ANSWER KEY CVP PROBLEMS ACCTG 2100 SCM

PROBLEM 3
Given

• Product A: selling price = ₱5.00/unit; CM ratio = 40% → CM per unit = 5.00 ×

0.40 = ₱2.00
• Product B: selling price = ₱2.50/unit; CM ratio = 30% → CM per unit = 2.50 ×
0.30 = ₱0.75
• Fixed costs = ₱72,000 per month
• Average monthly sales (units) = A: 30,000 ; B: 40,000
• The assumed product mix for part (a) is 3 A : 4 B (which matches 30k : 40k)

(a) Break-even with mix 3A : 4B

Build a 7-unit batch (3 A + 4 B):

• Revenue per batch = 3×₱5.00 + 4×₱2.50 = ₱15.00 + ₱10.00 = ₱25.00

• Contribution per batch = 3×₱2.00 + 4×₱0.75 = ₱6.00 + ₱3.00 = ₱9.00

Composite contribution margin ratio (CMR) = 9 / 25 = 0.36 (36%)

BEP in peso sales = Fixed ÷ composite CMR

= ₱72,000 ÷ 0.36 = ₱200,000

Number of batches to break even = BEP pesos ÷ revenue per batch

= 200,000 ÷ 25 = 8,000 batches

Therefore units at BEP:

• Product A units = 3 × 8,000 = 24,000 units

• Product B units = 4 × 8,000 = 32,000 units
• Total units = 56,000 units

Answer (a): BEP = ₱200,000; A = 24,000 units; B = 32,000 units (total 56,000 units).

(b) If fixed costs are assigned ₱36,000 to each product

Treat each product separately.

Product A

• Fixed_A = ₱36,000
• CM per unit_A = ₱2.00
• BEP units_A = 36,000 ÷ 2.00 = 18,000 units
• BEP peso sales_A = 18,000 × ₱5.00 = ₱90,000

Product B

• Fixed_B = ₱36,000
• CM per unit_B = ₱0.75
• BEP units_B = 36,000 ÷ 0.75 = 48,000 units
• BEP peso sales_B = 48,000 × ₱2.50 = ₱120,000

Combined BEP (by this allocation) = ₱90,000 + ₱120,000 = ₱210,000

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Answer (b):

• Product A BEP = 18,000 units (₱90,000)

• Product B BEP = 48,000 units (₱120,000)
• Combined = ₱210,000

(Note: allocating fixed costs by product often changes the combined BEP versus using the mixed-
package method in (a).)

(c) Income statement showing profit = 0 (i.e., at break-even from (a))

Use the BEP mix from (a): A = 24,000 units, B = 32,000 units, total sales ₱200,000.

Income statement (BEP):

INAD Company — Income Statement (Break-Even)

Sales:
Product A (24,000 × ₱5.00) ............. ₱120,000
Product B (32,000 × ₱2.50) ............. 80,000
Total Sales ............................ ₱200,000

Variable costs:
Product A (24,000 × ₱3.00) [5.00−2.00] . ₱72,000
Product B (32,000 × ₱1.75) [2.50−0.75] .. ₱56,000
Total Variable Costs ................... ₱128,000

Contribution Margin ...................... ₱72,000

Fixed costs .............................. (₱72,000)
Profit before tax ........................ ₱0

(Contribution = ₱72,000; fixed ₱72,000 → profit zero.)

(d) New proposal: spend additional ₱9,700 on advertising

New fixed = 72,000 + 9,700 = ₱81,700

Projected new monthly sales volumes:

• A = 40,000 units → Sales_A = 40,000 × ₱5 = ₱200,000; CM_A = 40,000 × ₱2.00 =

₱80,000
• B = 32,000 units → Sales_B = 32,000 × ₱2.50 = ₱80,000; CM_B = 32,000 × ₱0.75 =
₱24,000

Total projected sales = ₱200,000 + ₱80,000 = ₱280,000

Total projected contribution = ₱80,000 + ₱24,000 = ₱104,000

Composite CMR at the new mix = 104,000 ÷ 280,000 = 0.3714285714 (which is 13/35 ≈
0.37143)

