SOLUTION for Break even analysis example problem:

a.
SP=P125
Labor cost=daily salary of worker/average daily output of worker
=P420/70=P6
Variable cost(VC)=Material Cost + Labor Cost=P44+6=P50
Fixed Cost(FC)=P6M per year
x = # of slippers sold per day
TR = (SP) (x)
TC=FC + (VC) (x)

TR=TC
(SP) (x) = FC + (VC) (x)
Then solve for x,
(SP) (x) - (VC) (x) = FC
(SP-VC) (x) = FC
x=FC/SP-VC

Substituting the values of SP, VC and FC: BEP(units)=FC/CM per unit

x=6M/125-50 =6,000,000/75 SP 125 100%
= 6M/75 =80,000 units VC 50 40%
=80,000 slippers CM 75 60%

So how much the peso value of 80k units then? BEP(P)=FC/CM ratio
TR=(SP) (x) TC=FC + (VC) (x) =6,000,000/.60
=125 x 80,000 =6M + (50 x 80,000) =P10,000,000
=P10,000,000 =6,000,000 + 4,000,000
=P10,000,000
=50/125
Example of CVP Analysis with Changes in Cost Structure

The Don Company sold 100k units of its product at P20 per unit. Variable costs are P14 per unit (manufacturing costs o
Fixed costs are incurred uniformly throughout the year and amount to P792K(manufacturing costs P500k and marketin
Required
1. The BEP in units and in pesos
2. The number of units that must be sold to earn an income of P60k before income tax.
3. The number of units that must be sold to earn an income after tax of P90k. Income tax rate is 40%.
4. The number of units required to break-even if there is a 10% increase in wages and salaries.
Labor cost constitutes 50% of variable costs and 20% of fixed costs.

Solutions:
1 BEP=792/6=132k units

BEP(P)=792/30%=P2,640,000 20 100%
14 70%
6 30%

2 Desired net income 60,000.00

Add: fixed costs 792,000.00
Contri margin 852,000.00
Divided by: CM per unit 6.00
Total # of units 142,000.00

3 Desired net income after tax 90,000.00

Desired net income b4 tax

(90k / 60%) 150,000.00
Add: fixed costs 792,000.00
Contri margin 942,000.00
Divided by: CM per unit 6.00
Total # of units 157,000.00

4 BEP=792k + (20% x 792k) SP

P5.30 VC
=179,320 units Materials,OH & marketing(50%xP14 7.00
Labor(50%xP14x110%) 7.70
CM per unit
 per unit (manufacturing costs of P11 and marketing costs of P3).
turing costs P500k and marketing cost of P292k).

ax rate is 40%.

20.00

14.70
5.30
Example of CVP Analysis for multi-products firm
The Insular Corp sells two products, D and W at a rate of 2 units and 3 units respectively.
The following data are available:
D W
SP P10 P5
VC 6 3
Total FC P420k
Required:
1. Weighted CM per unit
2. BEP in units (combined)
3. Weighted CM ratio
4. BEP in pesos(combined)
5. BEP in pesos for
a Product D
b Product W

Solutions:
1 D W
Unit CM P4 P2
x by Sales Mix
D=2/5 40%
W=3/5 60%
Weighted CM per unit 1.6 1.2 2.8

2 BEP(units)=P420k/P2.80
=150k units

3 D W D W
Sales Mix rate 57% 43% =1.6/2.8 =1.2/2.8
x by CM ratio 40% 40% =4/10 =2/5
Weighted CMR 23% 17% 40%

4 BEP(P)=P420k/40%
=P1,050,000

5 BEP for:
Product D =P1,050,000 x 57% 600,000.00
Product W =P1,050,000 x 43% 450,000.00
Example of CVP in Decision Making
The income statement for the Woodstock Company for the past year is:
Sales (150k units @ P30) 4,500,000.00
COGS:
Materials 1,050,000.00
Labor 1,500,000.00
Variable FOH 450,000.00
Fixed FOH 500,000.00 3,500,000.00
Gross Profit 1,000,000.00
Variable Marketing exp. 135,000.00
Fixed marketing exp. 185,000.00
Fixed manufacturing exp. 180,000.00 500,000.00
Income b4 tax 500,000.00
Income tax(40%) 200,000.00
Net Income 300,000.00

Woodstock is preparing its budget for the coming year and has made the following projections
about cost increases: materials, 5%, labor 8%, and all other costs (including fixed ) 6%.
Production capacity is 200k units.
The president has been offered various proposals by the division manager as follows:
a Maintain the present volume and sales price.
b Produce and sell at capacity and reduce the unit price to P28.
c Raise the unit price at P32, spend an extra P300k on advertising and produce and sell 180k units.
Required:
Recommend action, based on quantification of alternatives.

