Mas Chap 13

MANAGEMENT ACCOUNTING (VOLUME I) - Solutions Manual
CHAPTER 13
COST-VOLUME-PROFIT RELATIONSHIPS
I. Questions
1. The total contribution margin is the excess of total revenue over total
variable costs. The unit contribution margin is the excess of the unit
price over the unit variable costs.
2. Total contribution margin:
Selling price - manufacturing variable costs expensed -
nonmanufacturing variable costs expensed = Total contribution margin.
Gross margin:
Selling price - variable manufacturing costs expensed - fixed
manufacturing costs expensed = Gross margin.
3. A company operating at break-even is probably not covering costs
which are not recorded in the accounting records. An example of such a
cost is the opportunity cost of owner-invested capital. In some small
businesses, owner-managers may not take a salary as large as the
opportunity cost of forgone alternative employment. Hence, the
opportunity cost of owner labor may be excluded.
4. In the short-run, without considering asset replacement, net operating
cash flows would be expected to exceed net income, because the latter
includes depreciation expense, while the former does not. Thus, the cash
basis break-even would be lower than the accrual break-even if asset
replacement is ignored. However, if asset replacement costs are taken
into account, (i.e., on a cradle to grave basis), the long-run net cash
flows equal long-run accrual net income, and the long-run break-even
points are the same.
5. Both unit price and unit variable costs are expressed on a per product
basis, as:
= (P1 - V1) X1 + (P2 - V2) X2 + + (Pn - Vn) Xn - F,
for all products 1 to n where:
= operating profit,
13-1
Chapter 13 Cost-Volume-Profit Relationships
P = average unit selling price,

V = average unit variable cost,
X = quantity of units,
F = total fixed costs for the period.
6. If the relative proportions of products (i.e., the product mix) is not held
constant, products may be substituted for each other. Thus, there may be
almost an infinite number of ways to achieve a target operating profit.
As shown from the multiple product profit equation, there are several
unknowns for one equation:
= (P1 - V1) X1 + (P2 - V2) X2 + + (Pn - Vn) Xn - F,
for all products 1 to n.
7. A constant product mix is assumed to simplify the analysis. Otherwise,
there may be no unique solution.
8. Operating leverage measures the impact on net operating income of a
given percentage change in sales. The degree of operating leverage at a
given level of sales is computed by dividing the contribution margin at
that level of sales by the net operating income.
9. Three approaches to break-even analysis are (a) the equation method, (b)
the contribution margin method, and (c) the graphical method. In the
equation method, the equation is: Sales = Variable expenses + Fixed
expenses + Profits, where profits are zero at the break-even point. The
equation is solved to determine the break-even point in units or peso
sales.
10. The margin of safety is the excess of budgeted (or actual) sales over the
break-even volume of sales. It states the amount by which sales can drop
before losses begin to be incurred.
11. The sales mix is the relative proportions in which a companys products
are sold. The usual assumption in cost-volume-profit analysis is that the
sales mix will not change.
12. A higher break-even point and a lower net operating income could result
if the sales mix shifted from high contribution margin products to low
contribution margin products. Such a shift would cause the average
contribution margin ratio in the company to decline, resulting in less total
contribution margin for a given amount of sales. Thus, net operating
income would decline. With a lower contribution margin ratio, the
break-even point would be higher since it would require more sales to
cover the same amount of fixed costs.
13-2
Cost-Volume-Profit Relationships Chapter 13
II. Exercises
Exercise 1 (Using a Contribution Format Income Statement)
Requirement 1
Total Per Unit
Sales (30,000 units 1.15 = 34,500 units)..............................................................
P172,500 P5.00
Less variable expenses............................................................................................
103,500 3.00
Contribution margin................................................................................................
69,000 P2.00
Less fixed expenses.................................................................................................
50,000
P19,000
Net operating income..............................................................................................
Requirement 2

P162,000 P4.50
108,000 3.00
54,000 P1.50
50,000
P 4,000
Requirement 3

P156,750 P5.50
85,500 3.00
71,250 P2.50
Less fixed expenses (P50,000 + P10,000)...............................................................
60,000
P11,250
Requirement 4

P151,200 P5.60
86,400 3.20
64,800 P2.40
50,000
P14,800
Exercise 2 (Break-even Analysis and CVP Graphing)
Requirement 1
13-3
The contribution margin per person would be:
Price per ticket........................................................................................................

