EXERCISE 1: CVP RELATIONSHIP

1. CM RATIO AND VARIABLE EXPENSES RATIO.

Total contribution margin = P300,000
CM ratio = Total Sales = P1,200,000 = 0.25 o 25%

Total Variable Expenses = P900,000

Variable Expenses Ratio
Total Sales = P1,200,000
2. BREAK-EVEN POINTS IN BOTH UNITS AND SALES IN PESO (EQUATING
METHOD)
BREAK-EVEN POINT IN UNITS, Q is computed as follows:
Sales = Variable Expenses + Fixed Expenses + Profits
Note: At the break-even point, profits are zero.
60Q = 45Q + 240,000 + 0
15Q = 240,000
Q = 240,000 / 15
Q = 16,000 cordless telephone

BREAK-EVEN POINT IN TOTAL PESO, X is computed as follows:

Sales = Variable Expenses + Fixed Expenses + Profits
X = 0.75X + 240,000 + 0 X = 240,000 / 0.25
0.25X = 240,000 X = P960,000

3. NET OPERATING INCOME INCREASE (CM METHOD)

= Increase in sales x CM ratio
= P400,000 x 25% = P100,000

4. UNITS SOLD TO MEET TARGET PROFIT

CVP EQUATION
Sales = Variable Expenses + Fixed Expenses + Profits
60Q = 45Q + 240,000 + 90,000 Q = 330,000 / 15
15Q = 330,0000 Q = 22,000 cordless telephone

CM APPROACH
Units sales to attain Fixed expenses + Target profit
target profit = Unit contribution margin
P240,000 + P90,000
= = 22,000 cordless telephone
15
5. MARGIN OF SAFETY IN BOTH PESO AND PERCENTAGE FORM
Margin of safety in peso = Total budgeted (or actual) sales - Break-even sales
Margin of safety in pesos = 1,200,000 - 960,000
Margin of safety in pesos = P240,000

Margin of safety in percentage = Margin of safety in pesos / Total Sales

Margin of safety in percentage = 240,000 / 1,200,000
Margin of safety in percentage = 0.2 or 20%

6. DEGREE OF OPERATING LEVERAGE, NET OPERATING INCOME INCREASE(%),

CONTRIBUTION FORMAT INCOME STATEMENT
A. DEGREE OF OPERATING LEVERAGE
Degree of Operating Leverage = Contribution margin / Net Operating Income
Degree of Operating Leverage = 300,000 / 60,000 = 5

B. NET OPERATING INCOME INCREASE IN PERCENTAGE

8% x 5 = 40%

C. NEW CONTRIBUTION FORMAT INCOME STATEMENT

TOTAL PER UNIT % OF SALES
Sales P1,296,000 *1 P60 100%
Less: Variable Expenses 972,000 *2 45 75%
Contribution Margin 324,000 P15 25%
Less: Fixed Expenses 240,000
Net Operating Income 84,000

*1 1,200,000 x 8% = 96,000 + 1,200,000 = 1,296,000 expected sales.

*2 900,000 x 8% = 72,000 + 900,000 = 972,000.

7. CHANGES MADE TO INCREASE ANNUAL SALES

New variable expense unit = 45 + 3 = 48 per unit
New fixed expenses = P240,000 - P30,000 = 210,000
New sales unit = 20,000 x 20% = 4,000 + 20,000 = 24,000 units

A. CONTRIBUTION FORMAT INCOME STATEMENT

TOTAL PER UNIT % OF SALES
Sales (24,000 units) P1,440,000 *1 P60 100%
Less: Variable Expenses 1,152,000 *2 P48 75%
Contribution Margin P288,000 P12 25%
Less: Fixed Expenses 210,000
Net Operating Income P78,000

*1 24,000 units x P60 per unit = P1,440,000 total sales

*2 24,000 units x P48 per unit = P1,152,000 total variable expenses
NOTE: I use the changes in no. 7 for other computation.

