CHAPTER 6 PROBLEMS:

II. Problems

Problem 1 (Day Sales Outstanding)

Tulips company has a DSO of 40 days, and its annual sales are 7,300,000. What is its accounts
receivable balance? Assume that it uses a 365-day year

DSO = 40 days; S = ₱7,300,000; AR = ?

AR AR
DSO = S 40 = ₱7,300,000
365 365

40 = AR/₱20,000 AR = (₱20,000) (40) = ₱800,000

Problem 2 (Debt Ratio)

Jasmine Inc. has an equity multiplier of 2.4, and its assets are financed with someone combination of
long-term debt and common equity. What is its debt-to-assets ratio?

A/E = 2.4; D/A = ?

D 1
A
= 1−( A/E)
D 1
A
= 1−( 2.4)
D
= 0 . 5833 = 58. 33%.
A

Problem 3 (Market/Book Ratio)

Alessandra company has P 10 billion in total assets. Its statement of financial position shows P 1
billion in current liabilities, P 3 billion in long-term debt, and P 6 billion in common equity
 TA = ₱10,000,000,000; LT debt = ₱3,000,000,000

CL = ₱1,000,000,000; CE = ₱6,000,000,000

Share outstanding = 800,000,000; Stock price = ₱32; M/B = ?

₱6,000,000,000
Book Value = 800,000,000 = ₱7.50

₱32.00
MB = ₱7.50 = 4.2667

Problem 4 (Price/Earnings Ratio)

A company has an EPS of P2.00, a book value per share of P20, and a market/book ratio of 1.2x.
What is its P/E ratio?

EPS = ₱2.00; BVPS = ₱20; M/B = 1.2; P/E = ?

M/B = 1.2×

P/₱20 = 1.2×

P = (₱20) ( 1.2×)

P = ₱24.00

P/E = ₱24.00/₱2.00 = 12.0

 Problem 5 (DuPont and ROE)

A firm has a profit margin of 2% and an equity multiplier of 2.0. Its sales are P100 million, and it
has total assets of P50 million. What is its ROE?

PM = 2%; EM = 2.0; Sales = ₱100,000,000; Assets = ₱50,000,000;

ROE = ?

ROE = PM x TATO x EM

= NI/S x S/TA x A/E

= 2% x ₱100,000,000/₱50,000,000 x 2

ROE = 8%

Problem 6 (DuPont and Net Income)

Mindanao Mining has P6 million in sales; its ROE is 12%, and its total assets turnover is 3.2x.

Step 1: Calculate total assets from information given.

Sales = ₱6,000,000

3.2 × = Sales/TA

3.2 × = ₱6,000,000/Assets

Assets = ₱6,000,000/3.2 ×

Assets = ₱1,875,000

Step 2: Calculate net income. There is 50% debt and 50% equity, so, Equity = ₱1,875,000 x 0.5 =
₱937,500.

ROE = NI/S x S/TA x TA/E

0.12 = NI/₱6,000,000 x 3.2 x ₱1,875,000/₱937,500

0.12 = 6.4NI/₱6,000,000
 6.4NI = (₱60,000) (0.12)

NI = ₱720,000/6.4

NI = ₱112,500

Problem 7 (Basic Earning Power)

Oriental Manufacturing recently reported the following information; Net income is P600,000, ROA
is 8%, and Interest expense is P225,000. Oriental MANUFACTURING TAX RATE IS 35%. What is its basic
earnings power (BEP) ratio?

ROA = 8%; NI = ₱600,000; TA = ?

ROA = NI/TA

8% = ₱600,000/TA

TA = ₱600,000/8%

TA = ₱7,500,000

To calculate BEP, we still need EBIT. To calculate EBIT, construct a partial income statement.

EBIT ₱1,148,077 (₱225,000 + ₱923,077)

Interest 225,000 Given

EBT 923,077 (₱600,000/0.65)

Taxes (35%) 323,077

NI ₱ 600,000

BEP = EBIT/TA

= ₱1,148,077/₱7,500,000

= (0.1531)

BEP= 15.31%
 Problem 8 (Ratio Calculations)

Assume the following relationships for Woody Corp: Sales/Total assets is 1.5x, return on assets
(ROA) is 3%, and return on equity is 5.0%.......

We are given ROA = 3% and Sales/Total assets = 1.5

From the DuPont equation:

ROA = Profit margin x Total assets turnover

3% = Profit margin (1.5)

Profit margin = 3%/1.5

Profit margin = 2%

We can also calculate the company’s debt-to-assets ratio in a similar manner, given the facts of
the problem. We are given ROA (NI/A) and ROE (NI/E); if we use the reciprocal of ROE we have
the following equation:

E NI E D E
= × and = 1 − , so
A A NI A A
E 1
= 3% ×
A 0. 05
E
= 60% .
A
D
= 1 − 0. 60 = 0 .40 = 40%.
A

Alternatively, using the DuPont equation:

ROE = ROA x EM

5% = 3% x EM

EM = 5%/3% = 5/3 = TA/E

 Take reciprocal: E/TA = 3/5 = 60%, therefore, D/A = 1 – 0.60 = 0.40 or 40%. Thus, the firm’s
profit margin = 2% and its debt-to-assets ratio = 40%.

Problem 9 (Ratio Calculations)

Giselle Company has P12 billion in assets, and its tax rate is 40%....... what is its times-interest-
earned (TIE) ratio?

TA = ₱12,000,000,000; T = 40%; EBIT/TA = 15%; ROA = 5%; TIE = ?

EBIT
₱12,000,000,00 = 0.15EBIT = ₱1,800,000,000
0

NI
₱12,000,000,00 = 0.05 NI = ₱600,000,000
0

Now use the income statement format to determine interest so you can calculate the firm’s TIE
ratio.
INT = EBIT – EBT
EBIT ₱1,800,000,000 See above.
= ₱1,800,000,000 – ₱1,000,000,000
INT 800,000,000
EBT ₱1,000,000,000 EBT = ₱600,000,000/0.6
Taxes (40%) 400,000,000
NI ₱ 600,000,000 See above.

