MS 0703 COST VOLUME PROFIT

ANALYSIS
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MS 0703 COST
VOLUME PROFIT
ANALYSIS
1. Chubby 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
Variable expenses 900,000
Contribution margin P 300,000
Fixed costs 240,000
Net operating income P 60,000

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.
2. Compute the company’s break-even point in units and in pesos by using
the equation method.
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.
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?
5. Refer to the original data. Compute the company, margin of safety in both
peso and percentage form.
6. Compute the company’s degree of operating leverage at the present level
of sales.
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.
8 Prepare a contribution format income statement to showing an 8%
increase in sales to check your answer in number 7.
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.
10. Refer to number 9, compute the company’s break-even point in units and
in pesos by using the contribution margin method.
11 Refer to number 9, should the change be made?
 Amount Unit Ratio
Sales 1,200,000.00 20,000 60(1,200,000/1,200,000) or(60/60) 100%
Variable Costs 900,000.00 20,000 45(900,000/1,200,000) or(45/60) 75%
Contribution Margin 300,000.00 20,000 15(300,000/1,200,000) or(15/60) 25%
Fixed Costs 240,000.00
Operating Income 60,000.00
BASIS:Income Statement Method
Amount Ratio
Sales (60XU) 100%
Variable Costs (45XU) 75%
Contribution Margin (15XU) 25%
Fixed Costs 240,000
Operating Income
 Amount Ratio
Sales (60XU) 100%
Variable Costs (45XU) 75%
Contribution Margin (15XU) 240,000 25%
Fixed Costs 240,000
Operating Income 0
 Amount Ratio
Sales (60XU) 100%
Variable Costs (45XU) 75%
Contribution Margin (15X16,000) 240,000 25%
Fixed Costs 240,000
Operating Income 0

Fixed Costs = 240,000.00 = 16,000 Units

Contribution Margin Per Unit (CMU) 15.00
 Amount Ratio
Sales (60X?) 960,000 100%
Variable Costs (45X?) 75%
Contribution Margin (15X16,000) 240,000 25%
Fixed Costs 240,000
Operating Income 0

Fixed Costs = 240,000.00 = 960,000

Contribution Margin Ratio (CMR) 25%
 Amount Ratio
Sales (60X16,000) 960,000 100%
Variable Costs (45X16,000) 720,000 75%
Contribution Margin (15X16,000) 240,000 25%
Fixed Costs 240,000
Operating Income 0

BEP Units X Selling Price Per Unit = 16,000Units X P60 = 960,000.00 Pesos
Contribution Margin Method

Fixed Costs = 240,000.00 = 16,000 Units

Contribution Margin Per Unit (CMU) 15.00

Fixed Costs = 240,000.00 = 960,000.00 Pesos

Contribution Margin Ratio (CMR) 25%

BEP Units X Selling Price Per Unit =16,000Units X= P60

960,000.00 Pesos
Contribution Margin Method

Fixed Costs = 240,000.00 = 16,000 Units

Contribution Margin Per Unit (CMU) 15.00

Fixed Costs = 240,000.00 = 960,000.00 Pesos

Contribution Margin Ratio (CMR) 25%

BEP Units X Selling Price Per Unit =16,000Units X=P60960,000.00 Pesos

Contribution Margin Method

Fixed Costs = 240,000.00 = 16,000 Units

Contribution Margin Per Unit (CMU) 15.00

Fixed Costs = 240,000.00 = 960,000.00 Pesos

Contribution Margin Ratio (CMR) 25%

BEP Units X Selling Price Per Unit =16,000Units X=P60960,000.00 Pesos

Equation Method
Let U be the no. of units
Sales = Variable Costs + Fixed Costs + Profit
60U = 45U + 240,000 + 0
60U-45U = 240,000 + 0
15U = 240,000
U = 240,000/15
U = 16,000

OR
Let X be sales
X = .75X + 240,000 + 0
X-.75X = 240,000 + 0
.25X = 240,000
X = 240,000/.25
X = 960,000.00
BASIS:Income Statement Method
Amount Ratio
Sales (60XU) 10 %
Variable Costs (45XU) 75%
Contribution Margin (15XU) 25%
Fixed Costs 240,0 0
Operating Income
Problem I 3
Contribution Margin Method