B. NEW BREAK-EVEN POINT IN BOTH UNITS AND PESO OF SALES (CM METHOD)
BREAK-EVEN POINT IN UNITS SOLD = Fixed expenses / Unit contribution margin
210,000 / 12=17,500 cordless telephone
BREAK-EVEN POINT IN TOTAL PESO = Fixed expenses / CM ratio
210,000 / 0.20 = P1,050,000

C. OPINION ON THE CHANGES MADE (WHY)

Yes. Based on the assessment, these adjustments are anticipated to boost yearly sales and
elevate net operating income by P18,000.
 = 0.75 or 75%
(EQUATING

ss telephone
OME INCREASE(%),
 ALES (CM METHOD)
ntribution margin

st yearly sales and

EXERCISE 2: CONTRIBUTION FORMAT INCOME STATEMENT
1. SALES VOLUME INCREASES BY 15%
TOTAL PER UNIT
Sales (23,000 units) P345,000 *1 P15
Less: Variable Expenses 207,000 *2 9
Contribution Margin P138,000 P6
Less: Fixed Expenses 70,000
Net Operating Income P68,000

*1 20,000 x 15% = 3,000 + 20,000 = 23,000 units x 15 per unit = P345,000 total sales
*2 23,000 units x 9 per unit = P207,000 total variable expenses

2. SELLING PRICE(-P1.50) AND SALES VOLUME(+25%)

TOTAL PER UNIT
Sales (25,000 units) P337,500 *1 P13.50
Less: Variable ExpensesP225,000 *2 9
Contribution Margin P112,500 P4.50
Less: Fixed Expenses 70,000
Net Operating Income P42,500

*1 20,000 x 25% = 5,000 + 20,000 = 25,000 units x 13.50 per unit = P337,500 total sales
*2 25,000 units x 9 =P225,000 total variable expenses

3. SELLING PRICE(+P1.50), FIXED EXPENSES(+P20,000) AND SALES VOLUME

TOTAL PER UNIT
Sales (19,000 units) P313,500 *1 P16.50
Less: Variable ExpensesP171,000 *2 9
Contribution Margin P142,500 P7.50
Less: Fixed Expenses 90,000 *3
Net Operating Income P52,500

*1 20,000 x 5% = 1,000 | 20,000 - 1,000 = 19,000 units x 16.50 per unit = P313,500 total sales
*2 19,000 units x 9 = P171,000 total variable expenses
*3 70,000 + 20,000 = P90,000 total fixed expenses

4. SELLING PRICE(+12%), VARIABLE EXPENSES(+P0.60) AND SALES VOLUM

TOTAL PER UNIT
Sales (19,000 units) P302,400 *1 P16.80 *2
Less: Variable ExpensesP172,800 *3 9.60
Contribution Margin P129,600 P7.20
Less: Fixed Expenses 70,000
Net Operating Income P59,600
*1 20,000 x 10% = 2,000 | 20,000 - 2,000 = 18,000 units x 16.80 per unit = P302,400 total sales
*2 P15 per unit x 12% = 1.80 + 15 = 16.80 per unit
*3 18,000 units x 9.60 = P172,800 total variable expenses
0 total sales

13,500 total sales

302,400 total sales
EXERCISE 3: CONTRIBUTION MARGIN (CM) RATIO
TOTAL PER UNIT
Sales (50,000 units) P200,000 4
Less: Variable Expenses 120,000 2.4
Contribution Margin P80.000 1.6
Less: Fixed Expenses 65,000
Net Operating Income 15,000

1. CM RATIO
Total contribution margi
CM ratio = Total Sales
P80,000
CM Ratio = P200,000 = 0.4 or 40%

2. INCREASE IN NET INCOME IF TOTAL SALES INCRE

Increase in net income = increase in sales x CM ratio = 1,000 x 40% = P400

PRESENT EXPECTEDINCREASE % OF SALES

Sales P200,000 P201,000 P1,000 100%
Less: Variable Expenses 120,000 120,600 *1 600 60%
Contribution Margin P80.000 P80,400 P400 40%
Less: Fixed Expenses 65,000 65,000 0
Net Operating Income P15,000 P15,400 P400