TIE = EBIT/INT

= ₱1,800,000,000/₱800,000,000

TIE = 2.25×

Problem 10 (Return on Equity)

Pomelo Company’s ROE last year was only 3%; but its management has developed a new
operating plan that calls for a debt-to-assets ratio of 60%..... What will be the company’s return on
equity?
 ROE = Profit margin x TA turnover x Equity multiplier

= NI/Sales x Sales/TA x TA/Equity

Now we need to determine the inputs for the DuPont equation from the data that were given. On
the left we set up an income statement, and we put numbers in it on the right:

Sales (given) ₱10,000,000

– Cost N/A

EBIT (given) ₱ 1,000,000

– INT (given) 300,000

EBT ₱ 700,000

– Taxes (34%) 238,000

NI ₱ 462,000

Now we can use some ratios to get some more data:

Total assets turnover = 2 = S/TA; TA = S/2 = ₱10,000,000/2

Total asset turnover = ₱5,000,000

D/A = 60%; so E/A = 40%; and, therefore,

Equity multiplier = TA/E = 1/ (E/A) = 1/0.4 = 2.5

Now we can complete the DuPont equation to determine ROE:

ROE = ₱462,000/₱10,000,000 x ₱10,000,000/₱5,000,000 x 2.5

ROE = 0.231 = 23.1%

Problem 11 (Current Ratio) The Artist Company has P1,312,500 in current assets and P525,000 in
current liab… ₱1,312,500

₱525,000
Present current ratio = = 2.5

₱1,312,500 + NP
Minimum current ratio = = 2.0
₱525,000 + NP
 ₱1,312,500 + NP = ₱1,050,000 + 2NP

NP = ₱262,500

Short-term debt can increase by a maximum of ₱262,500 without violating a 2 to 1 current ratio,
assuming that the entire increase in notes payable is used to increase current assets. Since we
assumed that the additional funds would be used to increase inventory, the inventory account will
increase to ₱637,500 and current assets will total ₱1,575,000, and current liabilities will total
₱787,500.

Problem 12 (DSO and Accounts Receivable)

James Inc. currently has P750,000 in accounts receivable, and its day sales outstanding (DSO) is 55
days. What will be the level of accounts receivable following the change? Assume a 365-day year.

Step 1: Solve for current annual sales using the DSO equation:
55 = ₱750,000/ (Sales/365)
55Sales = ₱273,750,000
Sales = ₱273,750,000/55
Sales = ₱4,977,272.73

Step 2: If sales fall by 15%, the new sales level will be ₱4,977,272.73 (0.85) = ₱4,230,681.82.
Again, using the DSO equation, solve for the new accounts receivable figure as follows:

35 = AR/ (₱4,230,681.82/365)
35 = AR/₱11,590.91
AR= (₱11,590.91) (35)
AR= ₱405,681.82  ₱405,682

Problem 13 (Balance Sheet Analysis)

Completer the statement of financial position and sales information using the following financial data:

1. Total debt = (0.50) (Total assets) = (0.50) (₱300,000) = ₱150,000

2. Accounts payable = Total debt – Long-term debt

= ₱150,000 – ₱60,000

Accounts payable = ₱90,000

3. Common stock = Total liabilities and equity – Debt – Retained earnings

Common stock = ₱300,000 – ₱150,000 – ₱97,500 = ₱52,500

4. Sales = (1.5) (Total assets) = (1.5) (₱300,000) = ₱450,000

5. Inventories = Sales/5 = ₱450,000/5 = ₱90,000

6. Accounts receivable = (Sales/365) (DSO)

= (₱450,000/365) (36.5)

Accounts receivable = ₱45,000

7. Cash + Accounts receivable + Inventories = (1.8) (Accounts payable)

Cash + ₱45,000 + ₱90,000 = (1.8) (₱90,000)

Cash + ₱135,000 = ₱162,000

Cash = ₱27,000

8. Fixed assets = Total assets – (Cash + Accounts receivable + Inventories)

Fixed assets = ₱300,000 – (₱27,000 + ₱45,000 + ₱90,000) = ₱138,000

9. Cost of goods sold = (Sales) (1 – 0.25) = (₱450,000) (0.75) = ₱337,500

Problem 14 (Ratio Analysis)

Data for Barry Company and its industry averages is as follows.

a. Amounts in thousands
Firm Industry
average
Current Current assets ₱655,000
= = = 1.98 2.0
ratio Current liabilities ₱330,000

Current assets − ₱655,000 −

Quick ratio = Inventories = ₱241,500 = 1.25 1.3
Current liabilities ₱330,000
 Accounts receivable ₱336,000 76.3
DSO = = = 35 days
Sales/365 ₱4,404.11 days

Inventory Sales ₱1,607,500

= = = 6.66 6.7
turnover Inventories ₱241,500

T.A. Sales ₱1,607,500

= = = 1.70 3.0
turnover Total assets ₱947,500

Profit Net income ₱27,300

= = = 1.7% 1.2%
margin Sales ₱1,607,500

Net income ₱27,300

ROA = = = 2.9% 3.6%
Total assets ₱947,500

Net income ₱27,300

ROE = = = 7.6% 9.0%
Common equity ₱361,000

Total debt ₱586,500

Debt ratio = = = 61.9% 60.0%
Total assets ₱947,500

b. For the firm;

₱947,500
₱361,000 = 7.6%
ROE = PM x TA turnover x EM = 1.7% x 1.7 x

For the industry, ROE = 1.2% x 3 x 2.5 = 9%

Note: To find the industry ratio of assets to common equity, recognize that 1 – (Total debt/Total
assets) = Common equity/Total assets. So, Common equity/Total assets = 40%, and 1/0.40 = 2.5
= Total assets/Common equity.

c. The firm’s days sales outstanding ratio is more than twice as long as the industry average,
indicating that the firm should tighten credit or enforce a more stringent collection policy. The
total assets turnover ratio is well below the industry average so sales should be increased, assets
decreased or both. While the company’s profit margin is higher than the industry average, its
other profitability ratios are low compared to the industry – net income should be higher given
the amount of equity and assets. However, the company seems to be in average liquidity
position and financial leverage is similar to others in the industry.

d. If 2011 represents a period of supernormal growth for the firm, ratios based on this year will be
distorted and a comparison between them and industry averages will have little meaning.
 Potential investors who look only at 2011 ratios will be misled, and a return to normal
conditions in 2012 could hurt the firm’s stock price.

Problem 15 (Ratio Analysis)

The Mango Corporation’s 20X3 and 20X4 financial statements are follows, along with some industry
average ratios.

