+-+***

DEPARTMENT OF PROJECT MANAGEMENT

GROUP MEMBERS ID NO
1. ALEMU ABDISA IMIRU……………………………………………..……….15/0707
2. ABIYOT LEMMA GUTEMA……………………………….………….……..15/0705
3. ABDULKADIR MOHAMMED JEMAL……………………….…..…………15/0703
4. AMANUEL DEBEBE BIZUNEH…………………………………..………….15/0709
5. ASKALE AMBISA AFETA…………………………………………...………..15/0711
6. ASMARE DABI BEKELE……………………………………………..……….15/0713

SUBMITTED TO: Dr. Abdela Y

NOV 12, 2023
SABETA, ETHIOPIA
 Project Cost Management 2023

1. Compare and contrast the International Financial Reporting Standards

(IFRS) and the Generally Accepted Accounting Principles (GAAP).

The IFRS vs GAAP refers to two accounting standards and principles adhered to by
countries in the world in relation to financial reporting. More than 110 countries
follow the International Financial Reporting Standards (IFRS), which encourages
uniformity in preparing financial statements.

On the other hand, the Generally Accepted Accounting Principles (GAAP) are
created by the Financial Accounting Standards Board to guide public companies in
the United States when compiling their annual financial statements.

International Financial Reporting Standards (IFRS)

The IFRS is a set of standards developed by the International Accounting Standards

Board (IASB). The IFRS governs how companies around the world prepare their
financial statements. Unlike the GAAP, the IFRS does not dictate exactly how the
financial statements should be prepared but only provides guidelines that harmonize
the standards and make the accounting process uniform across the world.

Both individual and corporate investors can analyze a company’s financial

statements and make an informed decision on whether or not to invest in the
company. The IFRS is used in the European Union, South America, and some parts
of Asia and Africa.

Generally Accepted Accounting Principles (GAAP)

The GAAP is a set of principles that companies in the United States must follow
when preparing their annual financial statements. The measures take an authoritative
approach to the accounting process so that there will be minimal or no inconsistency
in the financial statements submitted by public companies to the US Securities and
Exchange Commission (SEC). It enables investors to make cross-comparisons of
financial statements of various publicly-traded companies in order to make an
educated decision regarding investments.
The following are some of the ways in which IFRS and GAAP differ:
1. Treatment of inventory
One of the key differences between these two accounting standards is the accounting
method for inventory costs.

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 Project Cost Management 2023

Under IFRS, the LIFO (Last in First out) method of calculating inventory is not
allowed. Under the GAAP, either the LIFO or FIFO (First in First out) method can
be used to estimate inventory.
The reason for not using LIFO under the IFRS accounting standard is that it does
not show an accurate inventory flow and may portray lower levels of income than is
the actual case. On the other hand, the flexibility to use either FIFO or LIFO under
GAAP allows companies to choose the most convenient method when valuing
inventory.
2. Intangibles
The treatment of developing intangible assets through research and development is also different
between IFRS vs US GAAP standards. Under IFRS, costs in the research phase are expensed as incurred.
Costs in the development phase may be capitalized based on certain factors. On the other hand, US
GAAP generally requires immediate expensing of both research and development expenditures,
although some exceptions exist.

3. Rules and principles

The other distinction between IFRS and GAAP is how they assess the accounting
processes – i.e., whether they are based on fixed rules or principles that allow some
space for interpretations. Under GAAP, the accounting process is prescribed highly
specific rules and procedures, offering little room for interpretation. The measures
are devised as a way of preventing opportunistic entities from creating exceptions to
maximize their profits. On the contrary, IFRS sets forth principles that companies
should follow and interpret to the best of their judgment. Companies enjoy
some leeway to make different interpretations of the same situation.
4. Classification of liabilities

When preparing financial statements based on the GAAP accounting standards,

liabilities are classified into either current or non-current liabilities, depending
on the duration allotted for the company to repay the debts. Debts that the
company expects to repay within the next 12 months are classified as current
liabilities, while debts whose repayment period exceeds 12 months are classified
as long-term liabilities.

