JERIC C.

RISMA BSAIS-4B
STRATEGIC COST MANAGEMENT
MODULE 4 APPLICATION LESSON 1-3

APPLICATION: LESSON 1
Application
Answer the following questions.
1. PetNanny Inc, produces a single product, Nanny’s Biscuit for pet animals.
The results of the company’s operations for a typical month are summarized
in contribution format as follows:
Sales P720,000
Variable expenses  480,000
Contribution margin 240,000
Fixed expenses  120,000
Net operating income P 120,000
The company produced and sold 160,000 kilograms of product during the
month. There were no beginning or ending inventories.

Required: Given the present situation, compute

1. The unit variable cost and the variable cost ratio.
Unit Variable Cost = Variable expense / Number of units sold
Unit Variable Cost = P480,000 / 160,000 kg
Unit Variable Cost = P3.00 kg

Variable Cost Ratio = Variable expenses / Total sales

Variable Cost Ratio = P480,000 / P720,000
Variable Cost Ratio = 0.67 or 67%

2. The unit contribution margin and the contribution margin ratio.

Unit Contribution Margin = Selling price per unit – Unit variable cost
Unit Contribution Margin = P720,000 – 160,000 kg – P3.00/kg
Unit Contribution Margin = P4.50 kg – P3.00 kg
Unit Contribution Margin = P1.50 kg

To calculate contribution margin ratio, divide the contribution margin by the

total sales:
Contribution Margin Ratio = Contribution margin / Total sales
Contribution Margin Ratio = P240,000 / P720,000
Contribution Margin Ratio = 0.33 or 33%

3. The break-even sales in kilograms.

 Break – even Sales in Units = Fixed Expenses / Unit Contribution Margin
Break – even Sales in Units = P120,000 / P1.50 kg
Break – even Sales in Units = 80,000 kg

4. The break-even sales in pesos.

Break – even Sales in Pesos = Fixed Expenses / Contribution Margin Ratio
Break – even Sales in Pesos = P120,000 / 0.33%
Break – even Sales in Pesos = P363,636.36

5. The margin of safety in units.

Margin of Safety in Units = Actual (or Budgeted) Sales in Units – Break-even
Sales in Units
Since there were no actual or budget sales we will use the following formula:
Selling price per unit = Total sales / Number of units sold
Selling price per unit = P720,000 / 160,000 kg = P4.50/kg
Sales in Units = Sales in Pesos / Selling price per unit
Sales in Units = P720,000 / P4.50 kg
Sales in Units = 160,000 kg

We can proceed to calculate Margin of Safety in Units:

Margin of Safety in Units = Sales in Units – Break-even Sales in Units
Margin of Safety in Units = 160,000 kg – 80,000 kg
Margin of Safety in Units = 80,000 kg

6. The margin of safety in pesos.

Margin of Safety in Pesos = 80,000 kg x P4.50 kg x 0.33
Margin of Safety in Pesos = P119,520

2. Mango Go Go! Company produces and sells a single product, Mango

Graham Shake, which is popular among the teenagers. During February, the
company sold 4,200 units. Its total sales were P411,600, its total variable
expenses were P214,200, and its total fixed expenses were P82,400.

Required:
a. Construct the company’s contribution format income statement for
February in good form.
Mango Go Go! Company
Contribution Format Income Statement
For the Month Ended February 28
Per Unit Total
Sales (4,200 units) P98 P411,600
 Less: Variable Cost P51 P214,200
Contribution Margin P47 P197,400
Less: Fixed Cost P82,400
Operating Income P115,000

b. Redo the company’s contribution format income statement assuming that

the company sells 4,400 units.
Per Unit Total
Sales (4,400) P98 P431,200
Less: Variable Cost P51 P224,400
Contribution Margin P47 P206,800
Less: Fixed Cost P82,400
Operation Income P124,400

c. By how much did the income increase? Check your answer using the
formula presented in the text/abstraction.
The Increase in net operating income is P9,400.