BEP in pesos at the new mix = New fixed ÷ composite CMR

= ₱81,700 ÷ 0.3714285714 = ₱81,700 × (35/13) = ₱219,961.54 (rounded to cents)

Compare projected sales to new BEP:

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• Projected sales = ₱280,000

• New BEP = ₱219,961.54

Projected profit after advertising = Total contribution − New fixed

= ₱104,000 − ₱81,700 = ₱22,300

Compare to current situation (before ad) at actual average sales 30k A & 40k B:

• Current sales = (30,000×5) + (40,000×2.5) = ₱150,000 + ₱100,000 = ₱250,000

• Current contribution = (30,000×2) + (40,000×0.75) = ₱60,000 + ₱30,000 = ₱90,000
• Current profit = 90,000 − 72,000 = ₱18,000

Effect of the advertising proposal

• Profit increases from ₱18,000 to ₱22,300 → increase of ₱4,300 per month.

• The projected sales (₱280,000) are well above the new BEP (₱219,961.54), so the
company would be in a safe profit zone under the new mix.

Recommendation: Yes — based on these numbers the advertising spend is acceptable,

because it raises profit by ₱4,300 per month and leaves projected sales comfortably
above the new break-even.

PROBLEM 2
Given (summary)
Sales = ₱300,000
Variable costs = ₱150,000
Contribution margin (CM) = ₱150,000
Fixed costs = ₱100,000
Profit (before tax) = ₱50,000
Target profit = ₱40,000

From these we get the contribution margin ratio (CMR):

CMR = CM / Sales = 150,000 / 300,000 = 0.50 (50%)
(Meaning ₱0.50 of each peso of sales is contribution.)

1. BEP in units

Break-even in units = Fixed costs ÷ contribution margin per unit.

Note: you did not give a selling price (or number of units sold). Without price per unit
we cannot produce a numeric “units” answer.
So in formula form:

BEP (units) = ₱100,000 ÷ (selling price per unit − variable cost per unit).

If you want a numeric units answer, tell me the selling price per unit (or the number of
units sold to make current ₱300,000), and I’ll compute it.

(Useful alternative: express BEP units relative to current volume — see below.)

2. BEP in peso sales (numeric)

BEP (peso sales) = Fixed costs ÷ CMR = 100,000 ÷ 0.50 = ₱200,000.

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3. BEP in units (target profit)

Same issue as (1): formula only unless a unit price is provided.

BEP (units for target profit) = (Fixed costs + Target profit) ÷ contribution margin per
unit.

4. BEP in peso sales (target profit)

Required sales to earn target profit = (Fixed costs + Target profit) ÷ CMR
= (100,000 + 40,000) ÷ 0.50 = 140,000 ÷ 0.50 = ₱280,000.

5. Income statement showing target profit (i.e., at the required sales of ₱280,000)
INAD Company — Pro forma to achieve Target Profit (₱40,000)

Sales ........................................... ₱280,000

Less: Variable costs (50% of sales) ............. (140,000)
Contribution margin ............................. 140,000
Less: Fixed costs ............................... (100,000)
Profit before tax (Target profit) ................ 40,000

(That matches the computed required sales of ₱280,000.)

6. Margin of Safety (MOS) — all relevant cases

Definitions:

• MOS (₱) = Actual (or planned) sales − Break-even sales.

• MOS % = MOS (₱) ÷ Actual (or planned) sales.

a) Using current actual sales = ₱300,000

BEP sales = ₱200,000 (from #2)
MOS (₱) = 300,000 − 200,000 = ₱100,000
MOS % = 100,000 ÷ 300,000 = 33.33%

b) If company sells exactly the target-profit sales = ₱280,000

MOS (₱) = 280,000 − 200,000 = ₱80,000
MOS % = 80,000 ÷ 280,000 = 28.57%

c) At Break-Even sales the MOS is 0 (by definition).

7. Degree of Operating Leverage (DOL) — all cases

DOL = Contribution margin ÷ Profit (before tax). It measures sensitivity of profit to %

change in sales.

a) Current actual results (Sales ₱300,000, Profit ₱50,000)

DOL = 150,000 ÷ 50,000 = 3.0

Interpretation: a 1% change in sales → ~3% change in profit.