However, there is no plain distinction between liabilities in IFRS, so short-term and

long-term liabilities are grouped together.

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 Project Cost Management 2023

Comparison chart
Elements GAAP IFRS
Stands for Generally Accepted International Financial
Accounting Principles Reporting Standards
Performance Revenue or expenses, assets or Revenue or expenses, assets or
elements liabilities, gains, losses, liabilities
comprehensive income
Required Balance sheet, income Balance sheet, income
documents in statement, statement of statement, changes in equity,
financial comprehensive income, cash flow statement, footnotes
statements changes in equity, cash flow
statement, footnotes
Inventory Last-in, first-out; first-in, first- First-in, first-out or weighted-
Estimates out; or weighted-average cost average cost
Inventory Prohibited Permitted under certain criteria
Reversal
Purpose of US GAAP (or FASB) Under IFRS, company
the framework has no provision management is expressly
framework that expressly requires required to consider the
management to consider the framework if there is no
framework in the absence of a standard or interpretation for
standard or interpretation for an issue.
an issue.
Objectives of In general, broad focus to In general, broad focus to
financial provide relevant info to a wide provide relevant info to a wide
statements range of stakeholders. GAAP range of stakeholders. IFRS
provides separate objectives provides the same set of
for business and non-business objectives for business and
entities non-business entities.
Definition of The US GAAP framework The IFRS framework defines
an asset defines an asset as a future an asset as a resource from
economic benefit. which future economic benefit
will flow to the company.

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 Project Cost Management 2023

2. Briefly mention the methods, tools and techniques to estimate costs,

determine budget and control costs.
In the field of project management, cost estimation is the process of estimating all
of the costs associated with completing a project within scope and according to its
timeline. Initial, high-level estimates are often used in the earliest stages of project
planning and can determine whether or not a project is ultimately pursued. Once a
project is approved and an organization chooses to move forward with it, more
detailed and granular cost estimates become necessary in order to appropriately
allocate various resources.
Reliable cost estimates are necessary for all projects. Without a cost estimate, it
would be impossible to prepare a business plan, establish detailed budgets, predict
resource requirement or control project costs.

Methods of Cost Estimation in Projects

1. Expert Judgement
Expertise should be considered from individuals or groups with specialized
knowledge or training in team and physical resource planning and estimating. Expert
judgment, guided by historical information, provides valuable insight about the
environment and information from prior similar projects.

2. Analogous cost estimating

Analogous cost estimating uses the values such as scope, cost, budget, and duration
or measures of scale such as size, weight, and complexity from a previous, similar
project as the basis for estimating the same parameter or measurement for a current
project.

3. Parametric estimating

Parametric estimating uses an algorithm or a statistical relationship between

historical data and other variables (e.g., square footage in construction) to calculate
resource quantities needed for an activity, based on historical data and project
parameters.

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 Project Cost Management 2023

4. Data analysis
A data analysis technique used in this process includes but is not limited to
alternatives analysis. Alternatives analysis is used to evaluate identified options in
order to select the options or approaches to use to execute and perform the work of
the project. Alternatives analysis assists in providing the best solution to perform the
project activities, within the defined constraints.

5. Bottom-up estimating method

In the Bottom-up estimating method, team and physical resources are estimated at
the activity level and then aggregated to develop the estimates for work packages,
control accounts, and summary project levels. Bottom-up estimating is a method of
estimating a component of work. The cost of individual work packages or activities
is estimated to the greatest level of specified detail. The detailed cost is then
summarized or rolled up to higher levels for subsequent reporting and tracking
purposes.