Ratio Analysis 2011 2010 Industry Average

Liquidity
Current ratio 2.33 2.11 2.7
Asset Management
Inventory turnover 4.74 4.47 7.0
Days sales outstanding 37.79 32.94 32
Fixed assets turnover 9.84 7.89 13.0
Total assets turnover 2.31 2.18 2.6
Profitability
Return on assets 1.00% 5.76% 9.1%
Return on equity 2.22% 11.47% 18.2%
Profit margin 0.43% 2.64% 3.5%
Debt Management
Debt-to-assets ratio 54.81% 49.81% 50.0%
Market Value
P/E ratio 15.43 5.65 6.0
Price/cash flow ratio 1.60 2.16 3.5

a. Mango’s liquidity position has improved from 2010 to 2011; however, its current ratio is still
below the industry average of 2.7.

b. Mango’s inventory turnover, fixed assets turnover, and total assets turnover have improved
from 2010 to 2011; however, they are still below industry averages. The firm's days sales
outstanding ratio has increased from 2010 to 2011—which is bad. In 2010, its DSO was close to
the industry average. In 2011, its DSO is somewhat higher. If the firm's credit policy has not
 changed, it needs to look at its receivables and determine whether it has any uncollectibles. If it
does have uncollectible receivables, this will make its current ratio look worse than what was
calculated above.

c. Mango’s debt ratio has increased from 2010 to 2011, which is bad. In 2010, its debt ratio was
right at the industry average, but in 2011 it is higher than the industry average. Given its weak
current and asset management ratios, the firm should strengthen its balance sheet by paying
down liabilities.

d. Mango’s profitability ratios have declined substantially from 2010 to 2011, and they are
substantially below the industry averages. Mango needs to reduce its costs, increase sales, or
both.

e. Mango’s P/E ratio has increased from 2010 to 2011, but only because its net income has
declined significantly from the prior year. Its P/CF ratio has declined from the prior year and is
well below the industry average. These ratios reflect the same information as Corrigan's
profitability ratios. Corrigan needs to reduce costs to increase profit, lower its debt ratio,
increase sales, and improve its asset management.

f. ROE = PM × TA Turnover × Equity Multiplier

2011 2.22% 0.43% 2.31 2.21

2010 11.47% 2.64% 2.18 1.99

Industry Avg.18.20% 3.50% 2.60 2.00

Looking at the DuPont equation, Mango's profit margin is significantly lower than the industry
average and it has declined substantially from 2010 to 2011. The firm's total assets turnover has
improved slightly from 2010 to 2011, but it's still below the industry average. The firm's equity
multiplier has increased from 2010 to 2011 and is higher than the industry average. This
indicates that the firm's debt ratio is increasing and it is higher than the industry average.

Mango should increase its net income by reducing costs, lower its debt ratio, and improve its
asset management by either using less assets for the same amount of sales or increase sales.

g. If Mango initiated cost-cutting measures, this would increase its net income. This would
improve its profitability ratios and market value ratios. If Mango also reduced its levels of
 inventory, this would improve its current ratio—as this would reduce liabilities as well. This
would also improve its inventory turnover and total assets turnover ratio. Reducing costs and
lowering inventory would also improve its debt ratio.

Problem 16 (Profitability Ratios)

Esther Company can open a new store that will do an annual sales volume of P960,000. What would
net income and return on assets (investment) be for the year?

Esther Company

Sales ₱960,000
Assets = = = ₱400,000
Total asset turnover 2.4

Sales ₱960,000
Net income = = = ₱67,200
Profit margin 0.07

ROA(invest- Net income ₱ 67,200

= = = 16.80%
ment) Total assets ₱400,000

Problem 17 (Overall Ratio Analysis)

The statements of financial position for Bryan Corporation is shown below. Sales for the year were
P3,040,000, with 75 percent of sales on credit.

Bryan Corporation

a. Current Current assets ₱570,000

= = = 1.90
ratio Current liabilities ₱300,000

(Current assets −
b. Quick ratio = Inventory) = ₱330,000 = 1.10
Profit margin ₱300,000

c. Debt to total Total debt ₱ 418,000

= = = 44%
assets Total assets ₱950,000

d. Asset Sales ₱ 3,040,000

= = = 3.20
turnover Total assets ₱ 950,000

e. Average = Accounts = ₱ 280,000

collection receivable (₱3,040,000 x 0.75)
 Average daily 360 days
period
credit sales

₱ 280,000
= = 44.21 days
₱6,333 per day

Problem 18 (Profitability Ratios)

Alpha industries had an asset turnover of 1.4 times per year.

The following year, on the same level of assets, Alpha’s asset turnover declined to 1.2 times…

Alpha Industries

a. Total asset turnover x Profit margin = Return on total assets

1.4 x ? = 8.4%
Profit margin = 8.4%/1.4 = 6.0%

b. 12 x 7% = 8.4%

It did not change at all because the increase in profit margin made up for the decrease in the
asset turnover.

Problem 19 (DuPont System of Analysis)

King company has a return on assets (investment) ratio of 12

If the firm had no debt, what would the return-on-equity ratio be?

King Company

Return on assets
a. Return on (investment) 12%
= =
equity (1 – Debt /Assets) (1 – 0.40)

12%
= = 20%
0.60
b. The same as return on assets (12%).

Problem 20 (Average Collection Period)

A firm has sales of P1.2 million, and 10 percent of the sales are for cash
 Accounts ₱ 180,000
Average
receivable (₱1,200,000 x 0.90)
collection = =
Average daily 360 days
period
credit sales

₱ 180,000
= = 60 days
₱3,000 per day

Problem 21 (Average Daily Sales)

Charlie corporation has accounts receivable turnover equal to 12 times.

Charlie Corporation

Average daily Credit sales

=
credit sales 360

To determine credit sales, multiply accounts receivable by accounts

receivable turnover.

₱90,000 x 12 = ₱1,080,000

Average daily ₱1,080,000

= = ₱3,000
credit sales 360

Problem 22 (DuPont System of Analysis)

Jerry Company has P4,000,000 in yearly sales.

Jerry Company

a. Net income = Sales x Profit margin

= ₱4,000,000 x 3.5%
= ₱140,000

Stockholders’ equity = Total assets − Total liabilities

Total assets = Sales /Total asset turnover

= ₱4,000,000/2.5
Total assets = ₱1,600,000

Total liabilities = Current liabilities + Long-term liabilities

= ₱100,000 + ₱300,000
Total liabilities = ₱400,000
 Stockholders’ equity = ₱1,600,000 − ₱400,000
= ₱1,200,000

Return on Net income ₱ 140,000

stockholders’ = Stockholders’ = ₱1,200,000 = 11.67%
equity equity

b. The value for sales will be:

Sales = Total assets x Total asset turnover

= ₱1,600,000 x 3
Sales = ₱4,800,000

Net income = Sales x Profit margin

= ₱4,800,000 x 3.5%
Net income = ₱168,000

Return on Net income ₱ 168,000

stockholders’ = Stockholders’ = ₱1,200,000 = 14%
equity equity

Problem 23 (Analysis by Divisions)

The Global Corporation has three subsidiaries.