P30
Less variable expenses:
Dinner.................................................................................................................
P7
Favors and program.............................................................................................
3 10
Contribution margin per person..............................................................................P20
The fixed expenses of the Extravaganza total P8,000; therefore, the break-
even point would be computed as follows:
Sales = Variable expenses + Fixed expense + Profits
P30Q = P10Q + P8,000 + P0

P20Q = P8,000
Q = P8,000 P20 per person
Q = 400 persons; or, at P30 per person, P12,000
Alternative solution:
Break-even Fixed expenses
point = Unit contribution margin
in unit sales
P8,000
= P20 per person
= 400 persons
or, at P30 per person, P12,000.
Requirement 2
Variable cost per person (P7 + P3)..........................................................................

P10
Fixed cost per person (P8,000 250 persons).........................................................
32
Ticket price per person to break even......................................................................
P42
Requirement 3
Cost-volume-profit graph:
13-4
P22,000
P20,000
P18,000
P16,000 Total Sales
P14,000 Break-even point: 400 persons,

or P12,000 in sales
P12,000
Pesos
P10,000
Total Expenses
P8,000 Fixed Expenses
P6,000
P4,000
P2,000
P0
0 100 200 300 400 500 600
Number of Persons
Exercise 3 (Break-even and Target Profit Analysis)
Requirement 1
Sales = Variable expenses + Fixed expenses + Profits

P900Q = P630Q + P1,350,000 + P0
P270Q = P1,350,000
Q = P1,350,000 P270 per lantern
Q = 5,000 lanterns, or at P900 per lantern, P4,500,000 in sales
in unit sales
P1,350,000
=13-5P270 per lantern
= 5,000 lanterns
or at P900 per lantern, P4,500,000 in sales
Requirement 2
An increase in the variable expenses as a percentage of the selling price

would result in a higher break-even point. The reason is that if variable
expenses increase as a percentage of sales, then the contribution margin will
decrease as a percentage of sales. A lower CM ratio would mean that more
lanterns would have to be sold to generate enough contribution margin to
cover the fixed costs.
Requirement 3
Present: Proposed:
8,000 Lanterns 10,000 Lanterns*
Total Per Unit Total Per Unit
Sales P7,200,000 P900 P8,100,000 P810 **
Less variable expenses 5,040,000 630 6,300,000 630
Contribution margin 2,160,000 P270 1,800,000 P180
Less fixed expenses 1,350,000 1,350,000
Net operating income P810,000 P450,000
* 8,000 lanterns 1.25 = 10,000 lanterns

** P900 per lantern 0.9 = P810 per lantern
As shown above, a 25% increase in volume is not enough to offset a 10%

reduction in the selling price; thus, net operating income decreases.
Requirement 4

P810Q = P630Q + P1,350,000 + P720,000
13-6
P180Q = P2,070,000
Q = P2,070,000 P180 per lantern
Q = 11,500 lanterns
Unit sales to Fixed expenses + Target profit
attain target profit = Unit contribution margin
P1,350,000 + P720,000
= P180 per lantern
= 11,500 lanterns
Exercise 4 (Operating Leverage)
Requirement 1
Sales (30,000 doors)................................................................................................

P18,000,000 P600
12,600,000 420
5,400,000 P180
4,500,000
P 900,000
Degree of Contribution margin
operating leverage = Net operating income
P5,400,000
= P900,000
= 6
Requirement 2
a. Sales of 37,500 doors represents an increase of 7,500 doors, or 25%, over

present sales of 30,000 doors. Since the degree of operating leverage is 6,
net operating income should increase by 6 times as much, or by 150% (6
25%).
b. Expected total peso net operating income for the next year is:
Present net operating income..................................................................................

P 900,000
Expected increase in net operating income next year
(150% P900,000).............................................................................................
1,350,000
Total expected net operating income.......................................................................
P2,250,000
13-7
Exercise 5 (Multiproduct Break-even Analysis)
Requirement 1
Model E700 Model J1500 Total Company
Amount % Amount % Amount %
Sales P700,000 100 P300,000 100 P1,000,000 100
Less variable expenses
280,000 40 90,000 30 370,000 37
Contribution margin P420,000 60 P210,000 70 630,000 63 *
Less fixed expenses 598,500
Net operating income P 31,500
* 630,000 P1,000,000 = 63%.
Requirement 2
The break-even point for the company as a whole would be:

Break-even point Fixed expenses
in total peso sales = Overall CM ratio
P598,500
= 0.63
= P950,000 in sales
Requirement 3
The additional contribution margin from the additional sales can be

computed as follows:
P50,000 63% CM ratio = P31,500
Assuming no change in fixed expenses, all of this additional contribution

margin should drop to the bottom line as increased net operating income.
This answer assumes no change in selling prices, variable costs per unit,
fixed expenses, or sales mix.
Exercise 6 (Break-even Analysis; Target Profit; Margin of Safety)
Requirement 1
13-8

P40Q = P28Q + P150,000 + P0
P12Q = P150,000
Q = P150,000 P12 per unit
Q = 12,500 units, or at P40 per unit, P500,000
Alternatively:

in unit sales
P150,000
= P12 per unit
= 12,500 units
or, at P40 per unit, P500,000.
Requirement 2
The contribution margin at the break-even point is P150,000 since at that

point it must equal the fixed expenses.
Requirement 3
attain target profit = Unit contribution margin
P150,000 + P18,000
= P12 per unit
= 14,000 units
Total Unit
Sales (14,000 units P40 per unit).........................................................................
P560,000 P40
(14,000 units P28 per unit)...............................................................................
392,000 28
Contribution margin
(14,000 units P12 per unit)...............................................................................
168,000 P12
150,000
P18,000
13-9
Requirement 4
Margin of safety in peso terms:
Margin of safety in pesos = Total sales Break-even sales
= P600,000 P500,000 = P100,000
Margin of safety in percentage terms:

Margin of safety Margin of safety in pesos
percentage = Total sales
P100,000
=
P600,000
= 16.7% (rounded)
Requirement 5
The CM ratio is 30%.
Expected total contribution margin: P680,000 30%.............................................

P204,000
Present total contribution margin: P600,000 30%................................................
180,000
P24,000
Increased contribution margin.................................................................................
P80,000 incremental sales 30% CM ratio = P24,000
Since in this case the companys fixed expenses will not change, monthly net
operating income will increase by the amount of the increased contribution
margin, P24,000.
III. Problems
Problem 1 (CVP Relationships)
13-10
Requirement 1
Contribution margin P15
CM ratio= Selling price = P60 =25%
Variable expense P45

Variable expense ratio= Selling price = P60 =75%
Requirement 2

P60Q = P45Q + P240,000 + P0
P15Q = P240,000
Q = 16,000 units, or at P60 per unit, P960,000
X = 0.75X + P240,000 + P0
0.25X = P240,000
X = P240,000 0.25
X = P960,000; or at P60 per unit, 16,000 units
Requirement 3
Increase in sales................................................... P400,000

Multiply by the CM ratio..................................... x 25%
Expected increase in contribution margin............ P100,000
Since the fixed expenses are not expected to change, net operating income
will increase by the entire P100,000 increase in contribution margin
computed above.
Requirement 4

P60Q = P45Q + P240,000 + P90,000
P15Q = P330,000
Q = 22,000 units
Contribution margin method:

Fixed expenses + Target profit P240,000 + P90,000
Contribution margin per unit = P15 per unit = 22,000 units
13-11
Requirement 5
= P1,200,000 P960,000 = P240,000
Margin of safety Margin of safety in pesos P240,000

percentage = Total sales = P1,200,000 = 20%
Requirement 6
a.Degree of operating leverage = Contribution margin = P300,000 = 5

Net operating P60,000
income
b. Expected increase in sales.......................................... 8%
Degree of operating leverage..................................... x 5
Expected increase in net operating income................ 40%
c. If sales increase by 8%, then 21,600 units (20,000 x 1.08 = 21,600) will
be sold next year. The new income statement will be as follows:
Percent of
Total Per Unit Sales
Sales (21,600 units)................ P1,296,000 P60 100%
Less variable expenses........... 972,000 45 75%
Contribution margin............... 324,000 P15 25%
Less fixed expenses................ 240,000
Net operating income............. P 84,000
Thus, the P84,000 expected net operating income for next year represents
a 40% increase over the P60,000 net operating income earned during the
current year:
P84,000 P60,000 P24,000
P60,000 = P60,000 = 40% increase
Note from the income statement above that the increase in sales from
20,000 to 21,600 units has resulted in increases in both total sales and
total variable expenses. It is a common error to overlook the increase in
variable expense when preparing a projected income statement.
13-12
Requirement 7
a. A 20% increase in sales would result in 24,000 units being sold next
year: 20,000 units x 1.20 = 24,000 units.
Percent of
Total Per Unit Sales
Sales (24,000 units)................ P1,440,000 P60 100%
Less variable expenses........... 1,152,000 48* 80%
Contribution margin............... 288,000 P12 20%
Less fixed expenses................ 210,000
Net operating income............. P 78,000
* P45 + P3 = P48; P48 P60 = 80%.