Checking:
Change in Income = (New Sales – Old Sales) x Contribution Margin Ratio
Old Sales = 4,200 units x P98/unit = P411,600
Contribution Margin Ratio = (P98-P51) / P98 = 0.48 or 48%
Change in Fixed Expenses = P82,400 – P82,400 = 0

Change in Income = (4,400 – 4,200) x 0.48 – 0

Change in Income = 200 x 0.48
Change in Income = P96

APPLICATION: LESSON 2
Answer the following questions:
1. Mimiyuh Corporation produces and sells a single product. Data
concerning that product during their first year of operation appear below:
Selling price per unit P460
Variable expense per unit P207
Fixed expense per month P1,037.30

Required:
a. Assume the company’s monthly target profit is P25,300. Determine the
unit sales to attain that target profit.
Unit Sales = (Fixed Expenses + Target Profit) / Unit Contribution Margin

Unit Contribution Margin = Selling price per unit – Variable Expenses

Unit Contribution Margin = P460 – P207
Unit Contribution Margin = P253

Unit Sales = (P1,037.30 + P25,300) / P253

Unit Sales = 111 units (Rounded to the nearest whole unit)

b. Assume the company’s monthly target profit is P126,250. Determine the

peso sales to attain that target profit.
Peso Sales = (Fixed Expenses + Target Profile) / Contribution Margin Ratio

Contribution Margin Ratio = (Selling Price per unit – Variable Expenses per
unit) / Selling price per unit
Contribution Margin Ratio = (P460 – P207) / P460
Contribution Margin Ratio = 0.552 or 55.2%

Peso Sales = (P1,037.30 + P126,250) / 0.552

Peso Sales = P229,279 (Rounded to the nearest whole unit)

2. Jamie Corporation produces and sells Twisty Lollipops. Data concerning

that product appear below:

Per
Unit Percent of Sales
Selling price P480 100%
Variable expenses 336   70%
Contribution margin P144   30%
Fixed expenses are P602,000 per month. The company is currently selling
10,000 units per month.
Required:
The marketing manager would like to introduce sales commissions as an
incentive for the sales staff. The marketing manager has proposed a
commission of P32 per unit. In exchange, the sales staff would accept an
overall decrease in their salaries of P136,000 per month. The marketing
manager predicts that introducing this sales incentive would increase
monthly sales by 400 units. What should be the overall effect on the
company’s monthly net operating income of this change?
Solution:
Total Sales Revenue = 10,000 units x P480 per unit
Total Sales Revenue = P4,800,000

The projected sales commission of P32 per unit plus the variable cost of products
sold total P336, or the variable expenditures per unit. These are the current
monthly variable costs:

Total variable expenses = 10,000 units x P336 per unit

Total variable expenses = P3,360,000

The total fixed expenses monthly are P602,000.

Current monthly net operating income of the company is:

Net Operating Income = Total sales revenues – Total variable expenses
Net Operation Income = P4,800,000 – P3,360,000 – P602

If the company introduces the sales commission and experiences an increase in

sales by 400 units, the new total monthly sales revenue would be:
New total Sales revenue = (10,000 + 400) units x P480 per unit
New total sales revenue = P4,912,000

The total variable expenses per unit including the sales commission of P32 per
unit would be:
Total variable expense = P336 + P32
Total variable expense = P368

Therefore, the new monthly total variable expenses would be:

New total variable expenses = (10,000 + 400) units x P368 per unit
New total variable expenses = P4,147,200

The monthly fixed expenses would remain the same at P602,000. Therefore, the
company's new monthly net operating income would be:

New net operating income = New total sales revenue - New total variable
expenses - Fixed expenses - Commission expenses

New net operating income = P4,912,000 - P4,147,200 - P602,000 - P136,000

New net operating income = P26,800
The overall effect on the company's monthly net operating income of this change
would be an increase of P26,800 from the original net operating income of
P838,000.

3. Black Navy Corporation’s contribution format income statement for the

most recent month follows:
Sales P1,012,000
Variable expenses 473,000
Contribution margin 539,000
Fixed expenses 483,400
Net operating income P 55,600

Required:
a. Compute the degree of operating leverage to two decimal places.