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b) At target profit (sales ₱280,000, CM ₱140,000, Profit ₱40,000)

DOL = 140,000 ÷ 40,000 = 3.5

c) At Break-Even (profit = 0)
DOL is undefined (or approaches infinity) because profit = 0 — small changes in sales
cause very large % changes in profit.

Quick recap (numeric results)

• BEP (peso sales): ₱200,000

• BEP (peso sales for ₱40,000 target profit): ₱280,000
• Income statement at required sales ₱280,000 shown above.
• Margin of Safety (current sales ₱300k): ₱100,000 (33.33%)
• Margin of Safety (at target sales ₱280k): ₱80,000 (28.57%)
• DOL (current): 3.0; DOL (target): 3.5; DOL (BEP): undefined/infinite.

PROBLEM 1
Given Data

• Selling price per unit = ₱15

• Variable costs per unit:
o Production = ₱5
o SG&A = ₱1
→ Total variable cost/unit = ₱6
• Contribution margin/unit = ₱15 – ₱6 = ₱9
• Fixed costs:
o Production = ₱40,000
o SG&A = ₱60,000
→ Total fixed costs = ₱100,000
• Estimated volume = 20,000 units

1. Break-even point (BEP) in units

BEP (units)=Fixed CostsCM per unit=100,000/9=11,111.11

→ BEP = 11,112 units (rounded up).

2. Break-even point in peso sales

BEP (₱)=BEP (units)×Selling Price=11,112×15=₱166,680

3. Income statement at break-even (profit = 0)

At BEP units = 11,112:

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Particulars Amount

Sales (11,112 × ₱15) ₱166,680

Less: Variable Costs (11,112 × ₱6) (66,672)

Contribution Margin ₱100,008

Less: Fixed Costs (100,000)

Net Income ≈ ₱0

(rounding difference of ₱8 due to decimals is acceptable)

4. Margin of Safety (MOS)

MOS (units)=Actual Sales Units – BEP Units=20,000–11,112=8,888 units

MOS (₱)=MOS (units)×Selling Price=8,888×15=₱133,320

MOS (%)=MOS (₱)Actual Sales (₱)=133,320300,000=44.44%

5. Degree of Operating Leverage (DOL)

At 20,000 units:

• Sales = 20,000 × 15 = ₱300,000

• Variable costs = 20,000 × 6 = ₱120,000
• Contribution Margin = ₱180,000
• Fixed costs = ₱100,000
• Net Income = ₱80,000

DOL={180,000}/{80,000} = 2.25

6. Interpretation

• Break-even point (11,112 units / ₱166,680 sales): The company must sell at least
this level to cover all costs.
• At break-even: Net income is zero; contribution margin exactly equals fixed
costs.
• Margin of safety (44.44%): Actual sales can fall by 44% before the company
incurs losses. This indicates a relatively comfortable safety cushion.
• DOL (2.25): A 1% change in sales will cause approximately a 2.25% change in
net operating income, showing the firm has moderate operating leverage—
profits are sensitive to sales volume but not excessively risky.

Problem 3: The INAD Company

Given Information:

• Product A:

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oContribution Margin Ratio: 40%

oSelling Price: P5.00/unit
• Product B:
o Contribution Margin Ratio: 30%
o Selling Price: P2.50/unit
• Fixed Costs: P72,000/month
• Monthly Sales Average:
o Product A: 30,000 units
o Product B: 40,000 units

Solution:

a. Break-even analysis with a sales mix of 3 units of A for every 4 units of B.

Step 1: Calculate the contribution margin per unit for each product.

• Contribution Margin per unit (A) = Selling Price (A) * Contribution Margin Ratio
(A)
o CM (A) = P5.00 * 0.40 = P2.00
• Contribution Margin per unit (B) = Selling Price (B) * Contribution Margin Ratio
(B)
o CM (B) = P2.50 * 0.30 = P0.75

Step 2: Determine the weighted-average contribution margin per composite unit.

A composite unit is a combination of products in a specific sales mix. The sales mix is 3
units of A for every 4 units of B.

• Weighted-average Contribution Margin (WACM) = (CM_A * Mix_A) + (CM_B *

Mix_B)
o WACM = (P2.00 * 3) + (P0.75 * 4) = P6.00 + P3.00 = P9.00

Step 3: Calculate the break-even volume in composite units.

