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Accounting 314 by RRDO

Topic 3: CVP Analysis


Part 3. BEP on Multiple Products
CASE 1. Ms. Ganda sells two beauty products for hopeless individuals, Sandpaper and Eraser. Historically, the firm
has sold, on the average, 400 units of Sandpaper and 1,200 units of Eraser. It incurs fixed costs of P14,400 per
period. Pertinent data about the two products are as follows:
Sandpaper Eraser
Selling price P20 P10
Variable Cost per unit 14 6

REQUIRED:
1. What is the contribution margin per unit for each product?
2. What is the sales mix in units?
3. What is the sales mix in pesos?
4. What is the weighted average contribution margin per unit (WACMu)?
5. What is the weighted average contribution margin ratio (WACMR)?
6. How much revenue is needed to break-even? How many units of Sandpaper and Eraser does it represent?
7. How much revenue is needed to earn pre-tax profit of P10,800?

CASE 2. Boise Company manufactures and sells three products: Good, Better, and Best. Annual fixed costs are
$3,315,000, and data about the three products follow:
Good Better Best
Sales Mix in units 30% 50% 20%
Selling Price $250 $350 $500
Variable Cost 100 150 250
REQUIRED:
1. Determine the weighted-average unit contribution margin.
2. Determine the break-even volume in units for each product.
3. Determine the total number of units that must be sold to obtain a profit for the company of $234,000.
4. Assume that the sales mix for Good, Better, and Best is changed to 50%, 30%, and 20%, respectively. Will the
number of units required to break-even increase or decrease? Explain.

CASE 3. Alphabet Corporation sells three products: A, B, and C. The following information was taken from a recent
budget:
A B C
Unit Sales 40,000 130,000 30,000
Selling Price P 60 P80 P75
Variable Cost 40 65 50

Total fixed cost are anticipated to be P2,450,000.

REQUIRED:
1. Alphabet’s sales mix (both in units and pesos).
2. Determine the weighted-average contribution margin (both WAUCM and WACMR).
3. Calculate the number of units of J, K, and L that must be sold to break even.
4. Calculate the amount of sales that each product must generate to break even.
5. Target sales when desired profit is:
a. P68,000 after tax. (assuming 32% tax rate)
b. P3.50 per unit.
c. 8.25%

Part 4. Margin of Safety


CASE 4. Dackers Company, a wholesaler of jeans, had the following income statement:

Sales (40,000 pairs) P 1,400,000


Cost of sales 800,000
Gross margin 600,000
Selling expenses P 350,000
Administrative expenses 190,000 540,000
Income P 60,000
Mr. Dackers informs you that the only variables costs are cost of sales and P2 per unit selling costs. All
administrative expenses are fixed.

REQUIRED:
1. What is the total fixed costs?
2. What is the variable cost per unit of Dackers Company?
3. What is the contribution margin per unit?
4. What is the contribution margin ratio?
5. What is the breakeven point in units? In pesos?
6. What is the breakeven point ratio?
7. What is the margin of safety in units?
8. What is the margin of safety in pesos?
9. What is the margin of safety ratio?

CASE 5. Hellopo Company manufactures and sells a telephone answering machine. The company’s contribution
format income statement for the most recent year is given below:
Total Per Unit Percent of Sales
Sales (20,000 units) P 900,000 P45.00 100%
Less variable expenses ? 40.00 ?%
Contribution margin P 100,000 P 5.00 ?%
Less fixed expenses 80,000
Net income P 20,000

Management is anxious to improve the company's profit performance and has asked for several items of
information.

REQUIRED:
1. What is the margin of safety in units?
2. What is the margin of safety in pesos?
3. What is the margin of safety ratio?
4. What insights can you give to the company based from its margin of safety?

Part 5. Degree of Operating Leverage


CASE 6. Use the information in Case 4 to supply the next requirements.

REQUIRED:
1. What is the degree of operating leverage of Hellopo?
2. If the sales increase by 5% what is its effect on the profit in percentage?
3. Make an income statement to prove answer in question 2.
4. Let us say that there is a move to automate the production, thus decreasing the direct labor by P6.25, but
increasing the machines, which in turn adds up 100,000 to depreciation. Using the concept of operating
leverage, is the company right about the automation?
5. If the same increase in sales in number 2 is anticipated, what would be the adjusted effect in profit if
automation pushed through?

CASE 7. Once upon a time, two brothers (Barry and Larry) dreamt about owning and operating companies in the
same line of business. Barry believed in maintaining a very large, highly efficient manual labor force; Larry, on
the other hand, favored automated-production processes. One business was located in Madison and the other
was located in Austin. Recent data follow.

Madison Austin
Sales P2,000,000 P2,000,000
Contribution Margin 1,700,000 400,000
Net Income 150,000 150,000

REQUIRED:
1. Which of the two businesses, Madison or Austin, has the highest level of (1) variable cost and (2) highest level
of fixed cost? Explain how you determined your answer.
2. Determine the probable owner of the firm located in (1) Madison and (2) Austin. Briefly explain your logic.
3. Compute the operating leverage factor for Madison and Austin.
4. Suppose that both Madison and Austin had the opportunity to increase sales by 10%. Which of the two
locations would experience a larger percentage change in net income? Why?
COMPREHENSIVE ILLUSTRATION

CASE 8. Basic Illustration Corp. produces and sells a single product. The selling price is P25 and the variable costs
is P15 per unit. The corporation’s fixed costs is P100,000 per month. Average monthly sales is 11,000 units.

REQUIRED:
1. Contribution margin per unit.
2. Contribution margin ratio.
3. Variable cost ratio.
4. Breakeven point in units.
5. Breakeven point is pesos.
6. Target sales if desired profit is P2.00 per unit
a. in units
b. in pesos
7. Target sales if desired after tax profit is 21,000 (tax rate is 30%)
a. in units
b. in pesos
8. Target sales if desired profit is 8% of sales
a. in units
b. in pesos
9. Margin of safety
a. in units
b. in pesos
c. ratio
10. Degree of Operating Leverage
11. If the company wants to increase sales by 10%, what is its effect on the profit?
12. If fixed costs will increase by P20,000, how much will be the increase (decrease) in breakeven point
a. in units
b. in pesos
13. If variable cost per unit will go up by P5, how much will be the increase (decrease) in breakeven point
a. in units
b. in pesos
14. If selling price will be increase to P30, how much will be the increase (decrease) in breakeven point
a. in units
b. in pesos