Budgeting and control costs

Cost is usually one of the first questions that come up in any project. Making a
project budget is an important part of any project management. Various things are
there to take into consideration while calculating a budget for the project like
employee cost, software expense, necessary equipment purchase, etc. Project
budgets are a reflection of project work and the timing of that work. A
comprehensive budget provides management with an understanding of how the
budget will be utilized and expended over time for projects.

Project budgeting

The budget for a project is the sum of costs of individual activities that the project
must accomplish. Budgeting is important in the development of any major business
project.

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 Project Cost Management 2023

Without a well-planned budget, projects can scatter and be left incomplete.

Budgeting is not an easy process. It provides a number of different advantages that
a project manager should consider.

Advantage of budgeting in business

Establishing Guidelines: Project budget allows you to establish the main objectives
of a project. Without proper budgeting, a project may not be completed on time. It
allows the project manager to know how much he can spend on any given aspect of
the project.

Cost Estimating: Once a budget is in place, the project manager can determine how
much money can be spent on each component of the project. Hence it also
determines what percentage of the available funds can be allocated to the remaining
elements of the project. It gives the chance to decide whether or not the project can
be completed in the available budget.

Prioritizing: Another advantage of having a project budget is that it helps you to

prioritize the different tasks of the project. Sometimes it might seem to be completed
at once, but it doesn't happen due to some inefficiency. A budget will allow you to
prioritize which parts of the project can be completed first.

Benefits of budgeting

 The potential to attract investors

 The ability to set sales goals

 The chance to open lines of credit

 Easier tax preparation

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 Project Cost Management 2023

Cost control
Cost control is the process of identifying and minimizing business expenses to
increase profits. A business owner compares actual results with the expectations. If
the actual cost is higher than planned, then management takes actions.

Cost control is the practice of identifying and reducing business expenses to increase
profits, and it starts with the budgeting process. Cost control is an important factor
in maintaining and growing profitability. Outsourcing is a common method to
control costs because many businesses find it cheaper to pay a third party to perform
a task than to take on the work within the company.

3. The total assets and total liabilities of Coca-Cola and Pepsi Co. are shown
below.

Determine the owners’ equity of each company?

i) Coca-Cola company
Given:
Total assets (A) = $24,501
Total liabilities (L) = $12,701
By using basic accounting equation we can solve owners’ equity of each company
A = L+OE
Where, A = Asset
L = liabilities
OE = owners’ equity
Therefore, OE = A-L

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OE = $24,501-$12701
= $11,800
Hence, the owner’s equity of C-C Company is $11,800.
ii)PepsiCo
Total assets (A) = $23,474
Total liabilities (L) = 14,183
By using basic accounting equation we can solve owners’ equity of each company
A = L+OE
Where, A = Asset
L = liabilities
OE = owners’ equity
Therefore, OE = A-L
= $23,474-$14,183
= $9,291
Hence, the owner’s equity of Pepsi Company is $9,291.
4. After several months of planning Mr. X started a hotel that is called ABC
hotel. The following events occurred during its first month:
a. On August 1, Mr. X invested $3,000 cash and $15,000 of equipment in ABC hotel.
b. On August 2, ABC hotel paid $600 cash for furniture.
c. On August 3, ABC hotel paid $500 cash for rental of building.
d. On August 4, it purchased $1200 of equipment on credit for the hotel (using a
long-term note payable). e. On August 5, ABC hotel opened for business, cash
received from services provided in the first week and a half of the business (ended
August 15) is $825.
f. On August 15, it provided $100 of service on account.
g. On August 17, it received a $100 check for service previously rendered on
account.

