CHAPTER

Academic Areas of Competence

- Basic principles of marginal costing
- Basic assumption within the relevant range
- Understanding the marginal income statement
- Relevant formulas in marginal costing
- CVP sensitivity analysis
- BEP graph and CVP graph
- The indifference point
- Operating leverage computation and analysis
©
Basic principles
- Costs and expenses are segregated into fixed and variable
elements.
- Profit = Sales - Costs and expenses
- Profit = Sales - Fixed costs – Variable costs
(*The term cost means costs and expenses.)

- Activities and operations are made within the relevant

range
Basic assumptions within the relevant range
- Linearity - The behavior of sales and costs is linear.
- Behavior of sales, costs, and expenses:
a. Sales . it changes directly in relation to the level of units sold.
b. Fixed costs - Total fixed cost is constant without regard to the change
in the level of units of production and sales; unit fixed cost changes
(i.e. unit fixed cost decreases as the level of production increases,
and vice-versa).
c. Varable costs - Total variable costs change in direct proportion with
the level of units produced and sold; unit variable cost is constant.
Selling price - assumed to be constant. - WIP inventory - disregarded,
there is no WIP inventory. → FG inventory - no change in the FG
inventory (e. production = sales). * Product(s) and sales mix:
there is only one product, or if there are 2 or more products produced and
sold, the sales mix ig assumed to be constant.
© The marginal income statement for variable income
statement)
*
The condensed format
The expanded fomet
P

Sales - Variable costs and expenses X Contribution margin - Fixed costs

and expenses X Income before income tax
* 1x
X

Sales
· Variable costs of goods sold Manufacturing margin
• Variable expenses Contribution mergin - Direct fixed costs and expenses X Direct
margin (or segment margin) X
• Indirect fixed costs and expenses i Income before ncome tax
*

- Vanable production costs refer to direct materials, direct labor,

and
variable overhead. - Examples of variable expenses are delivery expenses,
salesmen's
commission, and packing supplies.
Direct fixed costs and expenses are those that are directly related to
the segment (i.e., division, department, or product line); these costs
are directly identified with the segment that once the segment is
discontinued, these costs are avoided. Indirect fixed costs and
expenses = sometimes called as allocated costs, or unavoidable costs
Summary of costs and expenses behavior within the relevant range:
Production and
Sales volume Unit sales price
ne

Variable costs
Per total
Per unit | constant i constant Fixed costs
Per total constant | constant
Per unit (no = no effeci)
ne
ne ne

Relevant formulas * Contribution margin = ?

CM = Sales - Variable costs
CM = Fixed costs + IBIT CM = Sales x
CMR
CM = Quantity sold x UCM CMR = ?
CMR = 100% - VCRatio
CMR = CM / Sales CMR = UCM USP
CMR = NPR / MSR CMR - AEBITI ASales
(if FC romains the same) s UCM = ?
UCM = USP - UVC UCM = FC I BEP (units) UCM = CM / Quantity
Sold Profit = ?
Profit= CM - Fixed costs Profit = Sales x MSRatio x CMRatio Profit
Sales x NPRatio AProfit = ACM-nin FC
AProfit = ACM + in FC BEP = 2
BEP (units) = FC/UCMargin BEP (pesos) = FCICMRatio Comp. BEP
(units) = FC/Average UCM Comp. BEP (pesos) = FC/Average CMR
BEP (units) - Actual sales x (1-MSRatio)
At BEP: Profit (logs) = 0
Sales - Total costs
Contribution margin = Total fixed costs o Fixed Costs = ?

FC = CM (at BEP)
FC = CM = Profit "FC = BEP (units) UCM 9 VCRatio = ?
VCRatio = VC/ Sales VCRatio = UVC / USP VCRatio = 100% - CMR VCRatio = ACosts
/ A$ales VCRatio = (AÇosts - Ain FC) / ASales
VCRatio = (AGosts in FC)/ 4Sales Margin of Safety = ?