Sales Increase 400,000

X Contribution Margin Ratio (CMR) 25%
Incraese in Net Operating Inciome 100,000

Additional
Current Next Year Sales
Sales 1,200,000 +400,000 1,600,000 400,000.00
Variable Costs 900,000 (75%x1,600,000) 1,200,000 300,000.00
Contribution Margin 300,000 (25%X1,600,000) 400,000 100,000
Fixed Costs 240,000 240,000 No additional FC
Operating Income 60,000 160,000 100,000 100,000
Problem I No. 4
BASIS:Income Statement Method
Amount Ratio
Sales (60X?) 100%
Variable Costs (45X?) 75%
Contribution Margin (15X?) 25%
Fixed Costs 240,000
Operating Income 90,000

Amount Ratio
Sales (60X?) 100%
Variable Costs (45X?) 75%
Contribution Margin (15X?) 330,000 25%
Fixed Costs 240,000
Operating Income 90,000
 Amount Ratio
Sales (60X?) 100%
Variable Costs (45X?) 75%
Contribution Margin (15X22,000) 330,000 25%
Fixed Costs 240,000
Operating Income 90,000

Fixed Costs + Desired Profit 240,000+90,000 22,000

CMU 15

Amount Ratio
Sales (60X?) 1,320,000 100%
Variable Costs (45X?) 75%
Contribution Margin (15X22,000) 330,000 25%
Fixed Costs 240,000
Operating Income 90,000

Fixed Costs + Desired Profit 240,000+90,000 1,320,000

CMR 25%
 Amount Ratio
Sales (60X22,000) 1,320,000 100%
Variable Costs (45X22,000) 990,000 75%
Contribution Margin (15X22,000) 330,000 25%
Fixed Costs 240,000
Operating Income 90,000
Problem I 5
Margin Of Safety Pesos =Actual Or Planned Sales -Breakeven Sales
Margin Of Safety = 1,200,000 - 960,000
Margin Of Safety = 240,000 -

Margin Of Safety Percentage = 240,000/1,200,000 or 4,000/20,000

Margin Of Safety = 20% -
20% = 100% - 80%

Margin Of Safety Units = 20,000 - 16,000

Margin Of Safety = 4,000
APS 1,200,00 20,000 100%

MOS 240,000 4,000 20%

BES 960,000 16,000 80%

LOSS
6. 7. 8.
6. 8% x5 = 40%
18,400 -8%;1,600 20,000 +8%;1,600 21,600 21,600
Sales 60 1,104,000 -8% 1,200,000 +8% 1,296,000+8% 1,296,000
Variable Costs 45 828,000 -8% 900,000 +8% 972,000+8% 972,000
Contribution Margin 15 276,000 -8% 300,000 +8% 324,000+8% 324,000
Fixed Costs 240,000 0% 240,000 0% 240,000+8% 259,200 Assuming VC
Operating Income 36,000 -40% 60,000 +40% 84,000+8% 64,800

Degree Of Operating Leverage (DOL)

-40% = 36,000-60,000 CM 300,000 84,000-60,000 = 40%
60,000 OI 60,000 60,000
-40%/-8% 5 5 40%/8% 5
Change In Operating Income/Change in Sales
RISK AND RETURN TRADE OFF
FIXED COST IS RISKY BECAUSE IT
BRINGS WITH IT FINANCIAL FIXED
COST IN THE FORM OF INTEREST
EXPENSE BUT IT MAGNIFIES
RETURNS
 0 1 2 15,999 16,000 16,001
Sales 60 - 60 120 959,940 960,000 960,060
Variable Costs 45 - 45 90 719,955 720,000 720,045
Contribution Margin 15 - 15 30 239,985 240,000 240,015
Fixed Costs 240,000 240,000 240,000 240,000 240,000 240,000
Operating Income (240,000) (239,985) (239,970) (15) - 15
Problem I 9, 10, 11
New Variable costs 45+3=48
New Fixed Costs 240,000-30,000=210,000
New Sales 20,000X1.20=24,000

20,000 20% 24,000

Sales 60 1,200,000 60 1,440,000 100%
Variable Costs 45 900,000 48 1,152,000 80%
Contribution Margin 15 300,000 12 288,000 20%
Fixed Costs 240,000 210,000
Operating Income 60,000 78,000
PROFIT INCREASE BY 18,000
10.
BEP=FC/CMU=210,000/12= 17,500 Increase from 16,000
BEP=FC/CMU=210,000/20%= 1,050,000.00 Increase from 960,000