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h. On August 17, it paid $125 cash to assistances for working during the grand
opining.
i. Cash received from services provided during the second half of August is $930.
j. On August 31, it paid a $400 installment toward principal on the note payable
entered in to on August 4.
k. On August 31, Mr. X made a $900 withdrawal for personal use.
Required:
a) Record each transaction in a two-column journal (Journal Entries)
b) Post the journal in to the ledger
c) Prepare a trial balance as of August 31
d) Prepare the following financial statements (Income statement, Statement of
owners’ equity, Balance sheet and cash flow statement)
Solution:
a) Record each transaction in a two-column journal (Journal Entries)
August 1, Mr. X invested $3,000 cash and $15,000 of equipment in ABC hotel.
Cash……………………………..….............$3000
Equipment…………………………$15,000
ABC hotel Capital………………..……….$18,000
August 2, ABC hotel paid $600 cash for furniture.
Expense………………………………$600
Cash…………………….…………..…………..$600
August 3, ABC hotel paid $500 cash for rental of building.
Expense……………………………….$500
Cash……………………………………………...$500
August 4, it purchased $1200 of equipment on credit for the hotel (using a long-term
note payable).
Equipment…………………….…….$1200
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Notes payable..………………..……………..$1200
August 5, ABC hotel opened for business, cash received from services provided in
the first week and a half of the business (ended August 15) is $825.
Cash…………………………….……$825
Sales…………………………………….…$825
August 15, it provided $100 of service on account.
Account receivable………………….$100
Sales……………………………….………$100
On August 17, it received a $100 check for service previously rendered on account.
Account receivable……………….…$100
Sales……………………………………...$100
August 17, it paid $125 cash to assistances for working during the grand opining.
Expense………………………….…..$100
Cash…………………………….…….….$100
Cash received from services provided during the second half of August is $930.
Cash……………………………….…$930
Sales………………………………..……….$930
August 31, it paid a $400 installment toward principal on the note payable entered
in to on August 4.
Expense……………………………..$400
Notes payable ………………….……………$400
August 31, Mr. X made a $900 withdrawal for personal use.
Withdrawal…………………………..$900
Cash………………………………………..$900

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b) Post the journal in to the ledger

Account: cash
Post Balance
date item ref. debit credit Debit credit
Aug 1 3000 3000
2 600 2400
3 500 1900
5 825 2725
21 930 3655
17 125 3530
31 900 2630

Account: account receivable

Post Balance
date item ref. debit credit Debit credit
Aug 15 100 100
17 100 200

Account: equipment
Post Balance
date item ref. debit credit Debit credit
Aug 1 15000 15000
4 1200 16200

Account: expense
Post Balance
date item ref. debit credit Debit credit
Aug 2 600 600
3 500 1100
17 125 1225
31 400 1625
Account: drawing
Post Balance
date item ref. debit credit Debit credit
Aug 31 900 900

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Account: notes payable

Post Balance
date item ref. debit credit Debit credit
Aug 4 1200 1200
31 400 1600

Account: ABC Hotel capital

Post Balance
date item ref. debit credit Debit credit
Aug 1 18000 18000

Account: sales
Post Balance
date item ref. debit credit Debit credit
Aug 5 825 825
15 100 925
17 100 1025
21 930 1955

c) Prepare a trial balance as of August 31

ABC Hotel
Trial balance
August 31
Cash 2,630
Account receivable 200
Equipment 16,200
Drawing 900
Expense 1,625
Account payable 1,600
ABC hotel capital 18,000
Sales 1,955
21,555 21,555

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d) Prepare the following financial statements (Income statement, Statement of

owners’ equity, Balance sheet and cash flow statement)
i) Income statement (net income)
Revenue 1,955
Expense 1,625
Net income 330
Income statement = (revenue)-(expense)
= 1,955-1,625
= 330
ii) Statement of owners’ equity
ABC hotel of capital as of august 1………………….18,000
Net income……………………………………330
Withdrawal…………………………………………….900
ABC hotel of capital as of august 31
= (ABC hotel of capital august 1 + net income) – (withdrawal)
= (18,000 + 330) – (900)
= 17,430
iii) Balance sheet
ABC Hotel
Balance sheet
August 31
Asset
Cash………………………….2630
Account receivable…………..200
Equipment……………………16,200
Total asset = 2,630 + 200 + 16,200
= 19,030

