MAS-02

Batch 1
COST VOLUME PROFIT ANALYSIS

Cost Volume Profit Analysis:

A. Lorenzo Company manufacture and sells cellular phone earphones. The company’s
contribution format income statement is given below:
Total
Sales (20,000 units) P1,200,000 100% 60
Variable expenses 900,000 75% 45
Contribution margin P300,000 25% 15
Fixed costs 240,000
Net operating income P60,000
In an effort to maximize profit, management have asked you to do and analyze the following:
1. Compute the company’s contribution margin ratio and variable expense ratio. CM = 25%,
VC = 75%

2. Compute the company’s break-even point in units and in pesos by using the equation
method.

BEP in units = FC / CM per unit BEP in Peso = FC / CM%

=240,000 / 15 = 240,000 / 25%
= 16,000 units = 960,000

3. Assume that sales increase by P400,000 next year. If cost behavior patterns remain
unchanged, by how much will the company’s, net operating income increase? Use the
contribution margin ratio to compute the answer.

400,000 x 25% = 100,000 + 60,000 = 160,000

Total
Sales (20,000 units) P1,600,000 100% 60
Variable expenses 1,200,000 75% 45
Contribution margin P400,000 25% 15
Fixed costs 240,000
Net operating income P160,000
4. Refer to the original data. Assume that next year management wants to earn a profit of
P90,000, how many units will have to be sold to meet this target profit?

Sales units required to earn a target profit = Fixed Cost + Target Profit
CM per unit
= 240,000 + 90,000
15
= 22,000 units

5. Refer to the original data. Compute the company, margin of safety in both peso and
percentage form.

MOS = Actual Sales – BEP Sales

240,000 = 1,200,000 – 960,000
20% = 100% - 80%

6. Compute the company’s degree of operating leverage at the present level of sales.

Operating Leverage = CM / Net Income

Operating leverage = Change in EBIT / Change in Sales

OL = 300,000 / 60,000
OL = 5.00

7. Assume that sales increase by 8% next year, by what percentage would you expect
operating income to increase? Use the degree of operating leverage to obtain your
answer.

OL = Change in EBIT
Change in Sales

5 = (x)
8%

X = 40%

Change in EBIT = 40% x 60,000 = 24,000

= 24,000 + 60,000 = 84,000
(20,000)

Page |2
 Total
Sales (21,600) 1,296,000 100% 60
Variable expenses 972,000 75% 45
Contribution margin 324,000 25% 15
Fixed costs 240,000
Net operating income P84,000

8 Prepare a contribution format income statement to showing an 8% increase in sales to

check your answer in number 7.
(20,000)
Total
Sales (21,600) 1,296,000 100% 60
Variable expenses 972,000 75% 45
Contribution margin 324,000 25% 15
Fixed costs 240,000
Net operating income P84,000

9. In an effort to increase sales, management is considering the use of a higher quality

speaker. This would increase variable costs by P3 per unit, but would eliminate one
quality inspector who is paid a salary of P30,000 per year. The estimate is that annual
sales will increase by 20%. Prepare a contribution format income statement to showing
the changes.

(20,000)
Total
Sales (24,000) 1,440,000 100% 60
Variable expenses 1,152,000 80% 48
Contribution margin 288,000 20% 12
Fixed costs 210,000
Net operating income P78,000

10. Refer to number 9, compute the company’s break-even point in units and in pesos by
using the contribution margin method.

BEP in units = FC / CM per unit

210,000 / 12 = 17,500 units

Page |3
BEP in peso = FC / CM%
= 210,000 / 20% = 1,050,000

11 Refer to number 9, should the change be made? YES, because of additional 18,000 in
Profit

B. Osol Company sells 's product sells for P16 and has a variable cost per unit of P12. Fixed
costs are P120,000.

1. Compute the break-even point in pesos.

BEP in peso = 120,000 / 25% = Php480,000

2. Compute the number of units Foris must sell to earn a P30,000 profit.

Sales in units to earn a target profit = (120,000 + 30,000) / 4 = 37,500 units

3. Osol has a target profit of P36,000 and expects to sell 30,000 units. Compute the
selling price Foris must charge to earn the target profit.

CM unit = (120,000 + 36,000) / 30,000 = 5.20 CM/unit

SP 17.20
VC 12.00
CM. 5.20

4. Osol wants to keep its selling price at P16 per unit and earn a 10% return on sales.
Calculate the number of units Foris must sell to meet the target.

Sales 16. 100%. 800,000 / 16 = 50,000 units

VC. 12. 75%
CM. 4. 25%
FC 15%. 120,000
NI 10%

Page |4
C. The Arboleda Company sells two products, A and B, with contribution margin ratios of 40
and 30 percent and selling prices of P5 and P2.50 a unit. Fixed costs amount to P72,000 a
month. Monthly sales average 30,000 units of product A and 40,000 units of product B.

a. Assuming that three units of product A are sold for every four units of product B,
calculate the peso sales volume necessary to break even.
b. As part of its cost accounting routine, Wilcox Company assigns P36,000 in fixed costs to
each product each month. Calculate the break-even peso sales volume for each product.
c. Wilcox Company is considering spending an additional P9,700 a month on advertising,
giving more emphasis to product A and less emphasis to product B. If its analysis is
correct, sales of product A will increase to 40,000 units a month, but sales of product B
will fall to 32,000 units a month. Recalculate the break-even sales volume, in Pesos, at
this new product mix. Should the proposal to spend the additional P9,700 a month be
accepted?
in ratio.

Variable and Absorption Costing:

A. Garcia Corporation produces a single product. The following is a cost structure applied to its
first year of operations.
Sales price P15 per unit
Variable costs:
SG&A P2 per unit
Production P4 per unit
Fixed costs (total cost incurred for the year):
SG&A P14,000
Production P20,000
During the first year, Garcia Corporation manufactured 5,000 units and sold 3,800. There
was no beginning or ending work-in-process inventory.
a. How much income before income taxes would be reported if Garcia uses absorption
costing?
b. How much income before income taxes would be reported if variable costing was used?
c. Show why the two costing methods give different income amounts.

B. Bennett Corporation
Bennett Corporation produces a single product that sells for P7.00 per unit. Standard capacity is

Page |5
100,000 units per year; 100,000 units were produced and 80,000 units were sold during the
year. Manufacturing costs and selling and administrative expenses are presented below.
There were no variances from the standard variable costs. Any under- or overapplied overhead
is written off directly at year-end as an adjustment to cost of goods sold.
Fixed costs Variable costs
Direct material P0 P1.50 per unit produced
Direct labor 0 1.00 per unit produced
Manufacturing overhead P150,000 0.50 per unit produced
Selling & Administration expense 80,000
0.50 per unit sold
Bennett Corporation had no inventory at the beginning of the year.

1.. Refer to Bennett Corporation. In presenting inventory on the balance sheet at December 31,
the unit cost under absorption costing is
a. P2.50. b. P3.00. c. P3.50. d. P4.50.

2. Refer to Bennett Corporation. What is the net income under variable costing?
a. P50,000 b. P80,000 c. P90,000 d. P120,000

3. Refer to Bennett Corporation. What is the net income under absorption costing?
a. P50,000 b. P80,000 c. P90,000 d. P120,000

Page |6