Problem 1.

Boise Company manufactures and sells three products: Good, Better, and Best. Annual fixed costs are P
3,315,000, and data about the three products follow.

Good Better Best

Sales mix in units 30% 50% 20%
Selling price P 250 P 350 P 500
Variable cost 100 150 250

Required:
A. Determine the weighted-average unit contribution margin.
B. Determine the break-even volume in units for each product.
C. Determine the total number of units that must be sold to obtain a profit for the company of P 234,000.

Answer:
A. Good Better Best
Selling price $250 $350 $500
Less: Variable cost 100 150 250
Contribution margin $150 $200 $250

Good: $150 x 30% $ 45

Better: $200 x 50% 100
Best: $250 x 20% 50
Weighted-average CM $195

B. Break-even volume: $3,315,000 ÷ $195 = 17,000 units

Good: 17,000 x 30% = 5,100 units
Better: 17,000 x 50% = 8,500 units
Best: 17,000 x 20% = 3,400 units

C. Volume to earn $234,000: ($3,315,000 + $234,000)  $195 = 18,200 units

Problem 2.
Menor Company sells two products with the following per unit data:

Standard Deluxe
Selling price/unit P 75 P 120
Variable costs/unit 45 60
Contribution margin/unit P30 P 60
Sales mix 3 2

If fixed costs are P 630,000, the number of standard and deluxe units that Menor must sell to break even
is 9,000 standard and 6,000 deluxe.

Problem 3.
Alphabet Corporation sells three products: J, K, and L. The following information was taken from a recent
budget:

J K L
Unit sales 40,000 130,000 30,000
Selling price P 60 P 80 P 75
Variable cost 40 65 50

Total fixed costs are anticipated to be P 2,450,000.

Required:
A. Determine Alphabet's sales mix.
B. Determine the weighted-average contribution margin.
C. Calculate the number of units of J, K, and L that must be sold to break even.
D. If Alphabet desires to increase company profitability, should it attempt to increase or decrease the
sales of product K relative to those of J and L? Briefly explain.

Answer:
A. Sales mix: 40,000 + 130,000 + 30,000 = 200,000 units
 J: 40,000 ÷ 200,000 = 20%
K: 130,000 ÷ 200,000 = 65%
L: 30,000 ÷ 200,000 = 15%

B. Unit contribution margins:

J K L
Selling price $60 $80 $75
Less: Variable cost 40 65 50
Contribution margin $20 $15 $25

J: $20 x 20% $ 4.00

K: $15 x 65% 9.75
L: $25 x 15% 3.75
Weighted-average CM $17.50

C. Break-even volume: $2,450,000 ÷ $17.50 = 140,000 units

J: 140,000 x 20% = 28,000 units
K: 140,000 x 65% = 91,000 units
L: 140,000 x 15% = 21,000 units

D. As measured in units, K has 65% of the company's sales mix. Unfortunately, though, K is
Alphabet's least profitable product ($15 contribution margin vs. $20 and $25). To increase
overall profitability, the firm should strive to decrease sales of K relative to those of J and L.

Problem 4.
The BoSan Corporation makes major household appliances such as refrigerators, stoves, and dishwashers.
Sales are heavily dependent on the number of housing starts and the level of disposable income. Next
year, the number of housing starts in the Central region is expected to be the same as this year's; however,
about two-thirds of these starts will be for rental apartments as compared to an historical average of one-
third. The remaining housing starts will be for single-family homes and upscale condominiums.

BoSan generally makes two models of each product: Economy (fully functional, but with few special
features) and Prestige (with the most popular special features). BoSan assumes a product mix of 40%
Economy and 60% Prestige.

Required:
A. Explain how a cost-volume-profit (CVP) analysis may be used by management.
B. One of the assumptions that underlies CVP analysis is a constant sales mix over the relevant range of
activity. What are three other assumptions of CVP analysis?
C. Describe how the percentage change in rental units could create a problem with BoSan's CVP analysis.

Answer:
A. CVP analysis may be used to perform "what if" analyses that allow management to study the effects of
various operating changes on firm profitability. For example, the effects of changes in selling price,
variable costs, fixed costs, and volume may be explored by manipulating the CVP model with different
values for these items.

B. Three additional assumptions for the CVP model are:

 The per-unit selling price is constant.
 Cost behavior is linear over the relevant range—that is, variable cost per unit is constant and fixed costs
in total are constant.
 The number of units manufactured and sold is the same.

C. The shift toward more apartments and fewer single-family homes and upscale condominiums may mean
that demand for the Economy models will increase relative to the demand for Prestige models. The rental
apartment generally will be used for households with lower income.