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Liability
Account payable………………..1,600
From basic accounting equation
Asset = liability + owners’ equity
A = L + OE
Rearranging the equation,
OE = A – L
= $19,030 – $1,600
= $17,430
Cash flow statement
a) (Cash received from customer) – (cash payment for expense)
= ($825 +$930) – ($600 + $500 + $100)
= $555
b) (Cash flow from investing activities) – (cash withdrawal by owners)
= $3000 – $900
= $2100
c) Net cash flow from financing activities
= $3000 + $600 + $500 + $825 +$100 + $900
= $5,925
Net cash flow statement
=a+b+c
= $555 + $2,100 + $5,925
= $8,580

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5. Financial Statement Analysis

Table 1: Income statement for Pepsi co, incorporation for the year ended, 1998

Table 2: Balance sheet for Pepsi Co. incorporation for the year 1997 and 1998

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Required:
Based on the given data from the above figures, find out the following for the year
1997 & 1998 (NB: for those ratios that uses input of income statement figure, you
can calculate those ratios for the year 1998):
a. Current ratio g. Long-Term Debt-Equity Ratio
b. Quick ratio h. Debt-equity ratio
c. A/R turnover & ACP (DSO) i. Times interest earned ratio
d. Inventory turnover ratio j. Net profit margin ratio
e. Total Asset turnover ratio k. Return on Asset (ROA) & ROE
f. Debt ratio
Solution
a. Current ratio
Curren asset
Current ratio (CR) =
current liability
In balance sheet
For 1997 For 1998
Current asset = 6,251 Current asset = 4,362
Current liability = 4,257 Current liability = 7,914
6,251 4,362
CR1997 = = 1.47 times CR1998 = = 0.55 times
4,257 7,914
The larger the current ratio is the less the difficulty that the company faces in
paying its obligations at the right time.
The current ratios of PepsiCo show that the company has 1.47 Birr in current assets
for each Birr of current liabilities during 1997 and 0.55 Birr in current assets for
each Birr of current liabilities during 1998.
b. Quick ratio
Current asset−(prepaid expense+supplies+inventories)
Quick ratio (QR) =
current liability

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In balance sheet
For 1997 For 1998
Current asset = 6,251 Current asset = 4,362
Current liability = 4,257 Current liability = 7,914

Inventories = 732 Inventories = 1,016

Current asset−(prepaid expense+supplies+inventories)

Quick ratio (QR) =
current liability

6,251−(732)
QR1997 =
4,257
= 1.3
4,362−(1,016)
QR1998 =
7,914
= 0.42
In the case of PepsiCo, the quick assets of 42 cents are available to meet each Birr
of current liabilities. This implies that the quick assets are not enough to settle all the
current obligations. Unless the company converts the non-quick current assets to the
extent they provide cash that is enough to pay the remaining 58cents for each Birr
of current liabilities. The quick ratio of 1.3 times for 1997, on the other hand, implies
that the company has 1.3 Birr of quick assets for each Birr of current liabilities.
Again, the company is in good liquidity position during 1997 compared to 1998.
c. A/R turnover & ACP (DSO)
Net sales
i)A/R turnover =
Account receivable
For 1998
Net sales = 22,348
Account receivable = 2,453

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22,348
A/R turnover =
2,453
= 9.11 times
ii)Average Collection Period – also called ‘Days sales outstanding’ (DSO)
365 days
Average Collection Period =
A/R turover
365 days
=
9.11 times
= 40.066 days
Credit customers on the average are paying their bills in almost 40 days for the
year 1998.
d. Inventory turnover ratio
cost of goods sold
Inventory turnover ratio =
inventory balance
For 1998
Cost of goods sold = 9,330
Inventory = 1,016

