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

Spud Company sells a single product. The company's sales and expenses for a recent month follow:

Sales ₱600,000
Variable Expenses 420,000
Contibution Margin ₱180,000
Fixed Expenses 150,000
Operating Income ₱30,000

Selling Price ₱40

Variable Cost ₱28

Required:

1. What is the monthly break-even point in units sold and in pesos?

BEP (units) = ₱150,000 / (₱40-₱28)

BEP (units) = ₱150,000 / ₱12
BEP (units) = 12,500 units

₱150,000
BEP (pesos) =
1 - (₱420,000 / ₱600,000)

BEP (pesos) = ₱500,000

2. Without resorting to computations, what is the total contribution margin at the break-even point?

The contribution margin at break-even point is ₱150,000. At break-even point, the fixed expenses is e
therefore, we can easily deduce that with a fixed expenses of ₱150,000, our contribution margin at break

3. How many units would have to be sold each month to earn a minimum target profit of ₱18,000?
Use the contribution margin method. Verify your answer.

Unit sales needed for a profit of ₱18,000 = ₱150,000 + ₱18,000

₱12/unit
 Unit sales needed for a profit of ₱18,000 = 14,000 units

Total
Sales ₱560,000
Less: Variable Expenses 392,000
Contribution Margin ₱168,000
Less: Fixed Expenses 150,000
Net Operating Income ₱ 18,000

4. Refer to the original data. Compute the company's margin of safety in both peso and percentage terms.

Margin of Safety (pesos) = ₱600,000 - ₱500,000

Margin of Safety (pesos) = ₱100,000

Margin of Safety (percentage) = ₱100,000

x 100
₱600,000
Margin of Safety (percentage) = 16.67%

5. What is the company's CM ratio? If monthly sales increase by ₱80,000 and there is no change in fixed expenses,
by how much would you expect monthly net operating income to increase?

Contribution Margin Ratio = ₱180,000

₱600,000
Contribution Margin Ratio = 30%

Increase in Contribution Margin = ₱80,000 x 30%

Increase in Contribution Margin = ₱24,000
Increase in Net Operating Income = ₱24,000

Increased Sales
Sales ₱680,000
Less: Variable Expenses 476,000
Contribution Margin ₱204,000
Less: Fixed Expenses 150,000
Net Operating Income ₱54,000
 Fixed Cost
BEP (units) =
(Selling Price/unit - Variable Cost / unit)

Fixed Cost
BEP (unit) =
Contribution Margin / unit

Fixed Cost
BEP (pesos) =
1- (Variable Expenses / Sales)

break-even point?

-even point, the fixed expenses is equal to the contribution margin;

0, our contribution margin at break-even point willl also be the same.

profit of ₱18,000?

₱150,000 + ₱18,000 Sales in units = Total Fixed Cost + Desired Profit

₱12/unit Contribution Margin per Unit
 14,000 units

Unit
₱40 14,000 units x ₱40 = ₱560,000
28 14,000 units x ₱28 = ₱ 392,000
₱12

so and percentage terms.

Margin of Safety (pesos) = Budgeted Sales - Break-even Sales

Margin of Safety ratio = Margin of Safety (pesos)

Budgeted Sales

ere is no change in fixed expenses,

CM Ratio = Contribution Margin

Sales

Current Sales Increase/Decrease

₱600,000 ₱80,000
420,000 56,000
₱180,000 ₱24,000
150,000 0
₱30,000 ₱24,000
Break-even Sales
EXERCISE 7 (Changes in Variable Costs, Fixed Costs, Selling Price, and Volume)

Data for Reby and David Corporation are shown below:

Selling Price
Variable Expenses
Contribution Margin

Fixed expenses are ₱75,000 per month and the company is selling 3,000 units per month.

Required:

1. The marketing manager argues than an ₱8,000 increase in the monthly advertising budget
would increase montly sales by ₱15,000. Should the advertising budget be increased?

