Problem I

KG Company manufactures and sells a single product. The company’s sales and expenses for the recent
month are shown below:

Total Per Unit

Sales P P 40
600,000
Less: Variable Expenses 420,000 28
Contribution margin P P 12
180,000
Less: Fixed Expenses 150,000
Profit P 30,000

Required:
1. Breakeven point in units and in pesos
Fixed expenses P 150,000
Divided by: Contribution Margin 12
Breakeven point in units 12,500 units

Fixed expenses P 150,000

Divide by: Contribution margin ratio 30%
Breakeven point in pesos P 500,000

2. What is the contribution margin at breakeven point?

Contribution margin at breakeven point P 150,000

3. How much is the total fixed costs and expenses at breakeven point?
Fixed cost P 150,000

4. Margin of safety in pesos, in units and in percentage.

Actual Sales P 600,000
Less: Breakeven Sales 500,000
Margin of Safety (Pesos) P 100,000

Actual Sales in units 15,000

Less: Breakeven Sales in units 12,500
Margin of Safety (units) 2,500
Margin of Safety (pesos) P 100,000
Actual sales 600,000
Margin of Safety Ratio 16.67%
5. Compute the profit using the margin of safety ratio.
Margin of Safety P 100,000
Contribution Margin Ratio 30%
Net income P 30,000
 6. How many units must be sold to earn a minimum profit of P 18,000?
Fixed expenses + Profit Before Tax P 150,000 + P 18,000
Contribution Margin per unit P 12
= Target Sales in units 14,000 units

7. If sales increase by P 80,000, how much is the expected increase in profit?

Increase in sales P 80,000
x CM Ratio 30%
Increase in income P 24,000

Problem II
Liya Band is planning its annual A Night of Extravaganza. The committee would like to charge P 800 per
person for the activity.

Diner per person P 250

Favors and programs per person 300
Band 25,000
Tickets and advertising 40,000
Venue rental 20,000
Floorshow 15,000
Required:
1. Breakeven point in terms of units and pesos

Band P 25,000
Ticket and advertising 40,000
Venue rental 20,000
Floorshow 15,000
Total Fixed Cost P 100,000

Fixed Cost P 100,000

Divide by: CM/ unit 250
Breakeven (persons) 400

Fixed Cost P 100,000

Divide by: CMR 31.25%
Breakeven (pesos) P 320,000

2. Assume that last year only 200 persons attended the event and the same number of attendees is
expected this year, what price per ticket must be charged to breakeven?

At break-even point,
Total Sales = Total Costs
Profit = P 0
CM = Total Fixed Costs
 SP (No. of persons) = Total Fixed Costs + Total Variable Costs
SP (200) = P 100,000 + P 550 (200)
SP (200) = P 100,000 + 110,000
SP (200) = P 210,000
SP = P 210,000/ 200 persons
SP = P 1,050

3. The committee has learned that Mega ShaSha will make an appearance during the evening.
Accordingly, the committee has decided to raise the ticket price to P 850 per person. Compute the
expected breakeven point in units and in pesos.

Fixed Cost P 100,000

Divide by: CM/ unit 300
Breakeven (persons) 333

Fixed Cost P 100,000

Divide by: CMR 35.29%
Breakeven (pesos) P 283,336

Problem III
Highlands, Inc. produces and sells camping equipment. One of the company’s products, a camp lantern,
sells for P 90 per unit. Variable expenses are P 63 per lantern, and fixed expenses associated with the
lantern total P 135,000 per month.
Required:
1. Determine the breakeven point in units and in pesos.
Break even (units) = Fc/ UCM
= 135,000/ 27
= 5,000 units

Break even (peso) = fc/ cmr

=135,000/30%
= P 450,000

2. At present, the company is selling 8,000 lanterns a month. The sales manager is convinced that a
10% reduction in the selling price would result in a 25% increase in the number of lanterns sold
each. How much is the change in net income if the sales manager’s expectations are correct?
Before After Changes
Sales (8,000 x 90) 720,000 (P 90*90 = P 81 x 10,000) 810,000 90,000
Vc (8,000 x 63) 504,000 (63 x 10,000) 630,000 126,000
Cm 216,000 180,000 (36,000)
Fc 135,000 135,000
Profit 81,0000 45,000
 Problem IV
Malingling Company produces a single product and presented below are data taken from its recent
income statement.
Sales (135,000 units at P 20) P 2,700,000
Less: Variable costs 1,890,000
Contribution margin 810,000
Less: Fixed costs 900,000
Net loss P (90,000)

Required:
1. The sales manager feels that an P 80,000 increase in monthly advertising budget, combined with
an intensified effort by the sales staff, will result in a P 700,000 increase in monthly sales.
Considering these changes, will the company’s net income increase or decrease?
Increase in sales P 700,000
Increase in fixed costs (80,000)
Increase in variable costs (490,000)
Increase in profit P 130,000