The shift in buying habits could create a problem since the CVP model assumes a constant sales mix. The
mix change could invalidate previous CVP studies.
 CASE STUDY

Pullman Company is a small but growing manufacturer of telecommunications equipment. The company has no sales force of its own;
rather, it relies completely on independent sales agents to market its products. These agents are paid a commission of 15% of selling
price for all items sold.

Maui Soliman, Pullman’s controller, has just prepared the company’s budgeted income statement for next year. The statement follows:

Pullman Company
Budgeted Income Statement
For the Year Ended December 31
Sales P 16,000,000
Manufacturing costs:
Variable P 7,200,000
Fixed overhead 2,340,000 9,540,000
Gross margin 6,460,000
Selling and administrative costs:
Commissions to agents 2,400,000
Fixed marketing costs* 120,000
Fixed administrative costs 1,800,000 4,320,000
Net operating income 2,140,000
Less fixed interest cost 540,000
Income before income taxes 1,600,000
Less income tax (30%) 480,000
Net income P 1,120,000
*Primarily depreciation on storage facilities

As Maui handed the statement to Kim Viceroy, Pullman’s president, she commented, “I went ahead and used the agents’ 15%
commission rate in completing these statements, but we’ve just learned that they refuse to handle our products next year unless we
increase the commission rate to 20%.”

“That’s the last straw,” Kim replied angrily. “Those agents have been demanding more and more, and this time they’ve gone too far.
How can they possibly defend a 20% commission rate?”

“They claim that after paying for advertising, travel, and the other costs of promotion, there’s nothing left over for profit,” replied Maui.

“I say it’s just plain robbery,” retorted Kim. “And I also say it’s time we dumped those guys and got our own sales force. Can you get
your people to work up some cost figures for us to look at?”

“We’ve already worked them up,” said Maui. “Several companies we know about pay a 7.5% commission to their own salespeople,
along with a small salary. Of course, we would have to handle all promotion costs, too. We figure our fixed costs would increase by
P 2,400,000 per year, but that would be more than offset by the P 3,200,000 (20% x P 16,000,000) that we would avoid on agents’
commissions.”

The breakdown of the P 2,400,000 cost figure follows:

Salaries:
Sales manager P 100,000
Salespersons 600,000
Travel and entertainment 400,000
Advertising 1,300,000
Total P 2,400,000

“Super,” replied Kim. “And I note that the P 2,400,000 is just what we’re paying the agents under the old 15% commission rate.”

“It’s even better than that,” explained Maui. “We can actually save P 75,000 a year because that’s what we’re having to pay the auditing
firm now to check out the agents’ reports. So our overall administrative costs would be less.”

“Pull all of these number together and we’ll show them to the executive committee tomorrow,” said Kim. “With the approval of the
committee, we can move on the matter immediately.”

Required:
1. What is the breakeven point in pesos for next year assuming that the agents’ commission rate remains unchanged at 15%?
2. What is the breakeven point in pesos for next year assuming that the agents’ commission rate is increased to 20%?
3. What is the breakeven point in pesos for next if the company employs its own sales force?
4. Assume that Pullman Company decides to continue selling through agents and pays the 20% commission rate. The volume of sales
that would be required to generate the same net income as contained in the budgeted income statement for next year would be:
5. The volume of sales at which net income would be equal regardless of whether Pullman Company sells through agents at a 20%
commission rate or employs its own sales force:
ANALYSIS/SOLUTION
1. Company’s breakeven point at different commission rates are as follows
a. When commission rate remains unchanged at 15%
Based on below budgeted income statement

Breakeven point (@15%) = Fixed costs / CM Ratio

= $ 4,800,000 / 0.4
= $ 12,000,000
b. When commission rate is increased to 20%
Based on below budgeted income statement

Breakeven point (@20%) = Fixed costs / CM Ratio

= $ 4,800,000 / 0.35
= $ 13,714,286

c. When company employs its own sales force

 Breakeven point (@7.5%) = Fixed costs / CM Ratio
= $ 7,125,000 / 0.475
= $ 15,000,000

2. Determine the volume of sales that would be required to generate the same net income as
contained in the budgeted income statement for next year. (@20%)

Dollar sales to attain target = (Fixed expenses + Target income before taxes) / CM Ratio

= ($4,800,000 + $1,600,000)/ .35

= $18,285,714

3. Determine the volume of sales at which net income would be equal regardless of whether pittman
company sells through agents or employ its own sales force

X= TOTAL SALES REVENUE

0.65X + $4,800,000 = 0.525X + $7,125,000
0.125X = $2,325,000
X = $2,325,000 / 0.125
X= $18,600,000