9,330
Inventory turnover ratio =
1,016
= 9.18 times
High inventory turnover may be taken as a sign of good inventory management.
e. Total Asset turnover ratio
Net sales
Total Asset turnover ratio =
total assets
For 1998
Net sales = 22,348
Total assets = 22,660

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Net sales 22,348

Total Asset turnover ratio = = = 0.99birr
total assets 22,660
During 1993, the company was able to make net sales of 0.99 birr for each birr it
has invested in the total assets.
f. Debt ratio
total liabilities
Debt ratio (DR) =
total assets
For 1997 For 1998
Total liability = 13,165 Total liability = 16,259
Total assets = 20,101 Total assets = 22,660

13,165
Debt ratio (DR)1997 = = 0.655
20,165
16,259
Debt ratio(DR)1998 = = 0.72
22,660
At the end of 1998, 72 percent of the total assets of PepsiCo were financed by funds
secured in the form of current and long-term liabilities. The remaining 28 percent
was financed by funds contributed by shareholders and retained from the profits
earned by the company. Similarly, debt financing constitutes about 65.5 percent of
the total assets of the company during 1997. This leaves 34.5 percent of the total
assets to be financing has declined during 1997 compared to 1998 signalling good
condition.
PepsiCo can borrow much more money during 1997 than it could do in 1998 because
the asset structure of the company was more debt-dominated in1998 than in 1997.
g. Long-Term Debt-Equity Ratio
long term debt
Long-Term Debt-Equity Ratio =
shareholder equity
For 1997 For 1998
Long term debt = 4,946 Long term debt = 4,028
Shareholder equity = 6,936 Shareholder equity = 6,401

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For 1997
4,946
Long-Term Debt-Equity Ratio = = 0.71
6,936
For 1998
4,028
Long-Term Debt-Equity Ratio = = 0.63
6,401
the long-term debt-equity ratio of 71 percent achieved during 1997 can be for a
single birr of share holders' equity in the long-term financing there is 0.71 birr of
long-term debt in the long-term financing.
h. Debt-equity ratio
total debt
Debt-equity ratio (DER) =
shareholder equity
For 1997 For 1998
Total liability(debt) = 13,165 Total liability(debt) = 16,259
Shareholder equity = 6,936 Shareholder equity = 6,401

total debt
Debt-equity ratio (DER) =
shareholder equity
13,165
DER1997 = = 1.9
6,936
16,259
DER1998 = = 2.54
6,401
i. Times interest earned ratio (interest coverage ratio)

For 1998
EBIT = 2,581
Interest expense = 321
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2,581
Interest coverage ratio = = 8.04
321
A larger interest coverage ratio, suggests that the company has sufficient margin of
safety to cover its interest expenses.
j. Net profit margin ratio
Earning after taxes
Net profit margin ratio =
Net sales
For 1998
Net sales = 22,348
Earnings after taxes(NI) = 1,990

Earning after taxes 1990

Net profit margin ratio = = = 0.089 = 8.9%
Net sales 22,348
PepsiCo had earned 8.9 percent, or nearly 9 cents net income per birr of net sales it
made during 1998.
k. Return on Asset (ROA) & ROE
Net income
Return on Asset =
Total asset
For 1998
Net income = 1,990
Total assets = 22,660

Net income 1,990

Return on Asset = = = 0.088 = 8.8%
Total asset 22,660
Thus, PepsiCo generated 8.8 percent, or about 9 cents in the form of net income
out of each birr it invested in its total assets during 1998.