*1 P201,000 expected sales / P4 per unit = 50,250 units x 2.4 per unit = 120,600 variable expenses
00 variable expenses
EXERCISE 4 BREAK-EVEN ANALYSIS; TARGET PROFIT; MARGIN OF
SAFETY; CM RATIO
1. BREAK-EVEN POINT IN UNITS SOLD AND IN PESO
BREAK-EVEN POINT IN UNITS, Q is computed as follows:
Sales = Variable Expenses + Fixed Expenses + Profits
Note: At the break-even point, profits are zero.
30Q = 12Q + 216,000 + 0 Q = 216,000 / 18
18Q = 216,000 Q = 12,000 units

BREAK-EVEN POINT IN TOTAL PESO, X is computed as follows:

Sales = Variable Expenses + Fixed Expenses + Profits
X = 0.40X + 216,000 + 0 *180,000 / 450,000 = 40%
0.60X = 216,000 *270,000 / 450,000 = 60%
X = 216,000 / 0.60
X = P360,000

2.TOTAL CONTRIBUTION MARGIN AT BREAK-EVEN POINT(NO COMPUTATI

At break-even, your total contribution margin equals your fixed expenses since profit is zero.

3. TARGET PROFIT (CM METHOD) WITH CONTRIBUTION FORMAT INCOME

STATEMENT AT THE TARGET SALES LEVEL
Units sales to attain Fixed expenses + Target profit
target profit = Unit contribution margin
P216,000 + P90,000
= 18 = 17,000 units

TOTAL PER UNIT

Sales (17,000 units) P510,000 P30
Less: Variable Expenses 204,000 12
Contribution Margin P306,000 P18
Less: Fixed Expenses 216,000
Net Operating Income P90,000

4. MARGIN OF SAFETY IN BOTH PESO AND PERCENTAGE FORM

Margin of safety in peso = Total budgeted (or actual) sales - Break-even sales
Margin of safety in pesos = 450,000 - 360,000
Margin of safety in pesos = P90,000

Margin of safety in percentage = Margin of safety in pesos / Total Sales

Margin of safety in percentage = 90,000 / 450,000
Margin of safety in percentage = 0.2 or 20%

5. CM RATIO
 Total contribution margi = P270,000
CM ratio = Total Sales = P450,000 = 0.6 or 60%

PRESENT EXPECTEDINCREASE % OF SALES

Sales P450,000 P500,000 P50,000 100%
Less: Variable Expenses 180,000 200,000 20,000 40%
Contribution Margin P270,000 P300,000 P30,000 60%
Less: Fixed Expenses 216,000 216,000 0
Net Operating Income P54,000 P84,000 P30,000
ce profit is zero.
EXERCISE 5: CHANGES IN VARIABLE COSTS, FIXED COSTS, SELLING
PRICE AND VOLUME
TOTAL PER UNIT% OF SALES
Sales (2,000 units) P180,000 P90 100%
Less: Variable Expenses 126,000 63 70%
Contribution Margin P54,000 P27 30%
Less: Fixed Expenses 30,000
Net Operating Income P24,000

1. CHANGE IN FIXED COST AND SALES VOLUME

Incremental contribution margin: P9,000 x 30% CM ratio = P2,700
Less: Incremental advertising expense = 5,000
Decreased net operating income =(P2,300)

Based on above analysis, the decrease in the advertising budget should not be
approved since it would decrease net operating income by P2,300.