MOS = 1,440,000 -1,050,000

= 390,000.00 Increase from 240,000

11.YES
B. Chubby 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.
2. Compute the number of units Chubby must sell to earn a P30,000 profit.
3. Chubby has a target profit of P36,000 and expects to sell 30,000 units. Compute
the selling price Chubby must charge to earn the target profit.
4. Chubby wants to keep its selling price at P16 per unit and earn a 10% return on
sales. Calculate the number of units Chubby must sell to meet the target.
 Amount Ratio
Amount Ratio
Sales 16 X 30,000 480,000 100%
Variable Costs 12 X 30,000 360,000 75%
Contribution Margin 4 X 30,000 120,000 25%
Fixed Costs 120,000
Operating Income 0

or 120,000/4= 30,000 units FC/CMU

2
Amount Ratio
Amount Ratio
Sales 16 X 37,500 600,000 100%
Variable Costs 12 X 37,500 450,000 75%
Contribution Margin 4 X 37,500 150,000 25%
Fixed Costs 120,000
Operating Income 30,000

120,000+30,000/4= 37,500 units FC+DP/CMU

3
Amount Ratio
Amount Ratio
Sales ? X 30,000 100%
Variable Costs 12 X 30,000 360,000
Contribution Margin ? X 30,000
Fixed Costs 120,000
Operating Income 36,000

Sales ? X 30,000 100%

Variable Costs 12 X 30,000 360,000
Contribution Margin ? X 30,000 156,000
Fixed Costs 120,000
Operating Income 36,000
Sales 17.20 X 30,000 516,000 100%
Variable Costs 12 X 30,000 360,000 69.77%
Contribution Margin 5.2 X 30,000 156,000 30.23%
Fixed Costs 120,000
Operating Income 36,000
4
Amount Ratio
Amount Ratio
Sales 16 X ? 100%
Variable Costs 12 X ? 75%
Contribution Margin 4X ? 25%
Fixed Costs 120,000
Operating Income 10%

Amount Ratio
Amount Ratio
Sales 16 X 50,000 800,000 100%
Variable Costs 12 X ? 75%
Contribution Margin 4X ? 25%
Fixed Costs 120,000 15% (25%-10%)
Operating Income 10%
 Amount Ratio
Amount Ratio
Sales 16 X 50,000 800,000 100% (120,000/15%)
Variable Costs 12 X ? 75%
Contribution Margin 4X ? 25%
Fixed Costs 120,000 15% (25%-10%)
Operating Income 10%

Sales 16 X 50,000 800,000

Variable Costs 12 X 50,000
Contribution Margin 4X 50,000 200,000
Fixed Costs 120,000
Operating Income 80,000 10%
C. Earl Company sells a product for P20, variable costs are P8 per unit, and fixed costs are
P32,000.
1. Compute the break-even point in units.
2. Find the selling price that Dennis must charge to earn an P8,000 profit selling 1,600
units.
3. Earl is considering new equipment that would increase fixed costs by P2,000 while
reducing unit variable costs by P1.60 per unit. Find the sales level where Dennis is
indifferent between the two cost structures.
Problem III
1
32,000/(20- 8) 2666.66667 2,667

2
Amount Ratio
Sales ? X 1,600 100%
Variable Costs 8X 1,600 12,800 ?
Contribution Margin ? X 1,600 ?
Fixed Costs 32,000
Operating Income 8,000

Sales 33 X 1,600 52,800 100%

Variable Costs 8X 1,600 12,800 24.24%
Contribution Margin 25 X 1,600 40,000 75.76%
Fixed Costs 32,000
Operating Income 8,000
3
Current Costs = Proposed Costs
Fixed Costs+ Variable Costs = Fixed Costs+ Variable Costs
32,000 + 8U = (32,000 + 2,000) + ( 8U - 1.60U)
32,000 + 8U = 34,000 + 6.40U
8U-6.40U= 34,000-32,000
1.60U = 2,000
U = 2000/1.60
U = 1,250 10008
8006.4
Fixed Costs+ Variable Costs = Fixed Costs+ Variable Costs
32,000 + 8U = 34,000 + 6.40U
32,000 + 8 ( 1,250U) = 34,000 + 6.40 ( 1,250U)
32,000 + 10,000 = 34,000 + 8,000
42,000 = 42,000

