© Basic principles : = Costs pe are segregated into fixed and variable elements. = Profit = Sales — Costs and expenses = Profit = Sales — Fixed costs — Variable costs* (“The term cost means costs and expenses. ) = Activities and operations are made within the relevant range © Basic assumptions within the relevant range => Linearity - The behavior of sales and costs is linear. ‘= Behavior of sales, costs, and expenses: ‘ = Sales - it changes directly in relation to the level of units sold. © Fixed costs - Total fixed cost is constant without regard to the change in the fevel of units of production and sales; unit fixed cost changes {i.e., unit fixed cost decreases as the level of production increases, and vice-versa). : © Variable costs — Total variable costs change in direct proportion with the level of units produced and sold; unit variable cost is constant. = Selling price - assumed to be constant. = WIP inventory — disregarded, there is no WIP inventory. = FG inventory — no change in the FG inventory (i.e., production = sales). ~ Product(s) and sales mix : © there is only one product, or © if there are 2 or more products produced and sold, the sales mix is assumed to be constant. © The marginal income statement (or variable income statement) = The condensed format = The expanded format Sales Px Sales Px - Variable costs and expenses _x - Variable costs of goads sold x Contribution margin x Manufacturing margin x - Fixed costs and expenses _x ~ Variable expenses. x Income before income tax Px Contribution margin x ~ Direct fixed costs and expenses x Direct margin (or segment margin) x Income before income tax ~ Indirect fixed costs and expenses ot Px = Variable production costs refer to direct materials, di variable overhead, » direct tabor, and = Examples of variable expenses are delivery ex ; commission, and packing supplies. Ty expenses, satesmen’shat are directly relay are those Te uct line): these = Direct fixed costs and expenses ET or produ ; these cog ‘.e., division, depart that once the segme,® = ‘rectly, ‘Sorted with the § segment mt discontinued, these costs are @ = sometimes called as alloctey = indirect fixed costs and expenses costs, or piper pee nses behavior within the relevant range, = Summary duction and : : reales volume Unit sales price ace ew Variable costs a 5 = Per total he Per unit constant | constant ne Fixed costs Per total constant | constant ne ic Per unit v * ne (ne = no effect) © Relevant formulas = Contribution margin = ? CM = Sales — Variable costs CM = Fixed costs + |BIT CM = Sales x CMR CM = Quantity sold x UCM = CMR =? CMR = 100% - VCRatio CMR = CM/ Sales CMR = UCM/USP CMR = NPR/MSR CMR = AEBIT / ASales (if FC remains the same) = UCM = ? UCM = USP-UVC UCM = FC /BEP (units) UCM = CM/ Quantity Sold = Profit = ? Profit = CM-—Fixed costs Profit = Sales x MSRatio x CMRatio Profit = Sales x NPRatio AProfit = ACM-inFC AProfit = ACM+W inFC = BEP =? BEP (units) = FC/UCMargin BEP (pesos) = FC/CMRatio Comp. BEP (units) = FC/Ave, Comp. BEP (pesos) = FG, BEP (units) = Actual sale; Tage UCM /AVerage CMR S x (1-MSRatio)At BEP: Profit (loss) = Sales = Total costs Contribution margin = Total fixed costs = Fixed Costs = ? FC = CM (at BEP) FC = CM= Profit = BEP (units) x UCM VCRatio = ? VCRatio = VC / Sales VCRatio = UVC / USP VCRatio = 100% - CMR VCRatio = ACosts / ASales VCRatio = (ACosts - 4 in FC) / ASales VCRatio = (ACosts +¥ in FC) / ASales Margin of Safety = ? MS Actual sales — Actual breakeven sales MS Budgeted sales — Budgeted breakeven sales MS