P240,000 P30,000 = P210,000.
Note that the change in per unit variable expenses results in a change in
both the per unit contribution margin and the CM ratio.
b. Break-even point Fixed expenses

in unit sales = Contribution margin per unit
P210,000
= P12 per unit
= 17,500 units

in peso sales = CM ratio
P210,000
= 0.20
= changes
c. Yes, based on these data the P1,050,000
should be made. The changes will
increase the companys net operating income from the present P60,000 to
P78,000 per year. Although the changes will also result in a higher
break-even point (17,500 units as compared to the present 16,000 units),
the companys margin of safety will actually be wider than before:
= P1,440,000 P1,050,000 = P390,000
13-13
As shown in requirement (5) above, the companys present margin of

safety is only P240,000. Thus, several benefits will result from the
proposed changes.
Problem 2 (Basics of CVP Analysis; Cost Structure)
Requirement 1
The CM ratio is 30%.

Total Per Unit Percentage
Sales (13,500 units) P270,000 P20 100 %
Less variable expenses 189,000 14 70
Contribution margin P81,000 P6 30 %
The break-even point is:

P20Q = P14Q + P90,000 + P0
P 6Q = P90,000
Q = 15,000 units
15,000 units P20 per unit = P300,000 in sales

P90,000
= P6 per unit
= 15,000 units

in sales pesos = CM ratio
P90,000
= 13-14
0.30
= P300,000 in sales
Requirement 2
Incremental contribution margin:

P70,000 increased sales 30% CM ratio............................................................
P21,000
Less increased fixed costs:
Increased advertising cost...................................................................................
8,000
Increase in monthly net operating income...............................................................
P13,000
Since the company presently has a loss of P9,000 per month, if the changes
are adopted, the loss will turn into a profit of P4,000 per month.
Requirement 3
Sales (27,000 units P18 per unit*).......................................................................

P486,000
(27,000 units P14 per unit)...............................................................................
378,000
108,000
Less fixed expenses (P90,000 + P35,000)...............................................................
125,000
Net operating loss...................................................................................................
P(17,000)
*P20 (P20 0.10) = P18
Requirement 4

P 20Q = P14.60Q* + P90,000 + P4,500
P5.40Q = P94,500
Q = P94,500 P5.40 per unit
Q = 17,500 units
* P14.00 + P0.60 = P14.60.

attain target profit = CM per unit
13-15
P90,000 + P4,500
= P5.40 per unit**
= 17,500 units
** P6.00 P0.60 = P5.40.
Requirement 5
a. The new CM ratio would be:

Per Unit Percentage
Sales P20 100 %
Less variable expenses 7 35
Contribution margin P13 65 %
The new break-even point would be:

P208,000
= P13 per unit
= 16,000 units

in sales pesos = CM ratio
P208,000
= 0.65
= P320,000 in sales
b. Comparative income statements follow:
Not Automated Automated
Total Per Unit % Total Per Unit %
Sales (20,000 units) P400,000 P20 100 P400,000 P20 100
Less variable expenses 280,000 14 70 140,000 7 35
13-16
Contribution margin 120,000 P 6 30 260,000 P13 65

Less fixed expenses 90,000 208,000
c. Whether or not one would recommend that the company automate its
operations depends on how much risk he or she is willing to take, and
depends heavily on prospects for future sales. The proposed changes
would increase the companys fixed costs and its break-even point.
However, the changes would also increase the companys CM ratio (from
30% to 65%). The higher CM ratio means that once the break-even point
is reached, profits will increase more rapidly than at present. If 20,000
units are sold next month, for example, the higher CM ratio will generate
P22,000 more in profits than if no changes are made.
The greatest risk of automating is that future sales may drop back down
to present levels (only 13,500 units per month), and as a result, losses
will be even larger than at present due to the companys greater fixed
costs. (Note the problem states that sales are erratic from month to
month.) In sum, the proposed changes will help the company if sales
continue to trend upward in future months; the changes will hurt the
company if sales drop back down to or near present levels.
Note to the Instructor: Although it is not asked for in the problem, if time
permits you may want to compute the point of indifference between the
two alternatives in terms of units sold; i.e., the point where profits will be
the same under either alternative. At this point, total revenue will be the
same; hence, we include only costs in our equation:
Let Q = Point of indifference in units sold
P14Q + P90,000 = P7Q + P208,000
P7Q = P118,000
Q = 16,857 units (rounded)
If more than 16,857 units are sold, the proposed plan will yield the greatest
profit; if less than 16,857 units are sold, the present plan will yield the
greatest profit (or the least loss).
Problem 3 (Sales Mix; Multiproduct Break-even Analysis)
Requirement 1
Products
13-17
Sinks Mirrors Vanities Total