1 - 1,249 1,250 1,251 - Upwards

Current Costs Indifferent Proposed Costs UNITS DIFFERENCE
32,008.00 34,006.40 1 1,998.40
42,000.00 42,000.00 1,250 0.00
42,008.00 42,006.40 1,251 -1.60
Fixed Costs+ Variable Costs = Fixed Costs+ Variable Costs Fixed Costs+ Variable Costs = Fixed Costs+ Variable Costs
32,000 + 8U = 34,000 + 6.40U 32,000 + 8U = 34,000 + 6.40U
32,000 + 8 ( 1) = 34,000 + 6.40 ( 1) 32,000 + 8 ( 1,251U) = 34,000 + 6.40 ( 1,251U)
32,000 + 8 = 34,000 + 6.40 32,000 + 10,008 = 34,000 + 8,006.40
32,008 = 34,006.40 42,008 = 42,006.40
1 - 1,249 1,250 1,251 - Upwards
Current Costs Indifferent Proposed Costs
32,008.00 34,006.40
42,000.00 42,000.00
42,008.00 42,006.40
5. Toby Company has sales of P350,000,variable costs of P200,000, and fixed costs of
P125,000. Toby has an effective tax rate of 40%.
a. Compute the break-even point in pesos.
b. Compute Eleva's sales needed to earn a P75,000 after-tax profit.
c. Compute the sales Eleva would need to earn a 15% after-tax return on sales.
Problem V
1
Sales X 350,000 100%
Variable Costs X 200,000 ?
Contribution Margin X 150,000 ?
Fixed Costs 125,000
Operating Income 25,000

Sales X 350,000 100%

Variable Costs X 200,000 57%
Contribution Margin X 150,000 43%
Fixed Costs 125,000
Operating Income 25,000

Fixed Costs = 125,000.00 290,697.67

Contribution Margin Ratio 43%
2
Sales X 581,395 100% (250,000/43%)
Variable Costs X 57%
Contribution Margin X 250,000 43%
Fixed Costs 125,000
Operating Income 100% 125,000 (75,000/60%)
Tax 40%
After Tax Profit 60% 75,000

FC + ATP/1-TR 125,000+75,000/1-.40 125,000+75,000/.60

CMR 43% 43%

250,000 = 581395.349
43%
3
Sales X 694,444 100% (125,000/18%)
Variable Costs X 57%
Contribution Margin X 43%
Fixed Costs 125,000 18% (43%-25%)
Operating Income 100% 25% (15%/60%)
Tax 40%
After Tax Profit 60% 15%
6. Mound Company has a before-tax return on sales of 9% and a 25% margin of
safety. Current sales are P800,000.
a. Compute the break-even point in pesos.
b. Find Mound's variable cost percentage.
MARGIN OF SAFETY = ACTUAL OR PLANNED SALES - BREAKEVEN SALES
25% = 100% - 75%
GIVEN = CONSTANT - 100%-25%
200,000 = 800,000 - 600,000
GIVEN ( 800,000 - 600,000 )

Particular ACTUAL BREAKEVEN

Sales 800,000 100% 600,000 75%
Variable Costs
Contribution Margin
Fixed Costs
Operating Income 9% 0%
 Particular ACTUAL BREAKEVEN
Sales 100% 75%
Variable Costs 91% 75%
Contribution Margin (100%-
9% =
91%)
Fixed Costs
Operating Income 9% 0
 Particular ACTUAL BREAKEVEN CHANGE IN
Sales 800,000 100% 600,000 75% 200,000 SALES
Variable Costs 728,000 91% 600,000 75% 128,000 TOTAL COSTS
Contribution Margin (100%-
9% =
91%) TOTAL COSTS
Fixed Costs #REF!
Operating Income 9% 0

CHANGE IN CHANGE IN VARIABLE

TOTAL COSTS VARIABLE COSTS 128,000 64% COST
CHANGE IN CHANGE IN 200,000 RATE
SALES SALES
 Particular ACTUAL ACTUAL
Sales 100% 800,000
Variable Costs 64% 512,000
Contribution Margin 36% 288,000
Fixed Costs 27% 216,000
Operating Income 9% 72,000

BEP = FC/CMR 216,000/36% 600,000

9. The Junior Philippine Institute of Accountants of Chubby University is planning for its
annual dinner-general assembly. The following costs were projected by the dinner-
general assembly committee.