2. CHANGE IN VARIABLE COSTS AND SALES VOLUME

The P2 increase in variable costs will decrease the unit contribution margin by P2, from P27 to P25
Expected total contribution margin with higher quality TOTAL CM
components: 2,200 units x P25 per unit P55,000 2,200 units
Present total contribution margin: 2,000 units x P27 per unit P54,000
Increase in total contribution margin P1,000
Based on the analysis in the above , it is recommended to use a high quality product.
Since fixed costs remain constant, the P1,000 increase in contribution margin
described earlier should translate directly into a P1,000 increase in net operating
income.
y P2, from P27 to P25
OTAL CM
EXERCISE 6: OPERATING LEVERAGE
1. CONTRIBUTION FORMAT INCOME STATEMENT AND DEGREE OF
OPERATING LEVERAGE
TOTAL PER UNIT
Sales (15,000 units) P300,000 P20
Less: Variable Expenses 90,000 6
Contribution Margin P210,000 P14
Less: Fixed Expenses 182,000
Net Operating Income P28,000

DEGREE OF OPERATING LEVERAGE

Degree of Operating Leverage = Contribution margin / Net Operating Income
Degree of Operating Leverage = 210,000 / 28,000 7.50 times

2. EXPECTED PERCENTAGE INCREASE IN NET OPERATING INCOME AND

EXPECTED TOTAL PESO NET INCOME
A. EXPECTED PERCENTAGE INCREASE IN NET OPERATING INC
% Change in Net Operating Income = Degree of Operating Leverage x % Change in Sales
= 7.5 x 20% = 1.5 o 150% increase

B. EXPECTED TOTAL PESO NET OPERATING INCOME

Net Income =Previous Net Income×% Change in Net Income
​ = P28,000 × 150% = P42,000
ange in Sales
EXERCISE 7: LEVEL OF SALES REQUIRED TO ATTAIN A TARGET PROFI
1. TARGET PROFIT OF P10,000 (EQUATION METHOD)
CVP EQUATION:
Sales = Variable Expenses + Fixed Expenses + Profits
120Q = 80Q + 50,000 + 10,000 Q = 60,000 / 40
40Q= 60,000 Q = 1,500 units

2. TARGET PROFIT OF P15,000 (CM RATIO)

Units sales to attain Fixed expenses + Target profit
target profit = CM ratio
P50,000 + P15,000
= 0.3333
= P195, 019.50 or round up to P195,020

unit contribution margin = P40 = 0.3333 or

CM ratio = unit selling price = P120 33.33%
EXERCISE 8: MARGIN OF SAFETY
1.MARGIN OF SAFETY
Margin of safety in peso = Total budgeted (or actual) sales - Break-even sales
Margin of safety in pesos = 30,000 - 22,502.25
Margin of safety in pesos = P7,497.75

BREAK-EVEN POINT IN TOTAL PESO, X is computed as follows:

Sales = Variable Expenses + Fixed Expenses + Profits
X = 0.6667X + 7,500 + 0 *10,000 / 30,000 = 33.33% CM ratio
0.3333X = 7,500 *20,000 / 30,000 = 66.67% variable expenses ratio
X = 7,500 / 0.3333
X = P22,502.25

2. MARGIN OF SAFETY AS A PERCENTAGE OF SALES

Margin of safety in percentage = Margin of safety in pesos / Total Sales
Margin of safety in percentage = 7,497.75 / 30,000
Margin of safety in percentage = 0.249925 or 24.9925%
enses ratio
EXERCISE 9: BREAK-EVEN POINT FOR A MULTIPRODUCT COMPANY
1. CONTRIBUTION MARGIN(CM) RATIO
contribution margin = P30,000 = 0.3 or
CM ratio = Sales = P100,000 30%