Degree of Operating Leverage = Contribution Margin / Net Operating Income

Degree of Operating Leverage = 539,000 / 55,600 = 9.70

b. Using the degree of operating leverage, estimate the percentage change in

net operating income that should result from a 7.5% increase in sales.

Percentage Change in Net Operating Income = Degree of Operating Leverage x

Percentage Change in Sales Percentage Change in Net Operating Income = 9.70 x
7.5% = 72.75%

c. Provide an analysis based on the results of your computation for

requirement a and b.
We can see from the calculation in criterion b that a 7.5% increase in sales is
anticipated to lead to a sizable rise in net operating income of 72.75%. This
emphasizes the profitability of the firm depends on sales growth. However, it also
suggests that if sales fall, the firm is exposed to a significant amount of risk.
Consequently, the business should concentrate on methods to sustain and boost
sales while simultaneously reducing expenditures to reduce the effect of any
prospective sales declines.
APPLICATION: LESSON 3
1. Sweets and Co. produces and sells two types of chocolates, product 143
and ILY. Data concerning those products for the most recent month appear
below:
Product 143 Product ILY
Sales P50,000 P54,000
Variable expenses P14,000 P17,200
Fixed expenses for the entire company were P65,720.

Required:
a. Determine the overall break-even point for the company in units and in
pesos.
The contribution margin ratio of Product 143 is:
Contribution Margin Ratio = (Sales - Variable expenses) / Sales
= (P50,000 - P14,000) / P50,000
= 72%
The contribution margin ratio of Product ILY is:
Contribution Margin Ratio = (Sales - Variable expenses) / Sales
= (P54,000 - P17,200) / P54,000
= 68%

b. Allocate the over-all break-even point.

Overall Break-even Point (Units) = Fixed expenses / Weighted average
contribution margin per unit

The weighted average contribution margin per unit can be calculated as follows:
Weighted Average Contribution Margin per Unit = [(Contribution margin per unit
of Product 143 * Sales mix of Product 143) + (Contribution margin per unit of
Product ILY * Sales mix of Product ILY)]

Sales mix of Product 143 = P50,000 / (P50,000 + P54,000) = 0.48

Sales mix of Product ILY = P54,000 / (P50,000 + P54,000) = 0.52

Weighted Average Contribution Margin per Unit = [(P50,000 - P14,000) * 0.48 /

1,000] + [(P54,000 - P17,200) * 0.52 / 1,000]
= P0.1944 per unit

Overall break-even point (Units) = P65,720 / P0.1944 per unit

= 338,477.4 units, rounded up to 338,478 units
To calculate the overall break-even point in pesos, we can use the following
formula:

Overall break-even point (Pesos) = Fixed expenses / Weighted average

contribution margin ratio

Weighted average contribution margin ratio = [(Contribution margin ratio of

Product 143 * Sales mix of Product 143) + (Contribution margin ratio of Product
ILY * Sales mix of Product ILY)]

Weighted average contribution margin ratio = (0.72 * 0.48) + (0.68 * 0.52) = 0.7
Overall Break-even Point (Pesos) = P65,720 / 0.7
= P93,885.71, rounded up to P93,886

To allocate the over-all break-even point between the two products, we can use
the following formula:

Product Break-even Point (Units) = Overall Break-even Point (Units) * (Sales mix
of the product / Weighted average contribution margin per unit)

For Product 143:

Product Break-even Point (Units) = 338,478 * (0.48 / 0.1944)
= 834,090 units, rounded up to 834,091 units

For Product ILY:

Product Break-even Point (Units) = 338,478 * (0.52 / 0.1944)
= 904,387 units, rounded up to 904,388 units

c. If the sales mix shifts toward Product 143 with no change in total sales,
what will happen to the break-even point for the company? Explain.

Without affecting overall sales, if the sales mix changes to favor Product
143, break-even point will generally drop. Considering that Product 143 has a
greater contribution margin per unit and an improved contribution margin ratio
compared to the Product a greater percentage of sales from Product 143 will
therefore boost the ILY, lower the company's break-even point and the total
contribution margin ratio