Dinner per person P18

Favors and programs per person P2
Band P2,800
Rental of ballroom P900
Professional entertainment during intermission P1,000
Tickets and advertising P1,300

The dinner- general assembly committee wants to charge P35 per person for the
activity:

a. Compute the break-even point in number of students who must attend the
dinner- general assembly.
b. The dinner- general assembly committee made a conservative estimate that only
300 students will attend out of the 600 accounting students in the University.
What price per ticket must be charged in order to break-even.
c. Prepare a CVP graph from a zero level of activity up to 600 tickets sold assuming
that P35 ticket price per person.
1. The contribution margin per person would be:
Price per ticket ....................................... P35
Less variable expenses:
Dinner .................................................. P18
Favors and program ............................. 2 20
Contribution margin per person ............. P15
The fixed expenses of the dinner-dance total P6,000
(P2,800+P900+P1,000+P1,300). The break-even
point would be:
Variable expenses + Fixed expenses +
Sales = Profits
P35Q = P20Q + P6,000 + P0
P15Q = P6,000
Q= P6,000 ÷ P15 per person
400 persons; or, at P35 per person,
Q= P14,000
 Alternative solution:
Break-even point = Fixed expenses
in unit sales
.
Unit contribution margin
$6,000
= = 400 persons
$15 per person

2. Variable cost per person ($18 + $2)................... $20

Fixed cost per person ($6,000 ÷ 300 persons).... 20
Ticket price per person to break even................. $40
 $20,000
Total Sales
$18,000
.
Break-even point: Total
$16,000 400 persons or Expenses
$14,000 total sales
$14,000

$12,000
Total Sales

$10,000

$8,000

$6,000 Total
Fixed
$4,000 Expenses

$2,000

$0
0 100 200 300 400 500 600 700
Number of Persons
 0 1 2 3 399 400 401
Sales 35 - 35 70 105 13,965 14,000 14,035
Variable Costs 20 - 20 40 60 7,980 8,000 8,020
Contribution Margin 15 - 15 30 45 5,985 6,000 6,015
Fixed Costs 6,000 6,000 6,000 6,000 6,000 6,000 6,000
Operating Income (6,000) (5,985) (5,970) (5,955) (15) - 15
 0 1 2 3 399 400 401
Sales 35 - 35 70 105 13,965 14,000 14,035
Variable Costs 20 - 20 40 60 7,980 8,000 8,020
Contribution Margin 15 - 15 30 45 5,985 6,000 6,015
Fixed Costs 6,000 6,000 6,000 6,000 6,000 6,000 6,000
Operating Income (6,000) (5,985) (5,970) (5,955) (15) - 15
The Wilcox 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.

1. 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.

2. 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.

3. 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?
1
A B Total
Sales 5.00 2.50 7.50
Variable Costs 3.00 1.75 4.75
Contribution Margin 40% 2.00 30% 0.75 2.75

Multiply:Sales Mix 3 4

Weighted
A B Total
Sales 15 10 25
Variable Costs 9 7 16
Contribution Margin 6 3 9

Weighted Average Contribution Margin Ratio 9 / 25 = 36%

Fixed Costs 72,000

Divide: WACMR 36%
BEP P 200,000
2
Fixed Costs 36,000 36,000 72,000
Divide: CMR 40% 30%
BEP P 90,000 120,000 210,000

3
A B Total
Sales 5.00 2.50 7.50
Variable Costs 3.00 1.75 4.75
Contribution Margin 40% 2.00 30% 0.75 2.75

Multiply:Sales Mix 5 4

Weighted
A B Total
Sales 25 10 35
Variable Costs 15 7 22
Contribution Margin 10 3 13

Contribution Margin Ratio 13 / 35 = 37.14%

Fixed Costs (72,000 + 9,700) 81,700

Divide: WACMR 37.14%
BEP P 219,962
PRESENT
Contribution Margin A 2.00 x 30,000 60,000
Contribution Margin B 0.75 x 40,000 30,000
Contribution Margin 90,000
Fixed Costs 72,000
Operating Income 18,000

PROPOSAL - INCREASE IN ADVERTISING

Contribution Margin A 2.00 x 40,000 80,000
Contribution Margin B 0.75 x 32,000 24,000
Contribution Margin 104,000
Fixed Costs 81,700
Operating Income 22,300

ADVANTAGE IN INCREASING ADVERTISING 4,300

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