• Break-even in Composite Units = Total Fixed Costs / WACM

o Break-even = P72,000 / P9.00 = 8,000 composite units

Step 4: Calculate the break-even volume in units for each product.

• Break-even units (A) = Break-even in Composite Units * Mix_A

o Units (A) = 8,000 * 3 = 24,000 units
• Break-even units (B) = Break-even in Composite Units * Mix_B
o Units (B) = 8,000 * 4 = 32,000 units

Step 5: Calculate the break-even sales in pesos for each product and the total.

• Break-even Sales (A) = Units (A) * Selling Price (A)

o Sales (A) = 24,000 * P5.00 = P120,000
• Break-even Sales (B) = Units (B) * Selling Price (B)
o Sales (B) = 32,000 * P2.50 = P80,000
• Total Break-even Sales = Sales (A) + Sales (B)
o Total Sales = P120,000 + P80,000 = P200,000

b. Break-even analysis for each product with assigned fixed costs.

Each product is assigned a fixed cost of P36,000. This analysis treats each product as a
separate entity.

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• Break-even Sales (A) = Assigned Fixed Costs (A) / Contribution Margin Ratio
(A)
o Break-even Sales (A) = P36,000 / 0.40 = P90,000
• Break-even Volume (A) = Break-even Sales (A) / Selling Price (A)
o Break-even Volume (A) = P90,000 / P5.00 = 18,000 units
• Break-even Sales (B) = Assigned Fixed Costs (B) / Contribution Margin Ratio (B)
o Break-even Sales (B) = P36,000 / 0.30 = P120,000
• Break-even Volume (B) = Break-even Sales (B) / Selling Price (B)
o Break-even Volume (B) = P120,000 / P2.50 = 48,000 units

c. Prepare an income statement showing the profit is zero.

An income statement at the break-even point will have zero profit. We use the results
from part (a) to construct this statement.

Product A Product B Total

Sales (Pesos) P120,000 P80,000 P200,000
Variable Costs P72,000 P56,000 P128,000
Contribution Margin P48,000 P24,000 P72,000
Fixed Costs P72,000
Net Profit P0
Export to Sheets

Note:

• Variable Costs (A) = Sales (A) * (1 - CM Ratio A) = P120,000 * (1 - 0.40) = P72,000

• Variable Costs (B) = Sales (B) * (1 - CM Ratio B) = P80,000 * (1 - 0.30) = P56,000

d. Break-even analysis with new sales mix and additional advertising costs.

Step 1: Calculate the new sales mix and the total number of units.

• New Sales Volume (A) = 40,000 units

• New Sales Volume (B) = 32,000 units
• Total Units = 40,000 + 32,000 = 72,000 units
• New Sales Mix: 40,000 units (A) : 32,000 units (B) which simplifies to 5:4.
o 5 units of A for every 4 units of B.

Step 2: Calculate the new total fixed costs.

• New Fixed Costs = Old Fixed Costs + Additional Advertising

o New Fixed Costs = P72,000 + P9,700 = P81,700

Step 3: Determine the weighted-average contribution margin per composite unit for
the new mix.

• Weighted-average Contribution Margin (WACM) = (CM_A * Mix_A) + (CM_B *

Mix_B)
o WACM = (P2.00 * 5) + (P0.75 * 4) = P10.00 + P3.00 = P13.00

Step 4: Calculate the break-even sales volume in pesos at the new product mix.

• Break-even in Composite Units = New Fixed Costs / WACM

o Break-even = P81,700 / P13.00 = 6,284.62 composite units
• Break-even Sales (A) = Break-even units (A) * Selling Price (A)
o Units (A) = 6,284.62 * 5 = 31,423.1 units
o Sales (A) = 31,423.1 * P5.00 = P157,115.50

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• Break-even Sales (B) = Break-even units (B) * Selling Price (B)

o Units (B) = 6,284.62 * 4 = 25,138.5 units
o Sales (B) = 25,138.5 * P2.50 = P62,846.25
• Total Break-even Sales = P157,115.50 + P62,846.25 = P219,961.75

Step 5: Should the proposal be accepted?