Sales x MSRatio MSR = MS / Actual (or Budgeted) sales MSR = NPR/CMR MSR = [1 -(BESales / Actual Sales)] NPRatio = ? Unit profit margin / USP NPRatio = MSR x CMR * Degree of operating leverage (DOL) DOL = CM/EBIT DOL = % Ain EBIT/% A in Sales % Ain EBIT = % A in Sales x DOL q wunud a onennn 4 STRAIGHT PROBLEMS . Basic CVP relationships. Melanie Company produces a merchandise that has the following data: Unit sales price P80 per unit Unit variable costs P48 per unit Total fixed costs P640,000 per annum Units sold during the current year 25,000 units Required: a. Unit contribution margin, contribution margin ratio, and variable cost ratio. b. Breakeven point in units and in pesos. c. Margin of safety in units and in pesos, and margin of safety ratio. d. Net profit ratio. e. The amount of profit using the margin of safety. f. If sales increase by P300,000, how much would you expect income to increase?SOLUTION GUII IALYSIS SHEET Amount a. fee Units Unit Price 2,000,000 — 100.00% Sales 25,000 P80.00 1200,000 _60.00_ - Variable costs 5,000 A800 O00 40.00% Contribution margin 25,000 P3200 ~ Fixed costs P_160,000 Income before income tax i: = : = VCR = 60.0 UCM = P32.00 ; CMR = 40.0%; op = 70,000 units b. BEP (units) = FC/UCM = P640,000/ P32 = 20,000 BRP (pesos) = FC/CMR = P640,000 / 40% = To prove: 40,000 Contribution margin (P1.6 M x 40%) 640, ee - Fixed costs 640,000 . BIT —_ aie c Amount Units ‘ Actual sales 2,000,000 25,000 ta He % - Breakeven sales 4,600,000 20,000 no: Margin of safety P_400,000 §,000 20.00! e. NPR = MSR x CMR = 40% x 20% = 8% d. Profit = MS x CMR = P2M x 8% = P160,000 f. Increase in CM (increase in profit) = increase In sales x CMR = P300,000 x 40% = P120,000 2. CVP sensitivity analysis. LAN Corporation manufactures and sells a single product that has a retail price of P150; unit variable cost of P120, and total fixed costs of P900,000. It expects to sell 50,000 units in the coming period (IBIT = income before income tax). Required: a. The CMR, BEP in units, and expected IBIT in the coming period. b. The new CMR, BEP in units, and operating profit for the coming period if: 1. Unit sales price increases by 10%. : 2. Unit variable costs decrease by 20%. 3. Total fixed costs increase to P1,440,000 4. 5. . The number of units sold increases to 65,000. . Unit sales price decreases by P4, unit vai d total fixed costs increase by P100,000, rable cost decreases by 10%, a" 2. SOLUTION GUIDE a * CMR = [(P150-P120)/ P1509] = * BEP (units) = P900,000/ P30 : = oe * — Contribution margin (50,000 units x P30) P fen - Fixed costs 1,800,000 200,000 IBITb..Sensitivity Analysis Data Changes New CMR New BEP (units) New IBIT. | 1, USP (P150 x 110%P165 | CMR=P45/ P165 BEP = P900,000 CM = (50,000 x P45) P2.25M | uve 120 = 22.27% P45, Fo 0.90 M ucm _ =20.0009 | |BIT PL30M FCE 2, USP P150 | CMR = P56/P150 BEP = P900,000 CM = (50,000 x P54) P2.70M uve —96 = 32.33% P54 FC 0.90 UCM Bose — = 16,667 \BIT PLaOM FCE Pa09.000 3. FCE Bi440.000 | CMR=P30/Pi50 | BEP= 1% ‘1,440,000 P30 ‘CM = (60,000 x P30) P1.50M | Fo 144M BIT = 48,000 . Quantity sold §5.000 | CMR=P307P150 | BEP = P900,000 = 20% P30 ‘CM = (65,000 x P30) P1.95 M Fo 090M 30,000 eit PLoS M 5. USP (P150-P4) “P146 | CMR=P38/P146 | BEP = P1,000,000 | CM= (60,000 x P38) P1.90M Wve (P120 x 90%) _108 = 26.03% P38 Fe 4,00 M BIT Fo ‘900, 000 + P 100,000) B1M 3. Sales with profit. with the following related data: Unit contribution margin Variable cost ratio Total fixed costs P40 75% P200,000 MJP Corporation presently sells product SIMPLE LANG