Global Corporation

a. Medical supplies Heavy machinery Electronics

Net income/
sales 6.0% 3.8% 8.0%

The heavy machinery division has the lowest return on sales.

b. Medical supplies Heavy machinery Electronics

Net income/
Total assets 15.0% 2.375% 10.67%

The medical supplies division has the highest return on assets.

c. Corporate net income ₱1,200,000 + ₱190,000 + ₱320,000

=
Corporate total assets ₱8,000,000 + ₱8,000,000 + ₱3,000,000

₱ 1,710,000
=
₱19,000,000
 Return on assets = 9.0%

d. Return on redeployed assets in heavy machinery.

15% x ₱8,000,000 = ₱1,200,000

Corporate net income ₱1,200,000 + ₱1,200,000 + ₱320,000

=
Corporate total assets ₱19,000,000

₱ 2,720,000
=
₱19,000,000

Return on assets = 14.32%

Problem 24 (Using Ratios to Construct Financial Statements)

Construct the current assets section of the statement of financial position from the following data:

Inventory = ₱420,000/7
= ₱60,000

Current assets = ₱2 x ₱80,000

= ₱160,000

Accounts receivable = (₱420,000/360) x 36

= ₱42,000

Cash = ₱160,000 − ₱60,000 − ₱42,000

= ₱58,000

Current assets
Cash ₱ 58,000
Accounts receivable ₱ 42,000
Inventory ₱ 60,000
Total current assets ₱160,000

Problem 25 (Using Ratios to Construct Financial Statements)

Shannon Corporation has credit sales of P750,000. Given the following ratios, fill in the statement
of financial position below.

Shannon Corporation

Sales/Total assets = 2.5 times

 Total assets = ₱750,000/2.5 = ₱300,000

Cash = 2% of total assets

Cash = 2% x ₱300,000 = ₱6,000

Sales/Accounts receivable = 10 times

Accounts receivable = ₱750,000/10 = ₱75,000

Sales/Inventory = 15 times
Inventory = ₱750,000/15 = ₱50,000

Fixed assets = Total assets − Current assets

Total current asset = ₱6,000 + ₱75,000 + ₱50,000 = ₱131,000
Fixed assets = ₱300,000 − ₱131,000 = ₱169,000

Current assets/current debt = 2

Current debt = Current assets/2 = ₱131,000/2 = ₱65,500

Total debt/total assets = 45%

Total debt = .45 x ₱300,000 = ₱135,000

Long-term debt = Total debt − Current debt

Long-term debt = ₱135,000 − ₱65,500 = ₱69,500

Net worth = Total assets − Total debt

Net worth = ₱300,000 − ₱135,000 = ₱165,000

Shannon Corporation
Balance Sheet as of December 31, 2011

Cash ₱ 6,000 Current debt ₱65,500

Accounts receivable 75,000 Long-term debt 69,500
Inventory 50,000 Total debt 135,000
Total current assets 131,000 Net worth 165,000
Fixed assets 169,000 Total debt and
Total assets ₱300,000 Stockholders’ equity ₱300,000
Problem 26 (Using Ratios to Determine Account Balances)

We are given the following information for Cathy Corporation.

Cathy Corporation

a. Accounts receivable = Sales/Receivables turnover

= ₱3,000,000/6x = ₱500,000

b. Marketable securities = Current assets − (Cash + Accounts

receivable + Inventory)

Current assets = Current ratio x Current liabilities

 = 2.5 x ₱700,000 = ₱1,750,000

Marketable securities = ₱1,750,000 − (₱150,000 + ₱500,000 +

₱850,000)
Marketable securities = ₱1,750,000 − ₱1,500,000 = ₱250,000

c. Fixed assets = Total assets − Current assets

Total assets = Sales/Asset turnover

= ₱3,000,000/1.2x = ₱2,500,000

Fixed assets = ₱2,500,000 − ₱1,750,000 = ₱750,000

d. Long-term debt = Total debt − Current liabilities

Total debt = Debt to assets x Total assets

= 40% x ₱2,500,000 = ₱1,000,00

Long-term debt = ₱1,000,000 − ₱700,000 = ₱300,000

Problem 27 (Using Ratios to Construct Financial Statements)

A restaurant has the following statistical information calculated from its financial statements for the
past three years:

Ruby Inc.

Sales/Total assets = 2
Total assets = ₱20,000,000/2 = ₱10,000,000

Total debt/Total assets = 30%

Total debt = ₱10,000,000 x .3 = ₱3,000,000

Sales/Inventory = 5.0x
Inventory = ₱20,000,000/5x = ₱4,000,000

Average daily sales = ₱20,000,000/360 days

= ₱55,556 per day

Accounts receivable = 18 days x ₱55,556 = ₱1,000,000 (or)

= (₱20,000,000)/(360/18) = ₱1,000,000

Fixed assets = ₱20,000,000/5x = ₱4,000,000

Current assets = Total assets − Fixed assets

= ₱10,000,000 − ₱4,000,000 = ₱6,000,000

Cash = Current assets − Accounts receivable −

 Inventory
= ₱6,000,000 − ₱1,000,000 − ₱4,000,000
Cash = ₱1,000,000

Current liabilities = Current assets/3x

Current liabilities = ₱6,000,000/3 = ₱2,000,000

Long-term debt = Total debt − Current debt

Long-term debt = ₱3,000,000 − ₱2,000,000 = ₱1,000,000

Equity = Total assets − Total debt

Equity = ₱10,000,000 − ₱3,000,000 = ₱7,000,000

Ruby Inc.

Cash ₱ 1,000,000 Current debt ₱ 2,000,000

Accounts receivable 1,000,000 Long-term debt 1,000,000
Inventory 4,000,000 Total debt 3,000,000
Total current assets 6,000,000
Fixed assets 4,000,000 Equity 7,000,000
Total assets ₱10,000,000 Total debt and equity ₱10,000,000

Problem 28 (Ratio Computation and Analysis)

The following data are available for MNO Printing Co

One way of analyzing the situation for each company is to compare the respective ratios for each
one, examining those ratios which would be most important to a supplier or short-term lender and a
stockholder.

