SBA QUIZ # 1

EXPLANATIONS:

1. B The statement defines the term "cos-volume-profit analysis."

2. D CVP analysis is one of the analytical techniques that managers can use.

3. D The elements of CVP analysis are total fixed costs, unit variable costs volume, selling price, and sales mix.
Relevant cost is not among such elements. In CVF analysis, costs are classified as to behavior, not as to
whether the costs are relevant or irrelevant.

4. C In CVP analysis, it is assumed that change in inventories is negligible, ie., production is equal to sales.

 Choice A - Gross margin is the difference between sales and cost of sales. It is synonymous with gross
profit or gross income. Contribution margin is the difference between sales and variable costs.
 Choice B - Contribution margin is the excess of sales over variable costs, and it is the amount
available for the recovery of fixed costs and generation of profit
 Choice D - Total variable costs change directly with the cost driver or activity level. Unit variable cost
is assumed to be constant.

5. C Choice A - All costs are classifiable as either variable or fixed costs.

Choice B - Costs and revenue relationships are predictable and linear over a relevant range of activity and
specified period of time.

Choice D - Total fixed costs are constant over the relevant range, but fixed costs per unit vary indirectly or
inversely with the cost driver or volume.

6. A In CVP analysis, the unit contribution margin is used to project the break-even point and profits at various
levels of production.

 Choice B - CVP analysis does not control the physical production of the products.
 Choice C - CVP analysis is not a costing system.
 Choice D - CVP analysis does not control costs.

7. A Within the relevant range and a specified time period, sales, variable costs, and fixed costs are assumed to
be linear. Within such range, selling price, variable cost per unit and total fixed costs are assumed to be
constant.

8. C In a contribution income statement, costs are classified as to behavior, i.e., fixed costs are shown
separately from variable costs.

9. A Sensitivity analysis examines the effect on the outcome of not achieving the original forecast or of
changing an assumption. Various possible scenarios are considered and the impact on profit of the various
predictions of future events is computed.

 Choice B - Sensitivity analysis as used in CYP analysis is not a study of which cost accounting system
should be used.
 Choice C-When probabilities are used to evaluate decision alternatives, the technique is called
"expected value analysis.
 Choice D-Fixed costs do not vary with cost drivers. Total fixed costs are constant within the relevant
range and specified period of time.

10. C When uncertainty' enters the situation, the MAS consultant should make an appropriate effort to
ascertain the probabilities of various outcomes. He can then work with management to make the
appropriate decision. The consultant, however, should not make the decisions for management.
11. B The statement describes the term “break-even point.”

12.C Beyond the break-even point (BEP), operating income will increase by the unit contribution margin (selling
price-variable cost per unit). Upon reaching the BEP, fixed costs will already have been recovered.
Assuming that the total fixed cost is constant, no additional fixed costs will be incurred beyond the BEP.

13. B Unit variable costs and total fixed costs, as well as productive efficiency, are assumed to be constant within
the relevant range during the specified time span.

It is assumed that production equals sales, thus, change in inventories is negligible.

14. D Under variable costing, variable costs are separated from fixed costs. Product costs include variable
manufacturing costs only. Fixed overhead cost is treated as a period cost. This classification of costs
according to behavior (variable and fixed) under variable or direct costing facilitates the use of CVP and BE
analyses.

Process costing, job-order costing, and absorption (full) costing do not separate variable costs from fixed
costs.

15. A A decrease in selling price decreases profit. Likewise, an increase in unit variable cost decreases profit.
Thus, the directions of change in profit are the same (both decreases profit). However, in terms of pesos,
the effects are not the same, because selling price is normally higher than the unit variable cost. For
instance, 10% of P100 is not the same as 10% of P80.

16. A CVP analysis is a study of the relationship between costs and volume or sales revenue at various levels of
operations.

17. A In break-even analysis, it is assumed that costs are predictable and can be classified as either variable or
fixed costs. It is accepted, however, that mixed costs or semi-variable costs may exist. In such case, the
fixed and variable components of mixed costs are segregated with the use of cost segregation methods
such as high-low, scattergraph diagram, or least squares method.

Moreover, it is assumed that production is equal to sales; the change in inventory is negligible; and the
combination of products being sold remains constant within the relevant range.

18.C Contribution margin is the excess of sales price over the related variable costs contributing to the recovery
of fixed costs and generation of profit.

Gross margin and gross profit refer to the excess of sales over cost of sales.

Margin of safety is the excess of sales over break-even sales. It is the amount by which sales may be
reduced without resulting into a loss.

19. B Even at the break-even point, the company may still earn gross profit, as it is the difference between sales
and cost of sales. After deducting all the other costs and expenses from the gross profit, profit is equal to
zero if the sales revenue is the break-even point.