Required : What would be the sales in pesos and in units if: b. c. d. e. Income before income tax is P300,000. Income after tax of 40% is P300,000. Profit rate before tax is 20% of sales. Unit profit margin before tax is P8. Profit rate before tax is 10% of CMR. 3. SOLUTION GUIDE Formulas Applications (FC + IIT) 7 UCM a. Salesinisy = (P200,000 + P300,000) /P40 (FC + IBIT) / CMR. = 12,500 units ‘SaleSipesea) = (P200,000 + P300,000) / 25% b. Income FC + (NI74-TR)/UCM |b. SaleSunis) = P200,000 + [P300,0007 after tax FC + (NI/1-TR)/ CMR (1-40%)] / P40} Salesipesosy = P200,000 + [P300,000 / (1-40%)] / 25%] = P28M ¢. Net profit | ¢. Sales) =FC/ (CMR - NPR) ©. SaleSipesoe) = 200, 300 25 20%) ratio Sales = Salesipesce) / UCM = Salesiunm = PAM / (P40 / 25%) P4M / P160 = units= P200,0007 (P40 - Py | & Unit profit | a. Sales) = FO/(UCM- UPM) od. SaleS¢unte) i margin Sales = Sales nis) x USP 200,000 / 32 = @259 sale: 50 units x P16g = pent 7 000 / (25% su ©: Profit rate | ©. Sales) = FO/ (CMR - NPR) 2 Bales (pases) = P20 ( 5%) a on Sales = Sales nis) x USP sale 7 Pas cee 269 / P160 = 556 wy 4. Multi product sales mix based on units. Baguio Corporation produces three products, D, E, and F, with the following related data: md . Pi20 Unit sales price P200 P50 i Unit variable costs 120 20 5 Sales mix 2 5 Total fixed costs, P800,000 Required: a. Weighted average unit contribution margin (WAUCM). b. Composite BEP in units and allocation of CBEP. ¢c. Composite BEP in pesos, d. Sales per mix and composite BEP. ®. The number of units to be sold if the firm wants a profit of P40,000. 4. SOLUTION GUIDE a. Product UCM Sales Mix Ratio WaUcM D P80 2/10 P16 E 30 510 15 F 30 ano _9 b.Composite BEP (units) = FC/ WAUCM = 800,000 / pag = i Allocation of Comp BEP(units): 20.000 units D = 20,000 units x 2/10 4,000 units 0,000 units x 5/10 10,000 units 0,000 units x 3/10 8,000 units 20.000 units ¢. Composite BEP (pesos) = FC / WACMR = P800,0 < WACMR = WAUCM /WAUSP = P40 / Pig, sasoson = P2.g20,000 wWausP = 2 D=P200x210= pag E= 50 x5/10 = 25 F= 120 x30 = 6 wausP Bagi d. Sales per mix = FC/ Composite UCM = Pg Comp. UCM = 7 90.000 1 P400 = 2.000 units Product ICM Sales Mix Comp.u D P= 2 Piso E 30 5 150 F 30 3 Total Payae BEP (units): = 2,000 units x2 4,000 units 10,000 units units Suimsen BEP (units) 20,000 units e. Composite sales = FC + IBIT / Ave. UCM = (P800,000 + P400,000) / P40 = 30,000 units 5, Multi product sales mix based on pesos. Davao Corporation produces three products, Durian, Pomelo, and Marang, with the following budgeted data: Durian Pomelo Marang Sales P400,000 —_- P600,000 P1,000,000 CMRatio 50% 40% 30% Total fixed costs, P1.48 MILLION Tax rate, 40%. Required: a. Weighted average contribution margin ratio. b. Composite BEP in pesos and allocation of CBEP. e. The composite sales in pesos If the firm wants a profit of P3 million. 5. SOLUTION GUIDE a. WACMR = The WACNR is determined based on the sales mix pesos which in this casa is 4/20, 6/20, and 1/20 for Durian, Pomelo, and Marang, respectively. Durian = 50% x 4/20 = 10% Pomelo = 40% x 6/20 2 Marang = 30% x 10/20 15 WACMR aZ% . ~Composite BEP (pesos) = FC/WZCMR = P1.48 million / = Allocation of Composite BEP in pesos: oe PAMILLION| Durian = P4million x 4/20 = P 800,000 Pomelo = P4 million x 6/20 = 1,200,000 Marang = P4 million x 10/20 = eae Total The IBIT is P5 million [i.