Black Corporation White Corporation

Profit margin 7.4% 5.25%
Return on assets 18.5% 12.00%
Return on equity 28.9% 34.4%
Receivable turnover 15.63x 14.29x
Average collection period 23.04 days 25.2 days
Inventory turnover 25x 13.3x
Fixed asset turnover 3.57x 4x
 Total asset turnover 2.5x 2.29x
Current ratio 1.5x 2.5x
Quick ratio 1.0x 1.5x
Debt to total assets 36% 65.1%
Times interest earned 24.13x 6x
Fixed charge coverage 13.33x 4.75x
Fixed charge coverage
calculation (200/15) (133/28)

a. Since suppliers and short-term lenders are more concerned with liquidity ratios, White
Corporation would get the nod as having the best ratios in this category. One could argue,
however, that White had benefited from having its debt primarily long term rather than short
term. Nevertheless, it appears to have better liquidity ratios.

b. Stockholders are most concerned with profitability. In this category, Black Corporation has much
better ratios than White Corporation. White does have a higher return on equity than Black, but
this is due to its much larger use of debt. Its return on equity is higher than Blacks’ because it
has taken more financial risk. In terms of other ratios, Black has its interest and fixed charges
well covered and in general its long-term ratios and outlook are better than White. Black has
asset utilization ratios equal to or better than White and its lower liquidity ratios could reflect
better short-term asset management, and that point was covered in part (a).

Note: Remember that to make actual financial decisions, more than one year’s comparative data
is usually required. Industry comparisons should also be made.

CHAPTER 7 PROBLEMS

III. Problems

Problem 1 (Statement of Cash Flows)

Luis Shop had cash flows from investing activities of P2,567,000 and cash flows from financing
activities of P3,459,000.

Cash flow from

Operating activities ₱(817,000) Outflow
Investing activities (2,567,000) Outflow
Financing activities 3,459,000 Inflow
Increase in Cash ₱ 75,000

Cash balance, beginning ₱ 950,000

Cash balance, end 1,025,000
 Increase in Cash ₱ 75,000

Note: The problem did not indicate whether the cash flows from investing and financing activities
represented net inflow or outflow. It is assumed that following normal course of operations,
investments will represent usage or outflow of cash and financing will represent sourcing or inflow
of cash. Hence since the cash account posted a net increase of ₱75,000, operating activities must
have used up a net cash flow of ₱817,000.

Problem 2 (Free Cash Flow)

You are considering an investment in East Corporation and want to evaluate the firm’s free cash
flow.

EBIT ₱62,000,000
Less: Taxes 17,000,000
EAT ₱45,000,000
Add: Depreciation 5,000,000
Operating Cash Flow ₱50,000,000

Free Cash Flow = Operating cash flow – Investment in operating capital

= ₱50,000,000 – [₱32,000,000 + (₱20,000,000 −₱12,000,000)]
Free Cash Flow = ₱50,000,000 − ₱40,000,000 = ₱10,000,000

Problem 3 (Free Cash Flow)

Tiffany Corporation reported free cash flows for 20X5 of P23 million and investment in operating
capital of P13 million.

Free Cash Flow = Operating cash flow – Investment in operating capital

₱23,000,000 = OCF − ₱13,000,000
OCF = ₱36,000,000

EBIT ₱45,000,000
Less: Taxes 17,000,000
EAT ₱28,000,000
Add: Depreciation 8,000,000
Operating Cash Flow ₱36,000,000

Problem 4 (Statement of Cash Flows)

Janice Corporation has net cash flow from financing activities for the last year of P20 million.

Notes payable, beginning ₱208,000,000

 Payment 23,000,000
Notes payable, end ₱185,000,000

Problem 5 (Free Cash Flow)

Problem 6 (Free Cash Flow)

Problem 7 (Working with Financial Statements)

The following information is available for Ubbie’s Jewelry and Gift Store:
Net Income 5,000
Depreciation Expense 2,500
Increase in deferred tax liabilities 500
Decrease in cash 3,000
Increase in marketable securities 1,000
Decrease in accounts receivable 2,000
Increase in inventories 9,000
Decrease in accounts payable 5,000
Increase in accrued liabilities 1,000
Increase in property and equipment 14,000
Increase in short-term notes payable 19,000
Decrease in Long-term notes payable 4,000
5. What is net cash flow from operating activities?

Answer: (3,000)

What is net cash flow from investing activities?

Answer: (14,000)

What is net cash flow from financing activities?

Answer: 15,000

What is the change in cash?

Answer: (2,000)

Assuming a tax rate of 35%, depreciation expenses of P400,000 will reduced by P140,000.

Assuming a tax rate of 40%, the after-tax cost of a P200,000 dividend payment is P200,000
CHAPTER 8 PROBLEMS

Problem 1 (Computing and Using the CM Ratio)

Last month when Fiesta, Inc., sold 50,000 units, total units, total sales were P200,000, total variable
expenses were P120,000, and fixed expenses were P65,000.

1. What is the company’s contribution margin (CM) ratio?

2. Estimate the change in the company’s net operating income if it were to increase its total
sales by P1,000.

1. The company’s contribution margin (CM) ratio is:

2. The change in net operating income from an increase in total sales of ₱1,000 can be estimated by
using the CM ratio as follows:

Total
Changesales.................................................. ₱200,000
in total sales.........................................................................
₱1,000
Total
× CMvariable expenses..............................   120,000
ratio........................................................................................
      40 %
==Total contribution
Estimated changemargin....................... ₱80,000
in net operating income....................................  400
÷ Total sales............................................... ₱200,000
= CM ratio................................................. 40% This computation can be
verified as follows:

Total sales........................................ ₱200,000

÷ Total units sold.............................    50,000 units
= Selling price per unit..................... ₱4.00 per unit

Increase in total sales....................... ₱1,000

÷ Selling price per unit..................... ₱4.00 per unit
= Increase in unit sales..................... 250 units
Original total unit sales.................... 50,000 units
New total unit sales.......................... 50,250 units

Original New
Total unit sales.................................    50,000    50,250
Sales................................................. ₱200,000 ₱201,000
Variable expenses............................  120,000   120,600
Contribution margin......................... 80,000 80,400
Fixed expenses.................................    65,000    65,000
Net operating income....................... ₱  15,000 ₱  15,400

Problem 2 (Compute the Break-even Point)

Mario Company distributes a single product, a woven basket whose selling price is P15 and whose
variable expense is P12 per unit. The company’s monthly fixed expense is P4,200.

Required:

1. Solve for the company’s break-even point in unit sales using the equation method.
2. Solve for the company’s break-even point in units sales using the formula method.
 3. Solve for the company’s break-even point in unit sales using the formula method and the CM
ratio.

