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Mas 02
Mas 02
CVP analysis- is useful tor profit planning by way of a systematic analysis of the profit's relationship with
various costs and volume of sales.
In multi-product companies, a change in sales mix may also affect company profit.
✔ Unless indicated otherwise, unit selling price is constant even if sales volume changes.
● CM Ratio= CM ÷ Sales
NOTE: The sign ‘ ‘ is used to mean change or difference
Break-Even Point (BEP) - a level of activity, in units (break-even volume) or in pesos (break even
sales), at which total revenues equal total costs At the break-even point,
there IS neither a profit nor a loss.
● BEP units = Fixed Costs ÷ CM per unit
● Unit Sales with Target Profit - (Fixed Costs + Profit*) ÷ CM per unit
Margin of Safety - the difference between actual sales and break-even sales. It indicates the
maximum amount by which sales could decline without incurring a loss.
● Margin of Safety = Sales Breakeven Sales
●
Indifference Point - the level of volume at which two alternatives being analyzed would yield equal
amount of total costs or profits.
Alternative A Alternative B
● (Unit CM x Q) - Fixed Cost = (Unit CM x Q) -Fixed Cost
Degree of Operating Leverage (DOL) - measures how a percentage change in sales will affect
company profits. It indicates how sensitive the company 1s to sales volume
increases and decreases. Tt 1s also known as operating leverage factor.
● DOL= Contribution Margin Profit before tax
Require No. 7
✔ Monthly fixed cost will decrease by P 1, 500 under the proposal (P 4,000 P2,500).
2. PROVING:
Contribution margin ratio x margin of safety ratio = net profit ratio
Where: Contribution margin ratio Contribution margin ÷ sales
Margin of safety ratio Margin of safety Sale
Net profit ratio= Profit Sales
3. Hulk’s break even sales are P 528,000. The variable cost ratio Is 60% while the profit ratio is 8%
4. Mahjong Company produces and sells two products, tables and chairs Following 15 next month budget:
REQUIRED:
1) How many units of chairs should be sold next month to break-even
2.) How many units of tables should be sold to earn a profit of P 150?
(Adapted: Managerial Accounting by Garrison, et.al.)
SOLUTION GUIDE
Chairs Tables
Contribution Margin (CM) per unit P 2.50 P 5.00
Sales Mix (4:1 → 80%:20%) 80% 20%
Weighted Average CM per unit:
3. Ms Rita has recently opened the UBE Fitness Gym being offered exclusively for malnourished
millennials. The income statement for its first year of operations follows.
Sales P 250,000
Variable Costs (100,000)
Contribution Margin P150,000
Fixed Costs (120,000)
Profit P 30,000
Ms Rita is unhappy about the results of his gyms first year of operations She observed that despite the
high contribution margin, profit was still low because of the high fixed costs. She concludes that an
increase in sales would not yield a satisfactory increase in profit.
REQUIRED:
1. Explain to Ms. Rita that his conclusion Is not right by computing the operating leverage factor 4
2. If sales increase by 10%, then how many percent would profit increase, ceteris paribus?
(NOTE: determine the percentage A in profit by using the operating leverage factor.)
(Adapted: Managerial Accounting by Garrison, et al.)