Problem 01
Data with respect to a basic product line sold by Fabula Company are as follows:
Selling price per unit
Variable manufacturing costs per unit
Variable selling and administrative costs per unit
Fixed manufacturing costs
Fixed selling and administrative costs
Sales in units
P50
20
10
P160,000
200,000
24,000 units
REQUIRED:
1. Compute the contribution margin per unit and calculate the break-even point
in units. Calculate the contribution margin ratio and the break-even sales
revenue.
2. The company plans to acquire equipment that is expected to increase
production and sales by 20%. The new equipment will be depreciated on a
straight line basis for P40,000 per year. By how much will operating income
increase or decrease as a result of this action? Profit increase:
3. Refer to the original data.
a. How much sales must be generated to earn pre-tax profit of P200,000?
b. How many units must be sold to earn an after-tax profit of
P210,000?Assume a tax rate of 30 percent.
c. How much must sales be to earn pre-tax profit of 10% of such sales?
d. How much sales must be to earn after tax profit of 10.5% of sales?
4. Compute the margin of safety based on the original income statement.
5. Compute the degree of operating leverage based on the original income
statement. If sales revenues are 20 percent greater than expected, what is the
percentage increase in profits?
Problem 02
Ms. Ganda sells two beauty products for hopeless individuals, Sandpaper and Eraser.
Historically, the firm has sold, on the average, 400 units of Sandpaper and 1,200
units of Eraser. It incurs fixed costs of P14,400 per period. Pertinent data about the
two products are as follows:
Sandpaper
Eraser
Selling Price
P20
P10
Contribution margin per unit
6
4
REQUIRED:
1. How much revenue is needed to break-even? How many units of Sandpaper
and Eraser does it represent?
2. How much revenue is needed to earn pre-tax profit of P10,800?
3. How much revenue is needed to earn an after-tax profit of P15,680? (Ms.Ganda
pays corporate income taxes OF 30%)
4. If the company earns the revenue determined in (2), but in doing so, sells 2
units of Sandpaper for each Eraser, what would the pre-tax profit or loss be?
Problem 03
The Vice-President of sales, Redge Guerrero, estimates that the variable cost per
product unit will increase from P80 to P95. The selling price is expected to remain at
P120. The fixed costs for the year amount to P340,000. Last year, the company sold
30,000 units of products and expects to sell the same quantity this year. Guerrero is
concerned about the loss in profitability because of increased costs. He asks you to
prepare an evaluation of what changes are taking place.
Required:
a. What is the contribution margin ratio for this year and last year? 33.33%;
20.83%
b. What is the break-even point in sales pesos for this year and last year?
P1,020,000; P1,632,000
c. Calculate the margin of safety for last year and this year. P2,580,000;
P1,968,000
d. Compute the operating leverage for this year and last year. e. Explain what
would happen to profits this year if the sales volume could be increased by
15%.
Problem 04
Gosnell Company produces two products: squares and circles. The projected income
for the coming year, segmented by product line, follows:
Squares
Circles
Total
Sales
P300,000
P2,500,000
P2,800,000
Less: Variable expenses
100,000
500,000
600,000
Contribution margin
P200,000
P2,000,000
P2,200,000
Less: Direct fixed expenses
28,000
1,500,000
1,528,000
Product margin
P172,000
P 500,000
P672,000
Less: Common fixed expenses
100,000
Operating income
P572,000
The selling prices are P30 for squares and P50 for circles.
Required:
1. Compute the number of units of each product that must be sold for Gosnell
Company to break even.
2. Compute the revenue that must be earned to produce an operating income of
10 percent of sales revenues.
3. Assume that the marketing manager changes the sales mix of the two products
so that the ratio is three squares to five circles. Repeat Requirements 1 and 2.
4. Refer to the original data. Suppose that Gosnell can increase the sales of
squares with increased advertising. The extra advertising would cost an
additional P45,000, and some of the potential purchasers of circles would
switch to squares. In total, sales of squares would increase by 15,000 units,
and sales of circles would decrease by 5,000 units. Would Gosnell be better off
with this strategy?