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6. ODA Company has a unit selling price of $400, variable costs per unit of
$240, and fixed costs of $180,000. Compute the break-even point in units and
sales dollar using:
i) An equation method iii) Contribution margin method iii) Graph method
Given
Selling price unit (SPU)…………………….$400
Variable cost unit (VCU)…………………….$240
Fixed costs (FC)……………… ………$180,000
Solution
Contribution margin per unit = selling price per unit- variable cost per unit
CMU = SPU – VCU
= $400 – $240
= $160
CMU 160
Contribution margin ratio (CM-ratio) = = = 0.4 (40%)
SPU 400
CM-ratio = 1 – VC-ratio
VC-ratio = 1 – CM-ratio = 1-0.4 = 0.6 (60%)
VCU 240
Or VC% = = = 0.6
SPU 400
a) An equation method
i) Net income = total revenue – (total variable cost) – total fixed cost
NI = TR- TVC – TFC
= (SPU×Q) –(VCU×Q) –TFC
= Q (SPU – VCU) – TFC
0 = Q(400 – 240) – 180,000
Q(160) = 180,000

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180,000
Q= = 1,125 units
160
In dollas = 1, 125 units × SPU = 1,125 units × $400
= $ 450,000
ii) Let “X” be sales volume in dollars to breakeven
CM-ratio = 0.4
VC-ratio = 0.6
Net income = total revenue – (total variable cost) – total fixed cost
0 = X – 0.6X – 180,000
X – 0.6X = 180,000
0.4X = 180,000
180,000
X= = $450,000
0.4

b) Contribution margin method

FC
i) Breakeven point (in units) =
CMU
$180,000
=
160
BEP (in units) = 1,125 units
FC
ii) Breakeven point (in dollars) =
CM%
$180,000
=
0.4
BEP (in dollars) = $450,000

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c) Graphic method

TR
Birr700,000 TC

Birr550,000 TR = Total revenue line

TC = Total cost line
Birr400,000

Birr250,000
0 500 1000 1500 2000 2500 X

7. Mi-Adama Company makes calculators that sell for $20 each. For the coming
year, management expects fixed costs to total $220,000 and variable costs to be $9
per unit.
Instructions:
a) Compute break-even point in units using the mathematical equation method.
b) Compute break-even point in dollars using the contribution margin (CM) ratio.
c) Compute the margin of safety percentage assuming actual sales are $500,000.
d) Compute the sales required in units and in dollars to earn net income of
$165,000
Given
Selling price per unit = $20
Total fixed cost = $220,000
Variable cost per unit (VCU) = $9

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Solution
a) Compute break-even point in units using the mathematical equation
method.
Net income = Total revenue – (Total variable cost) – Total fixed cost
NI = TR- TVC – TFC
= (SPU×Q) –(VCU×Q) –TFC
0 = Q (SPU – VCU) – TFC
𝑇𝐹𝐶 $220,000 $220,000
Q= = = = 20,000 units
SPU−VCU $20−$9 $11
b) Compute break-even point in dollars using the contribution margin (CM)
ratio.
Contribution margin per unit = selling price per unit- variable cost per unit
CMU = SPU – VCU
= $20 - $9
= $11
CMU $11
Contribution margin ratio (CM-ratio) = = = 0.55 (55%)
SPU $20
FC
Breakeven point (in dollars) =
CM%
$220,000
= = $400,000
0.55
c) Compute the margin of safety percentage assuming actual sales are
$500,000.
Given
Assume actual sale (Q) = $500,000
Total fixed cost (TF) = $220,000
FC
Q=
CM%
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 Project Cost Management 2023

By rearranging the above equation,

FC $220,000
CM% = = = 0.44 (44%)
Q $500,000
Therefore, the margin of safety percentage is 44%
d) Compute the sales required in units and in dollars to earn net income of
$165,000
Net income (NI) = $165,000
Net income = Total revenue – (Total variable cost) – Total fixed cost
NI = TR- TVC – TFC
= (SPU×Q) – (VCU×Q) –TFC
NI = Q (SPU – VCU) – TFC
Q (SPU – VCU) = NI +TFC
FC+NI $220,000+$165,000
Q= = = 35,000 units
SPU−VCU $20−$9
The sales in dollars Q = 35000 units × SPU
= 35,000 units × $20
= $700,000
FC+NI $220,000+$165,000
Or Q = = = $700,000
CM% 0.55

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