Chapter 13 - Answer

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,
average unit selling price,
13-1
Chapter 13 Cost-Volume-Profit Relationships
V =
X =
F =
average unit variable cost,

quantity of units,
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 breakeven point would be higher since it would require more sales to cover the
same amount of fixed costs.
II. Exercises
13-2
Cost-Volume-Profit Relationships Chapter 13
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
The contribution margin per person would be:
Price per ticket.........................................................................................................
P30
Less variable expenses:
13-3
Dinner..................................................................................................................
P7
Favors and program.............................................................................................
3
10
Contribution margin per person...............................................................................
P20
The fixed expenses of the Extravaganza total P8,000; therefore, the breakeven point would be computed as follows:
Sales
= Variable expenses + Fixed expense + Profits
P30Q
P20Q
Q
Q
=
=
=
=
P10Q + P8,000 + P0
P8,000
P8,000 P20 per person
400 persons; or, at P30 per person, P12,000
Alternative solution:
Break-even point
in unit sales
Fixed expenses
Unit contribution margin
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
Total Sales
P16,000
Break-even point: 400 persons,
or P12,000 in sales
Pesos
P14,000
P12,000
P10,000
Total Expenses
Fixed Expenses
P8,000
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
P900Q
P270Q
Q
Q
=
=
=
=
=
Variable expenses + Fixed expenses + Profits

P630Q + P1,350,000 + P0
P1,350,000
P1,350,000 P270 per lantern
5,000 lanterns, or at P900 per lantern, P4,500,000 in sales
Break-even point
in unit sales
Fixed expenses
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
Sales
Less variable expenses
Contribution margin
Less fixed expenses
Net operating income
Present:
Proposed:
8,000 Lanterns
10,000 Lanterns*
Total
Per Unit
Total
Per Unit
P7,200,000 P900
P8,100,000 P810 **
5,040,000
630
6,300,000 630
2,160,000 P270
1,800,000 P180
1,350,000
1,350,000
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
Sales
P810Q
P180Q
Q
Q
=
=
=
=
=

P630Q + P1,350,000 + P720,000
P2,070,000
P2,070,000 P180 per lantern
11,500 lanterns
13-6
Unit sales to attain
target profit
Fixed expenses + Target profit

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
operating leverage
Contribution margin
P5,400,000
P900,000
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
Exercise 5 (Multiproduct Break-even Analysis)
Requirement 1
13-7
Sales
Contribution margin
Less fixed expenses
Model E700
Model J1500
Total Company
Amount
%
Amount
%
Amount
%
P700,000 100 P300,000 100 P1,000,000 100
280,000
P420,000
40
90,000
60 P210,000
30
70
370,000
630,000
598,500
P 31,500
37
63 *
* 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
Sales
P40Q
P12Q
Q
Q
=
=
=
=
=

P28Q + P150,000 + P0
P150,000
P150,000 P12 per unit
12,500 units, or at P40 per unit, P500,000
13-8
Alternatively:
Break-even point
in unit sales
Fixed expenses
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
target profit

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
Requirement 4
Margin of safety in peso terms:
Margin of safety in pesos
Total sales
13-9
Break-even sales
P600,000
P500,000
P100,000
Margin of safety in percentage terms:

Margin of safety
=
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)
Requirement 1
CM ratio
Variable expense ratio
Contribution margin
Selling price
P15
P60
25%
Variable expense
Selling price
P45
P60
75%
Requirement 2
13-10
Sales
P60Q
P15Q
Q
Q
=
=
=
=
=

P45Q + P240,000 + P0
P240,000
16,000 units, or at P60 per unit, P960,000
X
0.25X
X
X
=
=
=
=
0.75X + P240,000 + P0
P240,000
P240,000 0.25
P960,000; or at P60 per unit, 16,000 units
Requirement 3
Increase in sales...................................................
Multiply by the CM ratio.....................................
Expected increase in contribution margin.............
P400,000
x 25%
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
Sales
P60Q
P15Q
Q
Q
=
=
=
=
=

P45Q + P240,000 + P90,000
P330,000
22,000 units
Contribution margin method:

Contribution margin per unit
P240,000 + P90,000
P15 per unit
= 22,000 units
Requirement 5
Total sales Break-even sales
P1,200,000 P960,000
13-11
P240,000
Margin of safety
=
percentage