Percentage of total sales 32% 40% 28% 100%
Sales P160,000 100 % P200,000 100 % P140,000 100 % P500,000 100%
Less variable expenses 48,000 30 160,000 80 77,000 55 285,000 57
Contribution margin P112,000 70 % P 40,000 20 % P 63,000 45 % 215,000 43%*
Less fixed expenses 223,600
Net operating income (loss)
P ( 8,600)
* P215,000 P500,000 = 43%.
Requirement 2
Break-even sales:
in total peso sales = CM ratio
P223,600
= 0.43
= P520,000 in sales
Requirement 3
Memo to the president:
Although the company met its sales budget of P500,000 for the month, the
mix of products sold changed substantially from that budgeted. This is the
reason the budgeted net operating income was not met, and the reason the
break-even sales were greater than budgeted. The companys sales mix was
planned at 48% Sinks, 20% Mirrors, and 32% Vanities. The actual sales mix
was 32% Sinks, 40% Mirrors, and 28% Vanities.
As shown by these data, sales shifted away from Sinks, which provides our
greatest contribution per peso of sales, and shifted strongly toward Mirrors,
which provides our least contribution per peso of sales. Consequently,
although the company met its budgeted level of sales, these sales provided
13-18
considerably less contribution margin than we had planned, with a resulting

decrease in net operating income. Notice from the attached statements that
the companys overall CM ratio was only 43%, as compared to a planned
CM ratio of 52%. This also explains why the break-even point was higher
than planned. With less average contribution margin per peso of sales, a
greater level of sales had to be achieved to provide sufficient contribution
margin to cover fixed costs.
Problem 4 (Basic CVP Analysis)
Requirement 1
The CM ratio is 60%:

Selling price P150 100%
Less variable expenses 60 40
Contribution margin P 90 60%
Requirement 2
in total sales pesos = CM ratio
P1,800,000
= 0.60
Requirement 3 = P3,000,000 in sales
P450,000 increased sales 60% CM ratio = P270,000 increased contribution

margin. Since fixed costs will not change, net operating income should also
increase by P270,000.
Requirement 4
a.Degree of operating leverage = Contribution margin = P2,160,000 = 6

Net operating P360,000
income
b. 6 15% = 90% increase in net operating income.
Requirement 5
Last Year: Proposed:
28,000 units 42,000 units*
Total Per Unit Total Per Unit
13-19
Sales P4,200,000 P150.00 P5,670,000 P135.00**

1,680,000 60.00 2,520,000 60.00
Contribution margin 2,520,000 P90.00 3,150,000 P 75.00
Less fixed expenses 1,800,000 2,500,000
* 28,000 units 1.5 = 42,000 units

** P150 per unit 0.90 = P135.00 per unit
No, the changes should not be made.
Requirement 6
Expected total contribution margin:

28,000 units 200% P70 per unit*..................................................................
P3,920,000
Present total contribution margin:
28,000 units P90 per unit.................................................................................
2,520,000
Incremental contribution margin, and the amount by which
advertising can be increased with net operating income
remaining unchanged..........................................................................................
P1,400,000
* P150 (P60 + P20) = P70
Problem 5 (Break-Even and Target Profit Analysis)
Requirement 1
The contribution margin per patch would be:
Selling price............................................................................................................
P30
Less variable expenses:
Purchase cost of the patches................................................................................
P15
Commissions to the student salespersons............................................................6 21
P9
Since there are no fixed costs, the number of unit sales needed to yield the
desired P7,200 in profits can be obtained by dividing the target profit by the
unit contribution margin:
Target profit P7,200
= = 800 patches
Unit contribution margin P9 per patch
13-20
800 patches x P30 per patch = P24,000 in total sales
Requirement 2
Since an order has been placed, there is now a fixed cost associated with
the purchase price of the patches (i.e., the patches cant be returned). For
example, an order of 200 patches requires a fixed cost (investment) of
P3,000 (200 patches P15 per patch = P3,000). The variable costs drop to
only P6 per patch, and the new contribution margin per patch becomes:
Selling price............................................................................................................
P30
Less variable expenses (commissions only)............................................................ 6
P24
Since the fixed cost of P3,000 must be recovered before Ms. Morales
shows any profit, the break-even computation would be:

in unit sales
P3,000
= P24 per patch = 125 patches TR
600,000
125 patches x P30 per patch = P3,750 in total sales
500,000 other than 200 patches were ordered, the answer would change
If a quantity
accordingly.
TC
Problem 6
400,000
(P)
Requirement 1: Break-even chart
Break-even
300,000 point
200,000
13-21
FC
100,000
5,000 10,000 15,000 20,000 25,000 30,000

