= (1000)(0.12)(4)
𝑰 = ₱𝟒𝟖0

Maturity Value or Future Value of (F)

➔ Maturity value or Future value- payment of borrowed money plus interest.

F= P + I
or
F = P(1+ rt)
Where:
F - future value or maturity value
P - principal
I - interest
r - rate

Example: Tessa borrowed ₱2,000 at 12% interest for 2 years. Find the interest and maturity value.
Given: P = 2,000 r = 12% = 0.12 t = 2 years
𝐼 = 𝑃𝑟𝑡
= (2000)(0.12)(2)
𝑰 = ₱𝟒𝟖𝟎
𝐹=𝑃+𝐼
= 2000 + 480
𝑭 = ₱𝟐, 𝟒𝟖0
Finding the Principal, Rate, and Time (Simple Interest)

I = Prt F = P(1+ rt) or

F=P+1
𝐼 𝐼
Principal: P= 𝑟𝑡
Principal: P= (1+ 𝑟𝑡)
P=F-I
𝐼 𝐹
Rate: r = 𝑃𝑡
Rate: r = 𝑃𝑡
-1

𝐼 𝐹
Time: t = 𝑃𝑟
Time: t = 𝑃𝑟
-1

Actual Time and Approximate Time

● Approximate time, like ordinary interest, assumes that each of the 12 months in a year has 30
days (360 days in a year)
● Actual time, counts the exact number of days in a month (365 days in a year)

Ordinary and Exact Interest

★ For ordinary interest, one year is taken 360 days ( using approximate time) *
𝑡
Io= Pr ( 360 )
★ For exact interest, one year is taken a 365 days (using exact time)
𝑡
Ie= Pr ( 365 )
*** banker’s rule
Simple Discount
Simple discount is where the interest computed is immediately deducted from the future payment.
The borrowers receive the difference between the maturity value of the loan and the interest,
which is called proceeds.

Formula:
D= Fdt
Where:
D = discount
F = future value or maturity or the loan itself
d = discount rate
t = time

Proceeds Formula:
To compute for the proceeds (P) or what the borrower will receive:
P=F-D
or
P = F(1 - dt)
Where:
P = proceeds
F = future value or maturity or the loan itself
D = discount
d = discount rate
t = time
*** Take note P(principal) in simple interest becomes F(future value) in simple discount.
Finding the Future Value (F), rate (d), Time (t) in (Simple Discount)

D = Fdt

𝐷 𝑃
Future value: F = or
𝑑𝑡 (1− 𝑑𝑡)
𝐷
Discount Rate: d =
𝐹𝑡
𝐷
Time: t =
𝐹𝑑

Lesson 3B: Interest and Annuities (Compound Interest)

Compound Interest
● Compound interest for the first period is similar to the simple interest but the difference occurs
from the second period of time. From the second period, the interest is also calculated on the
interest thus earned on the previous period of time, that is why it is known as interest on interest.
● The interest is added to the principal at the end of the period after which the interest is computed
on the new principal.
● The interest also earns interest.
● The "present value" represents the initial investment (the amount invested, the amount lent, the
amount borrowed, etc)
● The "future value" represents the final amount (initial investment + total interest).

Formula:

𝑟
𝐹𝑉 = 𝑃𝑉 (1 + 𝑚
) mt
Where:

● 𝐹𝑉 = 𝑓𝑢𝑡𝑢𝑟𝑒 𝑣𝑎𝑙𝑢𝑒 (𝑝𝑟𝑒𝑠𝑒𝑛𝑡 + 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡) 𝑎𝑚𝑜𝑢𝑛𝑡 𝑜𝑓 𝑚𝑜𝑛𝑒𝑦 𝑎𝑡 𝑦𝑒𝑎𝑟 𝑒𝑛𝑑 𝑡

● 𝑃𝑉 = 𝑝𝑟𝑖𝑛𝑐𝑖𝑝𝑎𝑙 𝑣𝑎𝑙𝑢𝑒

● 𝑟 = 𝑟𝑎𝑡𝑒
 ● 𝑚 = 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑐𝑜𝑛𝑣𝑒𝑟𝑠𝑖𝑜𝑛𝑠 𝑖𝑛 𝑎 𝑦𝑒𝑎𝑟

● 𝑡 = 𝑡𝑖𝑚e

Conversion Period (m)

The number of regular intervals in a year during which a loan or an investment is compounded.

Period Frequency m

Annually Once a year 1

Semi-annually Twice a year, or every 6 months 2

Quarterly Every three months 4

Monthly Every month 12

Compound Interest and Present Value

Compound Interest Formula:
𝑟
𝐹𝑉 = 𝑃𝑉 (1 + 𝑚
) mt
Present Value Formula:
𝑟
𝑃𝑉 = 𝐹𝑉 (1 + 𝑚
) -mt
Annuity
A series of equal payments made at fixed intervals for a specified number of periods.
Ordinary annuity: if the payment occurs at the end of the period. (housing loans, car loans , and
bank loans)
Annuity due: if the payment occurs at the beginning of each period. (insurance premiums, car
insurance, rental payments)

Future Value of an Ordinary Annuity

● Future value - refers to the value of an amount as accumulated in the future.
● Future value of an ordinary annuity - the sum of the payments made and the compound
interests accumulated for each payment.