To answer this, we compare the total profit under the old and new scenarios.

Old Scenario (Original Monthly Average):

• Sales (A) = 30,000 units * P5.00 = P150,000

• Sales (B) = 40,000 units * P2.50 = P100,000
• Total Sales = P250,000
• Total Contribution Margin = (P150,000 * 0.40) + (P100,000 * 0.30)
o Total CM = P60,000 + P30,000 = P90,000
• Net Income = Total CM - Fixed Costs
o Net Income = P90,000 - P72,000 = P18,000

New Scenario (With Additional Advertising):

• Sales (A) = 40,000 units * P5.00 = P200,000

• Sales (B) = 32,000 units * P2.50 = P80,000
• Total Sales = P280,000
• Total Contribution Margin = (P200,000 * 0.40) + (P80,000 * 0.30)
o Total CM = P80,000 + P24,000 = P104,000
• Net Income = Total CM - New Fixed Costs
o Net Income = P104,000 - P81,700 = P22,300

Conclusion:

The net income under the new scenario (P22,300) is higher than the net income under
the old scenario (P18,000). The increase in profit is P4,300 (P22,300 - P18,000). Therefore,
the proposal to spend the additional P9,700 a month on advertising should be
accepted.

Problem 4: INAD Company

Given Information:

• Product A:
o Selling Price (SP): P1,200/unit
o Variable Cost (VC): P480/unit
o Contribution Margin (CM) = P1,200 - P480 = P720/unit
• Product B:
o Selling Price (SP): P240/unit
o Variable Cost (VC): P160/unit
o Contribution Margin (CM) = P240 - P160 = P80/unit
• Sales Mix: 3 units of A for every 5 units of B.
• Fixed Costs: P1,800,000 per year.

Solution:

First, we need to determine the weighted-average contribution margin and weighted-

average selling price per composite unit, based on the sales mix.

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• A composite unit consists of 3 units of A and 5 units of B.

• Weighted-average Contribution Margin (WACM) = (3 units of A * P720/unit) +
(5 units of B * P80/unit)
o WACM = P2,160 + P400 = P2,560 per composite unit
• Weighted-average Selling Price (WASP) = (3 units of A * P1,200/unit) + (5 units
of B * P240/unit)
o WASP = P3,600 + P1,200 = P4,800 per composite unit
• Overall Contribution Margin Ratio = WACM / WASP
o CM Ratio = P2,560 / P4,800 = 0.5333 or 53.33%

a. Break-even in units and peso sales.

Step 1: Calculate the break-even point in composite units.

• Break-even (composite units) = Fixed Costs / WACM

o Break-even (composite units) = P1,800,000 / P2,560 = 703.125 composite
units

Step 2: Calculate the break-even in units for each product.

• Break-even units (A) = 703.125 * 3 = 2,109.375 units

• Break-even units (B) = 703.125 * 5 = 3,515.625 units

Step 3: Calculate the break-even sales in pesos for each product and total.

• Break-even sales (A) = 2,109.375 units * P1,200 = P2,531,250

• Break-even sales (B) = 3,515.625 units * P240 = P843,750
• Total Break-even Sales = P2,531,250 + P843,750 = P3,375,000

b. Break-even in units and peso sales to earn P800,000 of income before income taxes.

The formula for target profit is: Units = (Fixed Costs + Target Profit) / Contribution
Margin per Unit.

Step 1: Calculate the required sales in composite units.

• Required sales (composite units) = (Fixed Costs + Target Profit) / WACM

o Required sales = (P1,800,000 + P800,000) / P2,560 = P2,600,000 / P2,560 =
1,015.625 composite units

Step 2: Calculate the required sales in units for each product.

• Required units (A) = 1,015.625 * 3 = 3,046.875 units

• Required units (B) = 1,015.625 * 5 = 5,078.125 units

Step 3: Calculate the required peso sales for each product and total.

• Required sales (A) = 3,046.875 units * P1,200 = P3,656,250

• Required sales (B) = 5,078.125 units * P240 = P1,218,750
• Total Required Sales = P3,656,250 + P1,218,750 = P4,875,000

c. Break-even in units and peso sales to earn P800,000 of income after income taxes,
assuming a 30 percent tax rate.
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Step 1: Calculate the required pre-tax income.