(units)
250,000
Requirement 2: Profit-volume graph

P 200,000
R
O
F 150,000
I
T
100,000
Break-even
50,000
point
0
5,000 10,000 15,000 20,000 25,000 30,000
50,000
100,000
L 13-22
O
150,000
S
S
200,000
250,000
IV. Multiple Choice Questions
1. B 6. B 11. B 16. D 21. A 26. A

2. B 7. D 12. A 17. D 22. D 27. B
3. B 8. B 13. A 18. D 23. C 28. C
4. C 9. A 14. C 19. C 24. B 29. B
5. C 10. D 15. D 20. D 25. C 30. A
13-23

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MANAGEMENT ACCOUNTING (VOLUME I) - Solutions Manual

P = average unit selling price,

Exercise 1 (Using a Contribution Format Income Statement)

Sales (30,000 units 1.20 = 36,000 units)..............................................................

Sales (30,000 units 0.95 = 28,500 units)..............................................................

Sales (30,000 units 0.90 = 27,000 units)..............................................................

Exercise 2 (Break-even Analysis and CVP Graphing)

The contribution margin per person would be:

Price per ticket........................................................................................................

Sales = Variable expenses + Fixed expense + Profits

P30Q = P10Q + P8,000 + P0

Variable cost per person (P7 + P3)..........................................................................

P16,000 Total Sales

P14,000 Break-even point: 400 persons,

P8,000 Fixed Expenses

Exercise 3 (Break-even and Target Profit Analysis)

Sales = Variable expenses + Fixed expenses + Profits

or at P900 per lantern, P4,500,000 in sales

An increase in the variable expenses as a percentage of the selling price

* 8,000 lanterns 1.25 = 10,000 lanterns

As shown above, a 25% increase in volume is not enough to offset a 10%

Sales = Variable expenses + Fixed expenses + Profits

Exercise 4 (Operating Leverage)

Sales (30,000 doors)................................................................................................

a. Sales of 37,500 doors represents an increase of 7,500 doors, or 25%, over

Present net operating income..................................................................................

Exercise 5 (Multiproduct Break-even Analysis)

* 630,000 P1,000,000 = 63%.

The break-even point for the company as a whole would be:

The additional contribution margin from the additional sales can be

Assuming no change in fixed expenses, all of this additional contribution

Exercise 6 (Break-even Analysis; Target Profit; Margin of Safety)

Sales = Variable expenses + Fixed expenses + Profits

Break-even Fixed expenses

The contribution margin at the break-even point is P150,000 since at that

Margin of safety in peso terms:

Margin of safety in pesos = Total sales Break-even sales

= P600,000 P500,000 = P100,000

Margin of safety in percentage terms:

The CM ratio is 30%.

Expected total contribution margin: P680,000 30%.............................................

P80,000 incremental sales 30% CM ratio = P24,000

Problem 1 (CVP Relationships)

Variable expense P45

Sales = Variable expenses + Fixed expenses + Profits

Increase in sales................................................... P400,000

Sales = Variable expenses + Fixed expenses + Profits

Contribution margin method:

Margin of safety in pesos = Total sales Break-even sales

= P1,200,000 P960,000 = P240,000

Margin of safety Margin of safety in pesos P240,000

a.Degree of operating leverage = Contribution margin = P300,000 = 5

* P45 + P3 = P48; P48 P60 = 80%.

b. Break-even point Fixed expenses

Break-even point Fixed expenses

Margin of safety in pesos = Total sales Break-even sales

= P1,440,000 P1,050,000 = P390,000

As shown in requirement (5) above, the companys present margin of

Problem 2 (Basics of CVP Analysis; Cost Structure)

The CM ratio is 30%.

The break-even point is:

Sales = Variable expenses + Fixed expenses + Profits

15,000 units P20 per unit = P300,000 in sales