Exercise 13.

Cost volume profit analysis

XYZ Product market two computer games Xander and Xandee . A contribution format income statement for a recent
month for the two games below.

Xander Xandee Total

Sales 100,000 50,000 150,000

Variable expenses 25,000 5,000 30,000

Contribution margin 75,000 45,000 120,000

Fixed expenses 90,000

Net operating Income 30,000

Required:

1. Compute the overall contribution margin for the company.

Overall CM ratio = Total contribution margin / Total Sales
120,000 / 150,000 = 80%
2. Compute the overall brake-even point for the company in sales pesos.
Overall break-even = Total fixed expenses / Overall CM ratio
90,000 / 80% = ₱112,500
3. Prepare the income statement for the break-even point for the company showing the
appropriate levels of sales for the two product.

Xander Xandee Total

Original Sales 100,000 50,000 150,000

Percent of Total 67% 33% 100%

Sales at break-even 75,000 37,500 112,500

Variable expenses 18,750 3,750 22,500

Contribution margin 56,250 33,750 90,000

Fixed expenses 90,000

Net operating Income 0

Note: The sales at break-even are rounded. They are found by taking the overall break-even point in sales from
part (2) above ($122,500) and multiplying by their respective percentage of total sales.
So, for Predator, we take 67% of $112,000 = $75,000 (rounded)For Runway, we take 33% of $112,000 = $37,500
(rounded)
Predator variable expenses:(75,000/ 100,000) x 25,000 = 18,750
Runway variable expenses:(37,500/ 50,000) x $5,000 = 3,750

Exercise 14: Cost Volume Profit Analysis:

Johnson Company manufactures and sells a telephone answering machine . The company contribution format income
statement for the most recent year is given below:

Total Per Unit Percent of Sales

Sales(20,000 units) P1,200,000 P60 100%

Less :variable expenses 900,000 45 ? 75%

Contribution margin 300,000 15 ? 25%

Less: Fixed expenses 240,000

Net operating income P 60,000

Management is anxious to improve the company’s profit performance and has asked for an analysis of a number of
items.

Required:

1. Compute the company‘s CM ratio and variable expense ratio.

CM Ratio = Unit Contribution Margin / Unit Selling Price
15 / 60 = 25%
Variable Expense Ratio = Variable Expense / Selling Price
45 / 60 = 75%
2. Compute the company’s break-even point in both units and sales pesos.
A. In units.
Fixed cost/contribution margin unit 240,000 ÷ 15 = 16,000 units
B. In Peso Sales
Fixed cost/contribution margin ratio 240,000 ÷ 25% = ₱ 960,000
3. Assume that sales increase by P400,000 next year. If cost behaviour patterns remain unchanged by how much
will the company’s net operating income increase?
Increase in sales ₱ 400,000
Multiply by the CM ratio x 25%
Expected increase in contribution margin ₱100,000
Because the fixed expenses are not expected to change, net operating income will increase by the entire
₱100,000 increase in contribution margin computed above.
4. Refer to the original data. Assume the next year management wants the company to earn a minimum profit of
P90,000. How many unit will be sold to meet this target profit?
Profit = Unit CM x Q – Fixed Expenses
90,000 = (60-45) x Q – 240,000
15Q = 90,000 + 240,000
Q = 330,000 / 15
Q = 22,000 units
5. Refer to the original data. Compute the company’s margin of safety in both peso and percentage form.
Unit sales to attain the target profit = Target profit + Fixed expenses
Contribution Margin per unit
= 90,000 + 240,000 = 22,000 units
15 per unit

Margin of safety in peso = Total Sales – Break even sales

1,200,000 - 960,000 = ₱240,000
Margin of safety percentage = Margin of safety in peso / Total sales
240,000 / 1,200,000 = 20%

6. A. Compute the company’s degree of operating leverage at the present level sales.
Degree of operating leverage = Contribution Margin / Net operating income
300,000 / 60,000 = 5
b. Assume that through a more intense effort by the sales staff the company’s sales increase by 8% next year. By
what percentage would you expect net operating income to increase? Use the operating leverage concept to
obtain your answer.
Expected increase in sales 8%
Degree of operating leverage x5
 Expected increase in net operating income 40%
a. Verify your answer to (b) by preparing a new income statement showing an 8% increase in sales.
Total Per Unit Percent of Sales
Sales(21,600 units) P1,296,000 P60 100%
Less :variable expenses 972,000 45 75%
Contribution margin 324,000 15 25%
Less: Fixed expenses 240,000
Net operating income P 84,000

Thus, the 84,000 expected net operating income for next year represents a 40% increase over the
60,000 net operating income earned during the current year
7. In an effort to increase sales and profit, management is considering the use of a higher quality speaker. The
higher quality speaker would increase variable cost by P3 per unit. But management could eliminate one quality
inspector who is paid a salary of P30,000 per year. The sales manager estimates that the higher-quality speaker
would increase annual sales by at least 20%.
a. Assuming the changes are made as described above, prepare income statement for next year. Show the
data on a total per unit and percentage basis.
Total Per Unit Percent of Sales
Sales(24,000 units) P1,440,000 P60 100%
Less :variable expenses 1,152,000 48 80%
Contribution margin 288,000 12 20%
Less: Fixed expenses 210,000
Net operating income P 78,000
45 + 3 = 48; 48 ÷ 60 = 80%.
240,000 − 30,000 = 210,000.
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. Compute the company new break-even points in both units and pesos sales.
Unit sales to break even = Fixed expenses / Unit contribution margin
210,000 / 12 per unit = 17,500 units
Pesos sales to break even = Fixed expenses / CM ratio
210,000 / 0.20 = ₱ 1,050,000
c. Would you recommend that changes be made.
Definitely, given these findings, the changes should be done. The modifications raise the business's net
operating income from the current 60,000 to 78,000 annually. The company's margin of safety actually
increases despite the changes leading to a higher break-even point (17,500 units as opposed to the current
16,000 units).

Exercise No. 15 Cost volume profit analysis

Coco Enterprises sells two product, Model E700 and Model JI500 . Monthly sales and the contribution margin ratio for
the two products follows:

Product

Model E700 Model JI500 Total

Sales P700,000 P300,000 P1,000,000

Contribution margin ratio 60% 70% ?

The Company’s fixed expenses total P598,500 per month.

Required:

1. Prepared an income statement for the company as a whole

 Model E700 % Model JI500 % Total %

Sales P700,000 100% P300,000 100% P1,000,000 100%

Less: Variable cost 280,000 60% 90,000 70% 370,000 37%

Contribution Margin 420,000 40% 210,000 30% 630,000 63%

Less Fixed expenses 598,500

Net Operating income P 31,500

2. Compute the break-even point for the company based on the current sales mix
Break even point in total peso sales = Fixed expenses / Overall CM Ratio
598,500 / 0.63 = ₱950,000
3. If Sales increase by P50,000 per month, by how much would you expect net operating income to increase? What
are your assumption?
The following formula can be used to calculate the additional contribution margin from the higher sales:
50,000 x 63% CM ratio = ₱31,500
Assuming no change in fixed expenses, all of this additional contribution margin should boost net
operating income. The selling prices, variable costs per unit, fixed expenses, and sales mix are all
assumed to remain unchanged.