Solutions:
a.
Sales 150,000.00 x 30 4,500,000.00
Variable Costs
Materials 1,050,000.00 x 1.05 1,102,500.00
Labor 1,500,000.00 x 1.08 1,620,000.00
Variable FOH 450,000.00 x 1.06 477,000.00
Variable exp 135,000.00 x 1.06 143,100.00 3,342,600.00
Contri Margin 1,157,400.00
Fixed FOH 500,000.00 x 1.06 530,000.00
Fixed marketing exp. 185,000.00 x 1.06 196,100.00
Fixed manufacturing exp. 180,000.00 x 1.06 190,800.00 916,900.00
Net Inc b4 taxes 240,500.00

b. Sales 200,000.00 x 28 5,600,000.00

Variable Costs
Materials 7.00 200,000.00 x 1.05 1,470,000.00
Labor 10.00 200,000.00 x 1.08 2,160,000.00
Variable FOH 3.00 200,000.00 x 1.06 636,000.00
 Variable exp 0.90 200,000.00 x 1.06 190,800.00 4,456,800.00
Contri Margin 1,143,200.00
Fixed FOH 500,000.00 x 1.06 530,000.00
Fixed marketing exp. 185,000.00 x 1.06 196,100.00
Fixed manufacturing exp. 180,000.00 x 1.06 190,800.00 916,900.00
Net Inc b4 taxes 226,300.00

c Sales 180,000.00 x 32 5,760,000.00

Variable Costs
Materials 7.00 180,000.00 x 1.05 1,323,000.00
Labor 10.00 180,000.00 x 1.08 1,944,000.00
Variable FOH 3.00 180,000.00 x 1.06 572,400.00
Variable exp 0.90 180,000.00 x 1.06 171,720.00 4,011,120.00
Contri Margin 1,748,880.00
Advertising exp 300,000.00
Fixed FOH 500,000.00 x 1.06 530,000.00
Fixed marketing exp. 185,000.00 x 1.06 196,100.00
Fixed manufacturing exp. 180,000.00 x 1.06 190,800.00 1,216,900.00
Net Inc b4 taxes 531,980.00
Recommendation: Proposal C should be adopted because it will yield the highest amount of profit.
ll 180k units.
mount of profit.
Example Problem of Margin of Safety
Amflor Manufacturing Company's budget for the coming year revealed the following unit data:
Budgeted net income for the year 875,000.00
Unit Costs:
Varialbe Fixed
Manufacturing cost 14.00 12.00
Selling cost 2.50 5.50
General cost 0.25 7.00
Unit selling price 50.00
Required:
1. Determine the budgeted sales volume in units.
2. Determine the margin of safety in pesos amount and percentage.

Solutions:
1 Budgeted sales volume(units)=Total Budgeted net income
Net income per unit
=875,000/8.75
=100,000 units
Unit SP 50.00
Less: VC
Manufacturing 14
Selling 2.5
General 0.25 16.75
CM per unit 33.25
Less: FC 24.50
Net income per unit 8.75

2 Margin of Safety=Budgeted Sales-Break even sales

=5,000,000 - [(24.50 x 100,000)/66.5%]
=5,000,000 - 3,684,211
=1,315,789

Margin of Safety ratio = Margin of Safety(P)/Budgeted Sales

=1,315,789/5,000,000
=26%
Example Problem of Operating Leverage
The sales and cost data are for two companies in the trasnportation industry:

Company A Company B
Amount % of Sales Amount % of Sales
Sales 100,000.00 100% 100,000.00 100%
VC 60,000.00 60% 30,000.00 30%
CM 40,000.00 40% 70,000.00 70%
FC 30,000.00 60,000.00
Net income 10,000.00 10,000.00
Required:
1 Calculate the operating leverage for each company.
2 Assume sales rise 10% in the next year. Calculate the % increase in profit for each company.
Are the results what you expected?

Solutions:
1 OL=CM/Net income
Company A's OL = 40,000.00
10,000.00
= 4
Company B's OL = 70,000.00
10,000.00
= 7
2
Company A Company B
Amount % of Sales Amount % of Sales
110% Sales 110,000.00 100% 110,000.00 100%
110% VC 66,000.00 60% 33,000.00 30%
CM 44,000.00 40% 77,000.00 70%
FC 30,000.00 60,000.00
Net income 14,000.00 17,000.00

Company A's change in profits = 14-10 =40%

10

Company B's change in profits = 17-10 =70%

10