Total sales
P240,000
= P1,200,000 = 20%
Requirement 6
a.
b.
Degree of operating leverage = Contribution margin = P300,000

P60,000
Expected increase in sales...........................................
Degree of operating leverage......................................
Expected increase in net operating income..................
= 5
8%
x 5
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:
Sales (21,600 units)...............
Less variable expenses...........
Contribution margin..............
Less fixed expenses................
Net operating income.............
Total
P1,296,000
972,000
324,000
240,000
P 84,000
Per Unit
P60
45
P15
Percent of
Sales
100%
75%
25%
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
=
P60,000
P24,000
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.
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.
Sales (24,000 units)...............
Less variable expenses...........
Contribution margin..............
Less fixed expenses................
Net operating income.............
Total
P1,440,000
1,152,000
288,000
210,000
P 78,000
13-12
Per Unit
P60
48*
P12
Percent of
Sales
100%
80%
20%

* 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
in unit sales
Break-even point
in peso sales
Fixed expenses
P210,000
P12 per unit
17,500 units
Fixed expenses
CM ratio
P210,000
0.20
c. Yes, based on these data the
should be made. The changes will
= changes
P1,050,000
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 breakeven point (17,500 units as compared to the present 16,000 units), the
companys margin of safety will actually be wider than before:
=
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

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
P270,000
189,000
P81,000
Sales (13,500 units)

Contribution margin
13-13
Per Unit
P20
14
P6
Percentage
100 %
70
30 %
The break-even point is:

Sales
P20Q
P 6Q
Q
Q
=
=
=
=
=

P14Q + P90,000 + P0
P90,000
P90,000 P6 per unit
15,000 units
15,000 units P20 per unit = P300,000 in sales
Break-even point
in unit sales
Break-even point
in sales pesos
=
=
P90,000
P6 per unit
15,000 units
Fixed expenses
CM ratio
=
Requirement 2
Fixed expenses
P90,000
0.30
P300,000 in sales
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.
13-14
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
Sales
P 20Q
P5.40Q
Q
Q
=
=
=
=
=

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

target profit
=
=
=

CM per unit
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
P20
7
P13
Sales
Contribution margin
The new break-even point would be:
13-15
Percentage
100 %
35
65 %
Break-even point
in unit sales
Break-even point
in sales pesos
Fixed expenses
P208,000
P13 per unit
16,000 units
Fixed expenses
CM ratio
P208,000
0.65
P320,000 in sales
b. Comparative income statements follow:
Sales (20,000 units)

Contribution margin
Less fixed expenses
Not Automated
Automated
Total
Per Unit %
Total
Per Unit
P400,000
P20
100 P400,000
P20
280,000
14
70 140,000
7
120,000
P 6
30 260,000
P13
90,000
208,000
P30,000
P52,000
%
100
35
65
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
13-16
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 = P118,000 P7 per unit
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
Percentage of total sales

Sales
Contribution margin
Less fixed expenses
Net operating income (loss)
Products
Sinks
Mirrors
Vanities
Total
32%
40%
28%
100%
P160,000 100 % P200,000 100 % P140,000 100 % P500,000 100%
48,000 30
160,000 80
77,000 55
285,000 57
P112,000 70 % P 40,000 20 % P 63,000 45 % 215,000 43%*
223,600
P ( 8,600)
* P215,000 P500,000 = 43%.
Requirement 2
Break-even sales:
Break-even point
in total peso sales
Fixed expenses
CM ratio
P223,600
0.43
P520,000 in sales
13-17
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
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
Contribution margin
P150
60
P 90
Requirement 2
Break-even point
in total sales pesos
Fixed expenses
CM ratio
P1,800,000
0.60
P3,000,000 in sales
13-18
100%
40
60%
Requirement 3
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

P360,000
b. 6 15% = 90% increase in net operating income.