Current Montly
Sales

Sales ₱225,000
Variable Expenses 135,000
Contribution Margin ₱90,000
Fixed Expenses 75,000
Net Operating Inccome ₱15,000

Assuming that these are the only factors that we are considering for decision-making, the increase in
not be approved since it would lead to a decrease in net operating income of ₱2,000.

2. Refer to the original data. Management is considering using higher-quality components that would incre
₱3 per unit. The marketing manager believes the higher-quality product would increase sales by 15% per m
quality components be used?

Solution:
 Current Monthly
Sales

Sales ₱225,000
Variable Expenses ₱135,000
Contribution Margin ₱90,000
Fixed Expenses 75,000
Net Operating Income ₱15,000

Assuming all other costs remain the same, the higher-quality components should be used.
rice, and Volume)

Per Unit Percent of Sales:

₱75.00 100%
45.00 60%
₱30.00 40%

nits per month.

dvertising budget
increased?

Sales With
Additional Solution
Increase/Decrease
Advertising
Budget
₱240,000 ₱15,000 ₱225,000 + ₱15,000 = ₱240,000 ₱75 x 3,000 units = ₱225,000
144,000 9,000 ₱240,000 x 60% = ₱144,000 ₱225,000 x 60% = ₱135,000
₱96,000 ₱6,000 ₱240,000 x 40% = ₱96,000 ₱225,000 x 40% = ₱90,000
83,000 8,000 ₱75,000 + ₱8,000 = ₱ 83,000 (given) = ₱75,000
₱13,000 -₱2,000

cision-making, the increase in advertising budget should

me of ₱2,000.

ty components that would increase the variable cost by

uld increase sales by 15% per month. Should the higher-
 Sales with an
Increased Increase (Decrease)
Variable Cost Solution:
₱ 258,750.00 ₱ 33,750.00 ₱48 / ₱75 (100) = 64% (new percentage of variable expenses over the sell
₱165,600 30,600 100% - 64% = 36% (new percentage of contribution margin over the selling
₱93,150 ₱3,150 3000 x 115% = 3,450 units (increased sales)
75,000 0 3,450 x ₱75 = ₱258,750
₱18,150 ₱3,150 ₱258,750 x 64% = ₱165,600
258,750 x 36% = ₱93,150
nts should be used.
00 units = ₱225,000
x 60% = ₱135,000
x 40% = ₱90,000
able expenses over the selling price)
on margin over the selling price)
EXERCISE 8 (Compute the Margin of Safety)

Mama Jo Corporation is a distributor of a sun umbrella used at resort hotels. Data Concerning the
next month's budget appear below:

Selling Price ₱25 per unit

Variable Expense ₱15 per unit
Fixed Expense ₱8,500 per month
Unit Sales 1,000 unit per month

Required:
1. Compute the company's margin of safety.

First, let us compute the break-even unit sales.

Break-even point (units) = Total Fixed Cost/ Contribution Margin per unit

Total Fixed Cost = ₱8,500

Contribution Margin per Unit = ₱10

BEP (units) = 8,500

10

BEP (units) = 850 units

Sales (at the budgeted volume of 1,000 units)

Break-even sales ( at 850 units)
Margin of Safety (in pesos)

2. Compute the company's margin of safety as a percetage of its sales.

Margin of safety in pesos

Divided by: Sales in pesos in current month
Margin of safety ias a percetage of sales
oncerning the

Notes:
Contribution Margin per unit = Unit Selling Price - Unit Variable Costs

Notes:

Margin of safety = Budgeted Sales - Break-Even Sales

₱25,000 1000 units x ₱25/unit= ₱25,000
21,250 850 units x ₱25/unit= ₱21,250
₱3,750

₱3,750 Notes:
25,000 Margin of Safety Ratio = Margin of Safety / Budgeted Sales
15% 1000 units x ₱25/unit