1. The equation method yields the break-even point in unit sales, Q, as follows:

Profit = Unit CM × Q − Fixed expenses

₱0 = (₱15 − ₱12) × Q − ₱4,200
₱0 = (₱3) × Q − ₱4,200
₱3Q = ₱4,200
Q = ₱4,200 ÷ ₱3
Q = 1,400 baskets

2. The equation method can be used to compute the break-even point in sales pesos as follows:

Unit contribution margin

CM =
Unit selling price

CM = ₱3/₱15 = 0.20

Profit = CM ratio × Sales − Fixed expenses

₱0 = 0.20 × Sales − ₱4,200
0.20 × Sales = ₱4,200
Sales = ₱4,200 ÷ 0.20
Sales = ₱21,000

3. The formula method gives an answer that is identical to the equation method for the break-even
point in unit sales:

Fixed expenses
Unit sales to break even =
Unit CM

Unit sales to break even = ₱4,200/₱3 = 1,400 baskets

4. The formula method also gives an answer that is identical to the equation method for the break-
even point in peso sales:

Fixed expenses
Peso sales to break even =
CM ratio

Peso sales to break even = ₱4,200/0.20 = ₱21,000

Problem 3 (Compute the Margin of Safety)

Mariah Corporation is a distributor of a sun umbrella used at resort hotels. Data concerning the next
month’s budget appear below:
 1. To compute the margin of safety, we must first compute the break-even unit sales.

Profit = Unit CM × Q − Fixed expenses

₱0 = (₱30 − ₱20) × Q − ₱7,500
₱0 = (₱10) × Q − ₱7,500
₱10Q = ₱7,500
Q = ₱7,500 ÷ ₱10
Q = 750 units

Sales (at the budgeted volume of 1,000 units)............ ₱30,000

Less break-even sales (at 750 units)...........................  22,500
Margin of safety (in pesos)........................................ ₱  7,500

2. The margin of safety as a percentage of sales is as follows:

Margin of safety (in pesos)........................................ ₱ 7,500

÷ Sales....................................................................... ₱30,000
Margin of safety percentage...................................... 25%

Problem 4 (Compute and Use the Degree of Operating Leverage)

Yiruma Company sells musical instruments. The company’s most recent monthly contribution
format income statement follows:

1. The company’s degree of operating leverage would be computed as follows:

Contribution margin................................................... ₱48,000

÷ Net operating income.............................................. ₱10,000
Degree of operating leverage..................................... 4.8

2. A 5% increase in sales should result in a 24% increase in net operating income, computed as
follows:

Degree of operating leverage..................................... 4.8  

× Percent increase in sales.........................................   5%
Estimated percent increase in net operating income... 24%

3. The new income statement reflecting the change in sales is:

Amount Percent of Sales

Sales............................................. ₱84,000 100%
Variable expenses......................... 33,600 40%
Contribution margin...................... 50,400 60%
Fixed expenses.............................. 38,000
Net operating income.................... ₱12,400
 Net operating income reflecting change in sales........ ₱12,400
Original net operating income.................................... ₱10,000
Percent change in net operating income..................... 24%

Problem 5 (Target Profit and Break-Even Analysis; Margin of Safety; CM Ratio)

Louis Company distributes a single product. The company’s sales and expenses for last moth
follow:

1. break-even point in units

2. total contribution margin at the break-even point
3. how many units would have to be sold each month to earn a target profit of P90,000? Use
formula method.
4. Compute the company’s margin of safety in both peso and percentage terms
5. What is the company’s CM ratio?

1. Profit = Unit CM × Q − Fixed expenses

₱0 = (₱30 − ₱12) × Q − $216,000
₱0 = (₱18) × Q − ₱216,000
₱18Q = ₱216,000
Q = ₱216,000 ÷ ₱18
Q = 12,000 units, or at ₱30 per unit, ₱360,000

Alternative solution:

Fixed expenses
Unit sales to break even =
Unit CM

Unit sales to break even = ₱216,000/₱18 = 12,000 units

or at ₱30 per unit, ₱360,000

2. The contribution margin is ₱216,000 because the contribution margin is equal to the fixed
expenses at the break-even point.

Target profit + Fixed expenses

Unit sold to attain target profit =
Unit CM

₱90,000 + ₱216,000
Unit sold to attain target profit =
₱18

Unit sold to attain target profit = 17,000 units

3. Total Unit
 Sales (17,000 units × ₱30 per unit)............ ₱510,000 ₱30
Variable expenses
(17,000 units × ₱12 per unit)..................  204,000 12
Contribution margin................................... 306,000 ₱18
Fixed expenses...........................................  216,000
Net operating income................................. ₱ 90,000

4. Margin of safety in peso terms:

Margin of safety in pesos = Total sales − Break even sales

Margin of safety in pesos = ₱450,000 − ₱360,000 = ₱90,000

Margin of safety in percentage terms:

Margin of safety in pesos

Margin of safety percentage =
Total sales

Margin of safety percentage = ₱90,000/₱450,000 = 20%

5. The CM ratio is 60%.

Expected total contribution margin: (₱500,000 × 60%). . . ₱300,000

Present total contribution margin: (₱450,000 × 60%)......  270,000
Increased contribution margin.......................................... ₱ 30,000

Alternative solution:

₱50,000 incremental sales × 60% CM ratio = ₱30,000

Given that the company’s fixed expenses will not change, monthly net operating income will also
increase by ₱30,000.

Problem 6 (Operating Leverage)

Galaxy beyond, Inc. had developed a new fantasy board game. The company sold 15,000 games
last year at a selling price of P200 per game.