Requirement 5
Sales
Contribution margin
Less fixed expenses
Last Year:
28,000 units
Total
Per Unit
P4,200,000
P150.00
Proposed:
42,000 units*
Total
Per Unit
P5,670,000 P135.00**
1,680,000
2,520,000
1,800,000
P720,000
2,520,000
3,150,000
2,500,000
P650,000
60.00
P90.00
60.00
P 75.00
* 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)
13-19
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:
P7,200
Target profit
=
P9 per patch = 800 patches
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:
Break-even point
=
in unit sales
Fixed expenses
P3,000
= P24 per patch
13-20
= 125 patches
125 patches x P30 per patch = P3,750 in total sales

If a quantity other than 200 patches were ordered, the answer would change
accordingly.
Problem 6
Requirement 1: Break-even chart
TR
600,000
500,000
TC
400,000
(P)
300,000
Break-even
point
200,000
FC
100,000
5,000 10,000 15,000 20,000 25,000 30,000

Requirement 2: Profit-volume graph
(units)
13-21
Chapter250,000
13 Cost-Volume-Profit Relationships
200,000
P
R
O
F
I
T
150,000
100,000
Break-even
point
50,000
0
5,000 10,000 15,000 20,000 25,000 30,000

50,000
100,000
L
O
S
S
150,000
200,000
250,000
IV. Multiple Choice Questions

1.
2.
3.
4.
5.
B
B
B
C
C
6.
7.
8.
9.
10.
B
D
B
A
D
11.
12.
13.
14.
15.
B
A
A
C
D
16.
17.
18.
19.
20.
13-22
D
D
D
C
D
21.
22.
23.
24.
25.
A
D
C
B
C
26.
27.
28.
29.
30.
A
B
C
B
A
13-23

Chapter 13 - Answer

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Chapter 13 - Answer

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MANAGEMENT ACCOUNTING (VOLUME I) - Solutions Manual

Chapter 13 Cost-Volume-Profit Relationships

average unit variable cost,

Cost-Volume-Profit Relationships Chapter 13

Exercise 1 (Using a Contribution Format Income Statement)

Chapter 13 Cost-Volume-Profit Relationships

= Variable expenses + Fixed expense + Profits

or, at P30 per person, P12,000.

Cost-Volume-Profit Relationships Chapter 13

Exercise 3 (Break-even and Target Profit Analysis)

Variable expenses + Fixed expenses + Profits

Chapter 13 Cost-Volume-Profit Relationships

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

* 8,000 lanterns 1.25 = 10,000 lanterns

Variable expenses + Fixed expenses + Profits

Cost-Volume-Profit Relationships Chapter 13

Fixed expenses + Target profit

Exercise 4 (Operating Leverage)

Chapter 13 Cost-Volume-Profit Relationships

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

Variable expenses + Fixed expenses + Profits

Cost-Volume-Profit Relationships Chapter 13

or, at P40 per unit, P500,000.

Fixed expenses + Target profit

Chapter 13 Cost-Volume-Profit Relationships

Margin of safety in percentage terms:

Cost-Volume-Profit Relationships Chapter 13

Variable expenses + Fixed expenses + Profits

Variable expenses + Fixed expenses + Profits

Contribution margin method:

Total sales Break-even sales

Chapter 13 Cost-Volume-Profit Relationships

Margin of safety in pesos

Degree of operating leverage = Contribution margin = P300,000

Cost-Volume-Profit Relationships Chapter 13

P240,000 P30,000 = P210,000.

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

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

Sales (13,500 units)

Chapter 13 Cost-Volume-Profit Relationships

The break-even point is:

Variable expenses + Fixed expenses + Profits

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

Incremental contribution margin:

Cost-Volume-Profit Relationships Chapter 13

Variable expenses + Fixed expenses + Profits

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

Fixed expenses + Target profit

** P6.00 P0.60 = P5.40.

Chapter 13 Cost-Volume-Profit Relationships

b. Comparative income statements follow:

Sales (20,000 units)

Cost-Volume-Profit Relationships Chapter 13

drop back down to or near present levels.

Percentage of total sales

* P215,000 P500,000 = 43%.

Chapter 13 Cost-Volume-Profit Relationships

Cost-Volume-Profit Relationships Chapter 13

Degree of operating leverage = Contribution margin = P2,160,000 = 6

b. 6 15% = 90% increase in net operating income.

* 28,000 units 1.5 = 42,000 units

No, the changes should not be made.

Chapter 13 Cost-Volume-Profit Relationships