¢., P3 million / (1-0,40)}. Therefore: Composite sales (pesos) = (FC + IBIT)/ 37% = (P1.48 million+ P5 million) 137% = P17,513,513lowing operational day, 1d the foll /A. Charmaine Company reporte 6. Perfectly basic CPV, jn thousand of pesos) for its 2005 and 2006 results: (in thous 8 Change 30,000 pee oon 4,960 , 7 74,960 Lest Costs andoxpenses 70,000 ABH an Operating income 20.000 Pate ld be the expected igyy a. BEP in pesos. .cted to reach P122,000,000, what wo! b. If sales are expe increase by 20%, what wou ota ts and expenses are expected to i se by 4 Cc. If total fixed costs i ?. be the new breakeven point in 20077. 1ON GUIDE = 62% a verano” = A Costs / A Sales = P4,960 / P8,000 = 62 Fixed costs = 14,200,000 2004 2005 a Total costs and expenses P70,000,000 a0 760 bon ~ Variable costs (Sales x 62%) _ 55,800,000 0, P14,200.000 P14,200,000 Fixed costs and expenses BEP (pesos)- FC/CMR = P 14,200,000 / 38% = 37,368,421 b. Contribution margin (P122M x 38%) P46,360,000 - Fixed costs and expenses 14,200,000 IBIT New BEP(pesos) = (P14.2 Mx 120%) / 62% = 227,483,870 7. Operating leverage. David Corporation discloses the following data Felative to its Product Girata for its 2006 Operations: Contribution margin (40,000 units x P50) P2 Total fixed costs and expenses 4 So loos CMRatio et 40% Required: a Degree of Operating leverage. What would be the Per 7 P centage i increase by 40% in 2097 8° crease jin EBIT c.f the firm wants to increase it ; Needed increase ts DOL to 4.0 in in fixed ; 7, how much should be the cane? Sosts assuming the Contribution margin remains the if sales are expected to7, SOLUTION GUIDE . a. Degree of operating leverage = CM/EBIT = P2M/P800,000 = 28 b. ZA in EBIT = “A in Sales x DOL To prove (in thousands): “A in EBIT = 40% 28 Before After © Change = 100% Sales P5,000 P7,000 40% = VC _ 3,000 _4,200 _40% cm 2,000 — 2,800 40% -FC _1200 _1200 -~—_ EBIT _P_800 P1600 100% c. EBIT = CM/DOL = P2million/4 = P500,000 New fixed costs (P2 million - P500,000) P1,500,000 ~ Old fixed costs 14,200,000 Increase in fixed costs P_300,000 8. Indifference point. Kiko Company has decided to introduce’ a new product. The new product can be manufactured by either a fully-automated process or a semi- automated process. The manufacturing process will not affect the quality of the product. The estimated unit manufacturing costs by the two methods follow: Fully Semi- Automated Automated Materials P 5,00 P 6.00 Direct labor 6.00 7.00 Variable factory overhead 3.00 4.00 Directly traceable incremental fixed factory overhead is expected to be P2,380,000 if the fully-automated process is chosen and P1,285,000 if the semi-automated process is. chosen. The company's Market Research Department has recommended an introductory unit sales price of P40. Regardless of the manufacturing process chosen, the incremental marketing expenses are estimated to be P500,000 per year plus P2 for each unit sold. Required: a, Calculate the estimated breakeven point for the new product in annual units of sales if the company uses the: a1. fully-automated manufacturing process. a2. semi-automated manufacturing process. b, Determine the annual unit sales volume at which the choice between the two manufacturing processes would not make a difference. 8, SOLUTION GUIDE a. BEP (fully-automated) (P2.380 M + 500,000) / (P40 - P14 — P2) P2.88M/P24 = 120,000 units (P1.285 M + P500,000) / (P40 - P17 - P2) P1.785 M/ P21 = 85.000 units BEP (semi-automated)b. Indifference point = 7 Let X = indifference point in units where: Profit = CM - FC Profit (fully) = 24X - P2.880M Profit (semi) = 21X - P1.785M Profit (fully) = Profit (semi) Then: 24X—P2.880M = 21X - P1.785M 3X = P1.095M X = 365,000 units