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E5-16
Glacial Company estimates that variable costs will be 62.5% of sales, and fixed costs will total $600,000.
The selling price of the product is $4. Instructions
(a) Prepare a CVP graph, assuming maximum sales of $3,200,000. (Note: Use $400,000 increments for
sales and costs and 100,000 increments for units.)

Cost-Volume-Profit (CVP) Graph

3200 Sales Line

2800 Profit area Total Cost Line

2400
Break-even point in peso
2000
Pesos (000)

Variable Cost
1600

1200 Loss area

800

400 Fixed Cost

Break-even point in units
0
0 100 200 300 400 500 600 700 800
Units os Sales (000)

Sales Fixed Cost Total Cost

(b) Compute the break-even point in (1) units and (2) dollars.
Contribution margin per unit = 4 – 2.5
Contribution margin per unit = 1.5

Break-even point per unit = 600,000/1.5

Break-even point per unit = 400,000

Contribution margin ratio = 1.5/4

Contribution margin ratio = 0.375 or 37.5%
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Break-even point in dollars (peso) = 600,000/37.5%

Break-even point in dollars (peso) = Php 1,600,000

(c) Assuming actual sales are $2 million, compute the margin of safety in (1) dollars and (2) as a ratio.
Margin of safety in dollars (peso) = Php 2,000,000 – Php 1,600,000
Margin of safety in dollars (peso) = Php 400,000
Margin of safety ratio = Php 400,000/Php 2000,000
Margin of safety ratio = 20%