MS = Actual sales - Actual breakeven sales MS = Budgeted sales

- Budgeted breakeven sales MS = Sales K MSRatio MSR = MS /
Actual (or Budgeted) sales MSR = NPR/CMR
MSR = (1-(BESales / Actual Sales)] " NPRatio = ?
Unit profit margin / USP
NPRatio = MSR x CMR 2 Degree of operating leverage
(DOL)
DOL = CMI EBIT DOL = % A in EBIT 1% A in Sales % A in EBIT = %
A in Sales x DOL
STRAIGHT PROBLEMS
1. Basic CVP relationships. Melanie Company produces a
merchandise that has the
following data:

Unit sales price

P80 per unit Unit variable costs
P48 per unit Total fixed costs
P640.000 per annum Units sold during the
current year 25,000 units Required: a. Unit contribution margin
contribution margin ratio and variable cost rato. b. Breakeven point in
units and in pesos.
Margin of safety in units and in pesos, and margin of safety ratio d. Net profit ratio e.
The amount of profit using the margin of safety. 1. If sales increase by P300,000, how
much would you expect income to increase?
CVP sensitivity analysis LAN Corporation manufactures and sells a single product that has a
retail price of P150. unit variable cost of P120, and total fixed costs of P900 000. It expects to
sell 50.000 units in the coming period (BIT = income before income tax). Required: a. The CMR.
BEP in units, and expected IBIT in the coming period. b. The new CMR BEP in units and
operating profit for the coming period if:
1 Unit sales price increases by 10%. 2. Unit variable costs decrease by 20%. 3 Total fixed costs
increase to 11,1-10 000
The number of units sold increases to 65.000 5. Unit sales price decreases by 24
unit variable cost decreases by 10%, and
total fixed costs increaso by P100,000.

3
Sales with profit. MJP Corporation presently sells product SIMPLE
LANG with the following related data
Unit contribution margin
P40 Variable cost ratio
75% Total fixed costs –
P200,000 Required - What would
be the sales in pesos and in units if: a. Income before income tax is
P300,000, b. Incomic after tax of 40% is P300.000
Profit rate before tax is 20% of sales. d. Unit profit margin before tax is
P8.
. Profit rate before taxis 10% of CMR.
4. Multi product sales mix based on units. Baguio Corporation produces three
products,
D E and F, with the following related data:
120

20
80
Unit sales price

P200
P50
P120 Unit
variable costs Sales mix
Total fixed costs, P800,000 Required:
a Weighted average unit contribution margin (WAUCM). b Composite BEP in units and
allocation of CBEP c. Composite BEP in pesos. d Sales per mix and composite BEP.
The number of units to be sold if the firm wants a profit of P40,000.
VKMUNIS Muiti product
sales mix based on pesos. Davao Corporation producee three producta,
Durian, Pomelo, and Marang, with the following budgeted data:
Sales
Durian
Pomelo
Marang P400,000 CMRatio
P500,000 P1,000,000 Total fixed
costs, P1.48 MILLION
50%

40%
30% Tax rate,
40%. Required: a. Weighted average contribution margin ratio.
Composito DEP in pesos and allocation of CBEP. @ The composita sales in
pesos if the finn wants a profit of P3 milion.
6. Perfectly basic CPVA Charmaine Company reported the following
operational data
for its 2005 and 2006 results.
(in thousand of pesos) 2005
2006

Change
Sales
P90.000
Q& O◌ಂಕು P8,000 Loss:
Costs and expenses 70,000
74.960
 4 960
Operating income
P20,000 P23 040 P3. 040 Required:
BEP in pesos.

if sales are expected to reach P122,000,000, what would be the

expected IBIT in 2007? If total fixed costs and expenses are expected
to increase by 20%, what would be the new breakeven poirt in 2007?.
Operating leverage. David Corporation discloses the following data relative
to its product Girata for its 2006 operations:
Contribution margin (40,000 units * P50)
P2,000,000 Total fixed costs and
expenses
1,200,000 CMRatio

40%
Required:
a. Degree of operating leverage..
What would be the percentage increase in EBIT if sales are expected to increase by 40% in 2007 If the
firm wants to increase its DOL to 40 in 2007. how much should be the needed increase in fixed costs
assuming the contribution margin remains the sarie?
8. Indifference point. Kiko Company has decided to introduce a new product. The
new product can be manufactured by either a fully-automated process or a
semiautomated process. The manufacturing process will not affect the quality of the
product. The estimated unit manufacturing costs by the two methods follow.
Full y
Semi
Automated Automated Materiais
E 5 CHỖ

P 6.00 Direct labor

6,00
7.00 Variable factory
overhead
3.00
4.00
Directiy traceable incremental fixed factory overhead is expected to be P2,380 000 if the
fully-automated process is chosen and P1 285,000 if the serni-automated process is
chosen. The company's Market Research Department has recommended an
introductory unit sales price of P40. Regardless of the manufacturing process choson,
the incremental marketing expenses are estimated to be P500,000 per year plus P2 for
each unit sold. Required: a. Calculate the estimated breakaven point for the new
product in annual units of
sales if the company uses the:
al. fully-automated manufacturing process.
32 sami-automated manufacturing process. b. Determine the annual unit sales volume
at which the choice between the two

manufacturing processes would not make a difference.