INTENDED LEARNING ACTIVITY

Review Questions/Applications
1. Explain how changes in activity affect contribution margin and net operating
income.
Contribution margin is the net turnover minus the variable share of the total
cost of an organization. It covers the fixed cost of the organization also the
profit share. Therefore, the contribution margin is utilized to pay fixed
expenditures and then anything remains will go to earnings. And if the
contribution margin is insufficient to pay the fixed expenditures, the period
would be lost.
ACTIVITY/ASSESSMENT
1. Kape Barako is an espresso stand in a downtown office building. The
average selling price of a cup of coffee is P1.49 and the average variable
expense per cup is P0.36. The average fixed expense per month is
P1,300. An average of 2,100 cups are sold each month. What is the CM
Ratio for Kape Barako?

CM RATIO = P 1.49 – P 0.36

= P 1.13/P 1.49
= P 0.758

2. Kape Barako is an espresso stand in a downtown office building. The

average selling price of a cup of coffee is P1.49 and the average variable
expense per cup is P0.36. The average fixed expense per month is
P1,300. An average of 2,100 cups are sold each month. What is the
break-even sales dollars?

Break even sales = P 1,300/P0.758

= P 1,715

3. Kape Barako is an espresso stand in a downtown office building. The

average selling price of a cup of coffee is P1.49 and the average variable
expense per cup is P0.36. The average fixed expense per month is
P1,300. An average of 2,100 cups are sold each month. What is the
break-even sales in units?

Break even = P 1,300/P1.49 per cup – P 0.36 per cup

= P 1,300/P1.13 per cup
= P 1,150 cups

4. Kape Barako is an espresso stand in a downtown office building. The

average selling price of a cup of coffee is P1.49 and the average variable
expense per cup is P0.36. The average fixed expense per month is
 P1,300. Use the formula method to determine how many cups of coffee
would have to be sold to attain target profits of P2,500 per month.

Unit sales to attain the target profit = P 2,500 + P 1,300/P 1.13

= P 3,800/P1.13
= P 3,363 cups

5. Kape Barako is an espresso stand in a downtown office building. The

average selling price of a cup of coffee is P1.49 and the average variable
expense per cup is P0.36. The average fixed expense per month is
P1,300. Use the formula method to determine the sales dollars that must
be generated to attain target profits of P2,500 per month.

Dollar sales to attain the target profit = P 2,500 + P 1,300/P 0.758

= $ 5, 013

6. Kape Barako is an espresso stand in a downtown office building. The

average selling price of a cup of coffee is P1.49 and the average variable
expense per cup is P0.36. The average fixed expense per month is
P1,300. An average of 2,100 cups are sold each month. What is the
margin of safety expressed in cups?

Margin of safety = P 2, 100 cups - P 1,150 cups

= P 950 cups
= P 950 cups/P 2,100 cups
Margin of safety percentage = 45%

7. Kape Barako is an espresso stand in a downtown office building. The

average selling price of a cup of coffee is P1.49 and the average variable
expense per cup is P0.36. The average fixed expense per month is
P1,300. An average of 2,100 cups are sold each month. What is the
operating leverage?

Actual sales
2,100 cups
Sales P 3,129
Less: Variable expenses 756
Contibution margin 2, 373
Less: Fixed expenses 1, 300
Net operating income P 1, 073
 Operating leverage = P 2, 373/P 1,073
= 2.21
8. At Kape Barako the average selling price of a cup of coffee is P1.49, the
average and an average of 2,100 cups are sold each month. If sales increase by
20%, by how much should net operating income increase?
Percentage increase in sales 20.0%
Degree of operating leverage 2.21
Percent increase in profit 44.20%