2. BREAK-EVEN POINT IN PESO SALES

Fixed expenses = P24,000
Overall CM ratio = 0.3 P80,000

3. VERIFICATION OF THE BREAK-EVEN:

Claimjumper Makeover Total
Current peso sales P30,000 P70,000 P100,000
Percentage of total peso sales 30% 70% 100%
Sales at break-even P24,000 P56,000 P80,000

er Amount Makeover Total Amount

Sales P24,000 P56,000 80,000
Less: Variable expenses 16,000 40,000 P56,000
Contribution margin 8,000 16,000 P24,000
Less: Fixed expenses P24,000
Net Operating Income P0
EXERCISE 10: CVP ANALYSIS; COST STRUCTURE
1. CM RATIO AND BREAK-EVEN POINT IN UNITS SOLD AND PES
contribution margin = P81,000 = 0.3 or
CM ratio = Sales = P270,000 30%

BREAK-EVEN POINT IN UNITS, Q is computed as follows:

Sales = Variable Expenses + Fixed Expenses + Profits
Note: At the break-even point, profits are zero.
20Q = 14Q + 90,000 + 0 Q = 90,000 / 6
6Q = 90,000 Q = 15,000 units

BREAK-EVEN POINT IN TOTAL PESO, X is computed as follows:

Sales = Variable Expenses + Fixed Expenses + Profits
X = 0.70X + 90,000 + 0 *189,000 / 270,000 = 70% variable expenses
0.30X = 90,000 *81,000 / 270,000 = 30% CM ratio
X = 90,000 / 0.30
X = P300,000

2. CHANGE IN FIXED COST AND SALES VOLUME

Incremental contribution margin: P70,000 x 30% CM ratio = P21,000
Less: Incremental advertising expense = 8,000
Decreased net operating income =P13,000
Based on above analysis, the increase in the advertising budget should be approved
since it would increase net operating income by P4,000, as the company has a loss of
P9,000.
3. NEW CONTRIBUTION FORMAT INCOME STATEMENT
Total Per Unit
Sales (27,000 units) P486,000 P18*
Less: Variable expenses 378,000 14
Contribution margin 108,000 P4
Less: Fixed expenses (90,000 +35,00 125,000
Net operating income (loss) P(17,000)

* P20 x 0.10 = 2 , 20 - 2 = P18 per unit.

4. TARGET PROFIT OF P4,500

Sales = Variable Expenses + Fixed Expenses + Profits
20Q = P14.60Q* + P90,000 + P4,500 Q = 94,500 / 5.40
5.40Q= 94,500 Q = 17,500 units

* P14.00 + P0.60 = P14.60

5. CM RATIO, BREAK-EVEN POINT IN BOTH UNITS AND PESO, INCOME
STATEMENTS, AND OPINION.
A. CM RATIO AND BREAK-EVEN POINT IN BOTH UNITS AND PESO.
contribution margin = P175,500 = 0.65 or
CM ratio = Sales = P270,000 65%

BREAK-EVEN POINT IN UNITS, Q is computed as follows:

Sales = Variable Expenses + Fixed Expenses + Profits
Note: At the break-even point, profits are zero.
20Q = 7Q + 208,000 + 0 Q = 208,000 / 13
13Q = 208,000 Q = 16,000 units

BREAK-EVEN POINT IN TOTAL PESO, X is computed as follows:

Sales = Variable Expenses + Fixed Expenses + Profits
X = 0.35X + 208,000 + 0 *94,500 / 270,000 = 35% variable expenses
0.65X = 208,000 *175,000 / 270,000 = 65% CM ratio
X = 208,000 / 0.65
X = P320,000

B. AUTOMATED AND NOT, INCOME STATE

NOT AUTOMATED: Total Per Unit Percentage
Sales (20,000) P400,000 P20 100%
Less: Variable expenses 280,000 14 70%
Contribution margin P120,000 6 30%
Less: Fixed expenses 90,000
Net Operating Income 30,000

AUTOMATED: Total Per Unit Percentage

Sales P400,000 P20 100%
Less: Variable expenses 140,000 7 35%
Contribution margin P260,000 13 65%
Less: Fixed expenses 208,000
Net Operating Income 52,000

C.OPINION ON AUTOMATED
Yes, I suggest implementing this because according to the income statement,
automating some operations leads to an increase in net operating income.