1. Prepare a contribution format income statement

2. Management I confident that the company can sell 18,000 games next year and compute the
degree….

1. Total Per Unit

Sales (15,000 games)................. ₱3,000,000 ₱200
Variable expenses......................   900,000 60
Contribution margin.............................. 2,100,000 ₱140
Fixed expenses......................................  1,820,000
Net operating income............................ ₱ 280,000

The degree of operating leverage is:

Contribution margin
Degree of operating leverage =
Net operating income

Degree of operating leverage = ₱2,100,000/₱280,000 = 7.5

2. a. Sales of 18,000 games represent a 20% increase over last year’s sales. Because the degree
of operating leverage is 7.5, net operating income should increase by 7.5 times as much,
or by 150% (7.5 × 20%).

b. The expected total amount of net operating income for next year would be:

Last year’s net operating income............................. ₱280,000

Expected increase in net operating income
next year (150% × ₱280,000)..............................   420,000
Total expected net operating income....................... ₱700,000

Problem 7 (Multiproduct Break-even Analysis)

Oasis Sports, Inc is the distributor in the Philippines of two premium gold balls the Super Fast
and the Dynamic Shot.
1. prepare a contribution format income statement for the company as a whole
2. Compute break-even point for the company based on the current sales mix
3. If sales increase by 100,000 a month…..
1.
Super Fast Dynamic Shot Total Company
Amount % Amount % Amount %
Sales............................. ₱150,000 100 ₱250,000 100 ₱400,000 100.0 
Variable expenses.........   30,000 20 160,000   64 190,000  47.5 
Contribution margin..... ₱120,000  80 ₱ 90,000  36 210,000  52.5*
Fixed expenses.............  183,750
Net operating income.... ₱ 26,250
2. The break-even point for the company as a whole is:
*₱210,000 ÷ ₱400,000 = 52.5%
Peso sales to break even = Fixed expenses
 Overall CM ratio

₱183,750
Peso sales to break even = = ₱350,000
0.525

3. The additional contribution margin from the additional sales is computed as follows:

₱100,000 × 52.5% CM ratio = ₱52,500

Assuming no change in fixed expenses, all of this additional contribution margin of ₱52,500
should drop to the bottom line as increased net operating income.

This answer assumes no change in selling prices, variable costs per unit, fixed expense, or sales
mix.

Problem 8 (Break-even Analysis)

The Hernandez Corporation manufacturers baseball bats with Wade Boggs’s autograph stamped
on. Each ball sets for P1,200 and has a variable cost of P700. There are P2,000,000 in fixed costs
involved In the production process.

a. Compute the break-even point in units.

b. Find the sales (in units) needed to earn a profit of P1,500,000.

₱2,000,000
a. BE = = 4,000 units
₱1,200 − ₱700

b Profit + FC ₱1,500,000 + ₱2,000,000

Q = =
. (P − VC) ₱1,200 − ₱700

₱3,500,000
Q= = 7,000 units
₱500

Problem 9 (Break-even Analysis)

Jolly Company has fixed costs of P70,000. Its product currently sells for P4 per unit and has
variable costs per unit of P2.60. Mr. Torres, the head of manufacturing process…

₱70,000 ₱70,000
BE (before) = = = 50,000 units
₱4.00 − ₱2.60 ₱1.40

₱105,000 ₱105,000
BE (after) = = = 60,000 units
₱4.00 − ₱2.25 ₱1.75

The break-even point will go up.

Problem 10 (Degree of Leverage)

The Sapphire Company income statement for 20X4 is as follows

a. Degree of operating leverage

b. Degree of financial leverage
c. Degree of combined leverage
d. Break-even point in units

Q = 20,000, P = ₱60, VC = ₱30, FC = ₱400,000, I = ₱50,000

Q (P − VC) 20,000 (₱60 − ₱30)

a. DOL = =
Q (P − VC) − FC 20,000 (₱60 − ₱30) − ₱400,000

20,000 (₱30) ₱600,000

= =
20,000 (₱30) − ₱400,000 ₱600,000 − ₱400,000

₱600,000
DOL = = 3x
₱200,000

b EBIT ₱200,000
DFL = =
. EBIT − I ₱200,000 − ₱50,000

₱200,000
DFL = = 1.33x
₱150,000

Q (P − VC)
c. DCL =
Q (P − VC) − FC − I

20,000 (₱60 − ₱30)

=
20,000 (₱60 − ₱30) − ₱400,000 − ₱50,000

₱600,000
=
₱600,000 − ₱400,000 − ₱50,000

₱600,000
DCL = = 4x
₱150,000

₱400,000 ₱400,000
d. BE = = = 13,333 units
₱60 − ₱30 ₱30
Problem 11 (Break-even Point and Degree of Leverage)

Silver Yummy Burgers, Inc., Sells food to University Cafeterias for P15 a piece. The fixed costs of
this operation are P80,000

₱80,000 ₱80,000
a. BE = = = 16,000 pieces
₱15 − ₱10 ₱5

b. 15,000 pieces 30,000 pieces

Sales @ ₱15 per piece ₱225,000 ₱450,000
Less: Variable costs (₱10) (150,000) (300,000)
Fixed costs (80,000) (80,000)
Profit or Loss (₱5,000) (₱70,000)

Q (P − VC)
c. DOL =
Q (P − VC) − FC

20,000 (₱15 – ₱10)

DOL at 20,000 =
20,000 (₱15 − ₱10) − ₱80,000

₱100,000
DOL at 20,000 = = 5x
₱20,000

30,000 (₱15 – ₱10)

DOL at 30,000 =
30,000 (₱15 − ₱10) − ₱80,000

₱150,000
DOL at 30,000 = = 2.14x
₱70,000

Leverage goes down because we are further away from the break-even point, thus the firm is
operating on a larger profit base and leverage is reduced.
d EBIT
DFL =
. EBIT − I
 First, determine the profit or loss (EBIT) at 20,000 pieces. As indicated in part (b), the profit
(EBIT) at 30,000 pieces is ₱70,000.

20,000 pieces
Sales @ ₱15 per piece ₱300,000
Less: Variable costs (₱10) (200,000)
Fixed costs (80,000)
Profit or Loss (₱20,000)

₱20,000
DFL at 20,000 =
₱20,000 − ₱10,000

₱20,000
DFL at 20,000 = = 2x
₱10,000
₱70,000
DFL at 30,000 =
₱70,000 − ₱10,000

₱70,000
DFL at 30,000 = = 1.17x
₱60,000

Q (P − VC)
e. DCL =
Q (P − VC) − FC − I

20,000 (₱15 − ₱10)

DCL at 20,000 =
20,000 (₱15 − ₱10) − ₱80,000 − ₱10,000

₱100,000
DCL at 20,000 = = 10x
₱10,000

30,000 (₱15 − ₱10)

DCL at 30,000 =
30,000 (₱15 − ₱10) − ₱80,000 − ₱10,000

₱150,000
DCL at 30,000 = = 2.50x
₱60,000

Problem 12 (Japanese Firm and Combined Leverage)

Firms in Japan often employ both high operating and financial leverage because of the use of
modern technology and close borrower-lender relationships.