• Required pre-tax income = After-tax income / (1 - tax rate)

o Required pre-tax income = P800,000 / (1 - 0.30) = P800,000 / 0.70 =
P1,142,857.14

Step 2: Calculate the required sales in composite units.

• Required sales (composite units) = (Fixed Costs + Required Pre-tax Income) /

WACM
o Required sales = (P1,800,000 + P1,142,857.14) / P2,560 = P2,942,857.14 /
P2,560 = 1,149.55 units

Step 3: Calculate the required sales in units for each product.

• Required units (A) = 1,149.55 * 3 = 3,448.65 units

• Required units (B) = 1,149.55 * 5 = 5,747.75 units

Step 4: Calculate the required peso sales for each product and total.

• Required sales (A) = 3,448.65 units * P1,200 = P4,138,380

• Required sales (B) = 5,747.75 units * P240 = P1,379,460
• Total Required Sales = P4,138,380 + P1,379,460 = P5,517,840

d. Break-even in units and peso sales to earn 12 percent on sales revenue in before-tax
income.

Step 1: Set up the equation using the overall CM ratio.

• Target Profit = 0.12 * Total Sales

• Total Sales = (Fixed Costs + Target Profit) / Overall CM Ratio
• Let S = Total Sales
• S = (P1,800,000 + 0.12S) / 0.5333
• 0.5333S = P1,800,000 + 0.12S
• 0.5333S - 0.12S = P1,800,000
• 0.4133S = P1,800,000
• S = P1,800,000 / 0.4133 = P4,355,594.02

Step 2: Calculate the required units for each product.

• Total required composite units = Total Sales / WASP

o Composite units = P4,355,594.02 / P4,800 = 907.415 units
• Required units (A) = 907.415 * 3 = 2,722.245 units
• Required units (B) = 907.415 * 5 = 4,537.075 units

e. Break-even in units and peso sales to earn 12 percent on sales revenue in after-tax
income, assuming a 30 percent tax rate.

Step 1: Calculate the required before-tax income as a percentage of sales.

• Required before-tax income % = After-tax income % / (1 - tax rate)

o Required before-tax income % = 0.12 / (1 - 0.30) = 0.12 / 0.70 = 0.1714 or
17.14%

Step 2: Set up the equation and solve for total sales.

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• Target Profit = 0.1714 * Total Sales

• Total Sales = (Fixed Costs + Target Profit) / Overall CM Ratio
• Let S = Total Sales
• S = (P1,800,000 + 0.1714S) / 0.5333
• 0.5333S = P1,800,000 + 0.1714S
• 0.5333S - 0.1714S = P1,800,000
• 0.3619S = P1,800,000
• S = P1,800,000 / 0.3619 = P4,972,091.74

Step 3: Calculate the required units for each product.

• Total required composite units = Total Sales / WASP

o Composite units = P4,972,091.74 / P4,800 = 1,035.85 units
• Required units (A) = 1,035.85 * 3 = 3,107.55 units
• Required units (B) = 1,035.85 * 5 = 5,179.25 units

f. Prepare an Income Statement for cases d & e.

Case d: 12% on sales before tax

Product A Product B Total

Sales (units) 2,722.245 4,537.075
Sales Revenue P3,266,694 P1,088,900 P4,355,594
Variable Costs P1,306,678 P726,086 P2,032,764
Contribution Margin P1,960,016 P362,814 P2,322,830
Fixed Costs P1,800,000
Net Income Before Taxes P522,830
Net Income % of Sales (522,830 / 4,355,594) 12%
Export to Sheets

Case e: 12% on sales after tax (30% tax rate)

Product A Product B Total

Sales (units) 3,107.55 5,179.25
Sales Revenue P3,729,060 P1,243,020 P4,972,080
Variable Costs P1,491,624 P828,680 P2,320,304
Contribution Margin P2,237,436 P414,340 P2,651,776
Fixed Costs P1,800,000
Net Income Before Taxes P851,776
Income Tax (30%) P255,533
Net Income After Taxes P596,243
Net Income % of Sales (596,243 / 4,972,080) 12%

WINNIE VILLANUEVA 12