Future Value and Present Value of an Ordinary Annuity

Applications of Future Value and Present Value and Present Values:

• Future and present values have numerous applications in finance and investment decisions.
• These are useful in decision making ( how much deposit must be made to acquire a certain amount of
money, amortization of loans, and sinking fund)
• Future value of an ordinary annuity commonly holds for equal savings for the desired amount in the
near future.

Finding Periodic Payment

(Future Value)
 LESSON 3C: Interest and Annuities (Amortization)
Loan Amortization
● Amortization is borrowing money whether short-term or long-term is sometimes made by
installment.
● A short-term loan is an obligation payable within a period of one year while a long-term loan is
payable beyond one year. The installment payment may be made monthly, quarterly,
semi-annually, or annually. (car loans, housing loans, salary loans, or appliance loans)
● An amortization schedule is a schedule prepared to show the installment payments for the
period.

Finding Periodic Payment (Present Value)

SUMMARY:
➔ Interest is a major source of income for financial institutions. The interest may be paid monthly,
quarterly, semi-annually, or annually. Interest may be paid in advance or at the end of the term
together with the principal.
➔ Simple interest can be computed as 𝐼 = 𝑃𝑟t
➔ The payment or future value will include the interest and the principal. 𝐹 = 𝑃(1 + 𝑟𝑡)
➔ Simple discount is where the computed interest is immediately deducted from the future
payment. 𝐷 = 𝐹𝑑t
➔ Proceeds is the difference between the maturity value of the loan and the interest which the
borrower receives. 𝑃 = 𝐹 − 𝐷 or 𝑃 = 𝐹(1 − 𝑑𝑡)
➔ Compound interest is where the interest also earns interest. The interest is added to the
principal at the end of a certain period of time.
➔ The present value may be computed for compound interest.
➔ An annuity is a series of equal payments (receipts) made at fixed intervals for a specified number
of periods.
➔ Ordinary annuity if the payment occurs at the end of the period.
➔ Future value of an ordinary annuity.
➔ The present value of the future sum is the actual amount today equivalent to an amount with
compound interest in the future.

LESSON 4: Commission
Commissions
Is a fee that a business pays to a salesperson (agent) in exchange for his services in either
facilitating, supervising, or completing a sale. The commission may be based on a flat
arrangement or as a percentage of the revenue generated by a salesperson. In other words,
commission (remuneration) is a form of payment to an agent for services rendered.
An income is received is based on the number of units sold or based on a certain percentage of
the overall sales.
A sales person may be paid on straight
commission, on fixed salary per month plus a
commission in excess of the quota, or on
graduated commission.
Types of Commissions:

A. Straight or plain commission

• When an employee is paid based on commission.
• Is based on per unit sold or a rate based on the total sales.
Commission = (selling price per unit)(units sold)(rate of commission)

B. Salary and Commission

If a person is employed by a firm as a salesman, he is given a basic salary in addition to the commission
based on his sales. His gross earnings would be
𝐆𝐫𝐨𝐬𝐬 𝐞𝐚𝐫𝐧𝐢𝐧𝐠𝐬 = 𝐁𝐚𝐬𝐢𝐜 𝐒𝐚𝐥𝐚𝐫𝐲 + 𝐂𝐨𝐦𝐦𝐢𝐬𝐬𝐢𝐨n

C. Graduated Commissions
• Commissions are not given at a fixed rate or fixed amount of the total sales or sales units.
• Commissions are given based on the different levels attained.
• Under this commission scheme, the rate of commission increases as the total sales increase.
Down Payment
● First payment that one makes when one buys something with an agreement to pay the rest later.
Obtaining Down Payments
● When one purchases a car or any big item not through cash but installment terms, normally, a
certain down payment is required of the buyer. Car dealers normally require a minimum down
payment, which is usually 20% of the total cost of the vehicle being purchased. The interest on
the remaining balance is then computed depending on the number of years a buyer would want to
amortize the remaining balance.
● Companies selling houses or condo units lure buyers by stating that no down payment is required
but only a certain amount of reservation fee is required. The reservation fee paid is deductible
when the buyer decides to proceed with the purchase. Otherwise, it will be forfeited in favor of the
company. After the reservation fee has been paid, the buyer is told to pay the monthly
amortization.
● Other companies selling houses or condo units also have schemes like requiring the buyer to pay
a certain cash amount after one year aside from the monthly amortization. The cash amount
increases for the next year up to the third year. At the end of the third year, all cash amounts and
monthly amortizations paid by the buyer are deducted from the purchase price of the unit being
bought. The remaining amount will be the one subjected to interest either through in-house or
bank financing.

Book balance or gross balance:

• Total amount of money a bank has on deposit before adjusting for uncleared checks or deposits, as well
as reserve requirements.
• A measure of what the bank has on hand before adding or subtracting regulatory obligations and items
that will soon appear on its books.
• Term used by banks to describe the amount of money available before any adjustment is made for
deposits in transit, checks that have not been cleared, and reserve requirements and interest received
from “float funds”.

A simple case of gross balance refers to what is readily available for you to use based on your
bank deposits.

Current Increased Balance

Refers to the total amount you have to pay that includes penalties or interest incurred by unpaid balance
from a loan or payment you are supposed to have made but were not able to do so on time.