2. The president is convinced that a 10% reduction in the selling price, combined with an increase of
P 35,000 in the monthly advertising budget, will cause unit sales to double. Considering these
changes, how much is the company’s expected net income?
Sales (270,000 x 18) P 4,860,000
Variable cost (270,000 x14) (3,780,000)
Fixed cost (900,000)
Additional Cost ( 35,000)
Net income P 145,000

3. A new package for the product is being considered to induce sales. This package costs P 0.60 per
unit. Considering the new package cost, how many units would have to be sold each month to
earn a profit of P 45,000?
Fixed cost + Target Profit P 900,000 + P 45,000
CM per unit 5.4
Sales in units = 175,000 units

Problem V
Castleton Company has analyzed the costs of producing and selling 5,000 units of its only product to be
as follows:
Direct materials P 60,000
Direct labor 40,000
Variable factory overhead 20,000
Fixed factory overhead 30,000
 Variable marketing and administrative expenses 10,000
Fixed marketing and administrative expenses 15,000

Required:
1. Compute the number of units needed to breakeven at a per unit sales price of P 38.50.

Total Fixed Cost P 45,000

Divide by: CM per unit 12.50
Break-even point (units) 3,600 units

2. Determine the number of units that must be sold to produce an P 18,000 profit at a P 40 per unit
sales price.

Target sales (units) = Fixed Costs + Desired Profit

UCM
Target sales (units) = P 45,000 + P 18,000
P 14
Target Sales (units) = 4,500 units

3. Determine the price Castleton must charge at a 5,000 unit sales level to produce a profit equal to
20% of sales.

Sales Ratio 100%

Profit Ratio 20%
Total Cost Ratio 80%

Total Cost P 175,000

Divide by: Total Cost Ratio 80%
Total Sales P 218,750
Divide by: 5,000 units
Selling price per unit P 43.75

Problem VI

Wild’s Company’s income statement is shown below:

Total Per Unit

Sales (30,000 units) P 150,000 P 5.00
Less: Variable costs 90,000 3.00
Contribution margin 60,000 P 2.00
Less: Fixed expenses 50,000
Net income P 10,000

Required:
1. Compute the contribution margin ratio, breakeven point in pesos, and operating income.
CM per unit P 2.00
 Divide by: Selling price per unit 5.00
CMR 40%

Fixed Costs P 50,000

2. Calculate the new contribution margin ratio, breakeven point in pesos, and operating profit under
each of the changes below:
a. Unit sales price increase by 15%
b. Unit variable costs decrease by 25%
c. Total fixed costs increase to P 80,000
d. Unit sales price decreases by 20% and the sales volume increases by 20%
e. The selling price increases by P 0.50 per unit, fixed costs increase by P 10,000, and the
sales volume decreases by 5%.
f. Variable costs increase by P 0.20 per unit, the selling price increases by 12%, and the
sales volume decreases by 10%.

  CMR BEP (Pesos) Operating Profit

Original 40% 125,000.00 10,000.00
a 47.83% 104,545.45 32,500.00
b 55% 90,909.00 32,500.00
c 40% 200,000.00 - 20,000.00
d 25% 200,000.00 - 14,000.00
e 45.45% 132,013.00 11,250.00
f 42.86% 116,659.00 14,800.00

Montgomery Company expected to incur the following costs to produce and sell 70,000 units of its
product:
Variable manufacturing cost P 210,000
Fixed manufacturing cost 80,000
Variable marketing expenses 105,000
Fixed marketing and administrative expenses 60,000

Required:
1. What price does the company have to charge for the product in order to just breakeven if all
70,000 units are sold?
Total Sales = Total cost
No. of units to breakeven = Total Cost P 455,000
Unit sales 70,000
= P 6.50

2. If management decides on a price of P 8 and has a profit objective of 10%, what amount of sales
is required?0
Target Sales (Pesos) = Total Fixed Cost
CMR – PRBT
= P 140,000.00
43.75% - 10%
= P 414,815.00
 3. The company plans to expand capacity next year to 100,000 units. The increased capacity will
increase fixed manufacturing costs to P 100,000. If he sales price of each of unit of product
remains at P 8, how many units must the company sell to produce a profit of 15% of sales?

Target Sales (Pesos) = Total Fixed Cost

CMR – PRBT
= P 160,000.00
43.75% - 15%
= P 556,522.00

Locker Company manufactures and sells electronic door lockers for P 600 each. Variable costs are P 420
per unit, and fixed costs total P 4,500,000 per year. The company currently sells 40,000 units year.

Required:
1. Compute the degree of operating leverage at the present level of sales.
Contribution margin P 7,200,000
Fixed cost 4,500,000
Net Income P 2,700,000

Operating Leverage = P 7,200,000/ P 2,700,000

= 2.667 times

2. If 48,000 units are sold next year, what is the

a. Expected increase in net income next year?
Net income P 2,700,000
% Change 53.34%
Expected Increase P 1,440,180

b. Percentage change in net income

Units (additional) 8,000
Original units 40,000
sssss 20%
Operating Leverage 2.667
% change in net income 53.34%