Q (P − VC)
DCL =
Q (P − VC) − FC − I

125,000 (₱25 − ₱5)

=
125,000 (₱25 − ₱5) − ₱1,800,000 − ₱400,000

125,000 (₱20)
=
125,000 (₱20) − ₱2,200,000
 ₱2,500,000
DCL = = 8.33x
₱2,500,000 − ₱2,200,000

Problem 13 (Leverage and Sensitivity Analysis)

Dream Company has P12 million in assets. Currently held of these assets are financed with long-
term debt at 10 percent and half…..

Income Statements

a. Return on assets = 10% EBIT = ₱1,200,000

Current Plan D Plan E

EBIT ₱1,200,000 ₱1,200,000 ₱1,200,000
Less: Interest 600,0001 960,0002 300,0003
EBT 600,000 240,000 900,000
Less: Taxes (45%) 270,000 108,000 405,000
EAT 330,000 132,000 495,000
Common shares 750,0004 375,000 1,125,000
EPS ₱.44 ₱.35 ₱.44

(1) ₱6,000,000 debt @ 10%

(2) ₱600,000 interest + (₱3,000,000 debt @ 12%)

(3) (₱6,000,000 − ₱3,000,000 debt retired) x 10%

(4) (₱6,000,000 common equity) ÷ (₱8 par value) = 750,000 shares

Plan E and the original plan provide the same earnings per share because the cost of debt at 10
percent is equal to the operating return on assets of 10 percent. With Plan D, the cost of
increased debt rises to 12 percent, and the firm incurs negative leverage reducing EPS and also
increasing the financial risk to Dream Company.

b. Return on assets = 5% EBIT = ₱600,000

Current Plan D Plan E

EBIT ₱600,000 ₱600,000 ₱600,000
Less: Interest 600,000 960,000 300,000
EBT 0 (360,000) 300,000
Less: Taxes (45%) 0 (162,000) 135,000
 EAT 0 (198,000) 165,000
Common shares 750,000 375,000 1,125,000
EPS 0 (₱.53) ₱.15

Return on assets = 15% EBIT = ₱1,800,000

Current Plan D Plan E

EBIT ₱1,800,000 ₱1,800,000 ₱1,800,000
Less: Interest 600,000 960,000 300,000
EBT 1,200,000 840,000 1,500,000
Less: Taxes (45%) 540,000 378,000 675,000
EAT 660,000 462,000 825,000
Common shares 750,000 375,000 1,125,000
EPS ₱.88 ₱1.23 ₱.73

If the return on assets decreases to 5%, Plan E provides the best EPS, and at 15% return, Plan D
provides the best EPS. Plan D is still risky, having an interest coverage ratio of less than 2.0.

c. Return on assets = 10% EBIT = ₱1,200,000

Current Plan D Plan E

EBIT ₱1,200,000 ₱1,200,000 ₱1,200,000
EAT 330,000 132,000 495,000
Common shares 750,000 500,0001 1,000,0002
EPS ₱.44 ₱.26 ₱.50

(1) 750,000 – (₱3,000,000/₱12 per share)

= 750,000 – 250,000 = 500,000

(2) 750,000 + (₱3,000,000/₱12 per share)

= 750,000 + 250,000 = 1,000,000

 As the price of the common stock increases, Plan E becomes more attractive because fewer
shares can be retired under Plan D and, by the same logic, fewer shares need to be sold under
Plan E.

Problem 14 (Leverage and Sensitivity Analysis)

Lee Pascual Company has p10 million on assets, 80 percent financed by debt and 20 percent and
the par value of the stock is P10 per share….

a. Return on assets = 12%

Current Plan A Plan B

EBIT ₱1,500,000 ₱2,250,000 ₱2,250,000
Less: Interest 1,200,0001 1,920,0003 1,200,0005
EBT 300,000 330,000 1,050,000
Less: Taxes (40%) 120,000 132,000 420,000
EAT 180,000 198,000 630,000
Common shares 200,0002 300,0004 700,0006
EPS ₱.90 ₱.66 ₱.90

(1) (80% x ₱10,000,000) x 15% = ₱8,000,000 x 15% = ₱1,200,000

(2) (20% x ₱10,000,000)/ ₱10 = ₱2,000,000/₱10 = 200,000 shares

(3) ₱1,200,000 (current) + (80% x ₱5,000,000) x 18%

= ₱1,200,000 + ₱720,000 = ₱1,920,000

 (4) 200,000 shares (current) + (20% x ₱5,000,000)/ ₱10

= 200,000 + 100,000 = 300,000 shares

(5) Unchanged

(6) 200,000 shares (current) + ₱5,000,000/₱10

= 200,000 + 500,000 = 700,000 shares

b EBIT
DFL =
. EBIT − I

₱1,500,000
DFL (Current) = = 5x
₱1,500,000 − ₱1,200,000

₱2,250,000
DFL (Plan A) = = 6.82x
₱2,250,000 − ₱1,920,000

₱2,250,000
DFL (Plan B) = = 2.14x
₱2,250,000 − ₱1,200,000

c.
Plan A Plan B
EAT ₱198,000 ₱630,000
Common shares 250,0001 450,0002
EPS ₱.79 ₱1.40

(1) 200,000 shares (current) + (20% x ₱5,000,000)/ ₱20

= 200,000 + 50,000 = 250,000 shares

(2) 2000,000 shares (current) + ₱5,000,000/₱20

= 200,000 + 250,000 = 450,000 shares

 Plan B would continue to provide the higher earnings per shares. The difference between Plans
A and B is even greater than that indicated in part (a).

d. Not only does the price of the common stock create wealth to the shareholder, which is the
major objective of the financial manager, but it greatly influences the ability to finance projects
at a high or low cost of capital.

MULTIPLE CHOICE

If a firm has a break-even point of 20,000 units and the contribution margin on the firm’s single
product is P3.00 per unit and fixed costs are P60,000, what will the firm’s net income be at sales of
30,000 units?

ANSWER: 15,000

If EBIT equals P140,000 and interest equals P21,000, with rate of 31%,what is the degree of financial
leverage?

ANSWER: 1.18x

Marcus Company manufacturers and sells a single product, Product E. The product sell for P60 per unit
and has a CM ratio of 40%. The company’s monthly fixed expenses are 28,800.

VARIABLE COST PER UNIT OF PRODUCT E= P36.00

BREAK-EVEN POINT FOR PRODUCT E= P72,000

IF MARCUS COMPANY DESIRES A MONTHLY INCOME EQUAL TO 10% OF SALES (IGNORE TAXES)= 1,600
units

IF THE SELLING PRICE REDUCED BY 5% .....= 2,700 UNITS