20. B An increase in selling price or a decrease in unit variable costs will increase the unit contribution margin.
However, since the selling price is normally higher than the variable costs, a 10%change in selling price
will have a greater effect on the contribution margin than a 10% change in the unit variable cost.

A change in fixed cost will not affect the contribution margin.

A decrease in selling price decreases the unit contribution margin.

21. A Break-even point may be calculated with the use of the following formula:
F ×C
BEPu =−
UCM
 A decrease in fixed costs or an increase in UCM decreases the break-even point. The other choices (B, C,
and D) increase the break-even point.

22. D Assume the following figures:

Total fixed costs P400

Selling price P5
Unit variable cost 3
Unit CMP 2
CMR (2/5) 40%

Break-even point:

P 400
=200 units orP 400/40 %=P 1.000
2

 Choices A and B

Equal percentage increases in both selling price and variable cost per unit will cause both the peso break-
even sales and contribution margin ratio to remain unchanged.

Assume a 10% increase:

Selling price (P5x1.10) P5.50

Unit variable cost (P3 x 1.10) 3.30
CM/unit P2.20
CMR (P2.20/P5.50) 40%

Break-even point: P400/40% = P1.000

 Choices C and D

Equal peso increases in both the selling price and unit variable cost will cause the break-even point in units to
remain unchanged. The peso break-even point, however, will change.

Assume a P2 increase:

Selling price (P5 + P2) P7.00

Unit variable cost (P3+P2) 5.00
Unit CM P2.00
CMR (P2/P7) 28.57%

Break-even point in units: P400/2 = 200 units

Break-even point in pesos: 200 units×P7 = P1,400 or P400 ÷ 28.57% = P1,400

23. A The break-even point in pesos is calculated using the formula:

F ×C
BE P p =
CMR
Genevieve Co.: P50,000 + 40% = P125,000.00

Odessa Co.: P70,000 + 52% = P134,615.38

24. C The indifference point in peso sales volume where the peso profits of the two companies are equal is the
peso volume where total costs (fixed costs plus variable costs) are equal.

Let x = the indifference point in peso sales volume

Variable cost = x multiplied by the variable cost ratio

The variable cost ratio (VCR) is the complement of the contribution margin ratio. Thus, the companies'
CMR and VCR are as follows:

CMR VCR
Genevieve Co. 40% 60%
Odessa Co. 52% 48%

P50,000 + 0.60x = P70,000 + 0.48×

0.12x = P20.000

x = P166,666.67

25. D

Genevieve Co. Odessa Co.

Sales* P166,666.67 P166,666.67

x CMR 40% 52%

Contribution margin P. 66,666.67 P 86,666.67

Less fixed costs 50,000.00 70,000.00

Profit P 16,666.67 P 16,666.67

*indifference point, from Item #24

26. A Once the indifference point is exceeded, Genevieve Co. will make lower profits than Odessa Co. because
Genevieve Co.'s contribution margin ratio is lower.

27. A Margin of safety is the amount by which sales may be reduced without resulting info a loss.

28. A The CM ratio is the ratio of contribution margin to sales (CM/S). One product may have a higher unit
contribution margin, but its selling price may be so high that its CM ratio is lower.

29. A CM/u = P25 - P15 = P10 per unit

CMR = P10 ÷ P25 = 40%

˙
P 100,000
30.C BE Pu = =10 , 000 units ;
10
P 100,000
BEPP= =P 250.000
40 %
31. D Required sales to earn desired profit before tax:

¿ cos t +desired profit

Sales∈units=
Unit CM
 P 100,000=P 20,000
¿
P10
¿ 12,000 units
¿ cos t +desired profit
Sales∈ pesos=
CMR
P 100,000+ P 20,000
¿
40 %
¿ P 300,000
32. A Required sales to earn a desired after- tax net profit (NP):

NP
F ×C 1 +
1 −T × R
R SU=
CM /u

P 21,000
P 100,000+
70 %
¿
P 10
 = 13,000 units

NP
F ×C+
1 −T × R
R SP=
CMR
P 21,000
P 100,000+
70 %
¿
40 %
¿ P 325.000

33. B Required peso-sales with desired profit ratio:

F ×C P100,000
R SP= =
CMR− PR 40 % − 8 %
˙
P 100.0 0 0
¿−
32%
¿ P 312.500

34. C Required sales in units to earn a desired profit per unit:

F ×C P100.000
R SU= =
UCM − P/U P 10 − P 2
P 100.000
¿
P8
= 12,500 units

35. A

Units Pesos
Average monthly sales 11,000 P275,000
Less break-even sales 10,000 250,000
Margin of safety 1,000 P 25,000

MS 1 , 000 P 25.000
36. A MSR=− = ∨ =9 %
S 1 1 , 000 P 275.000
BES 10.000 P 250,000
BESR= = ∨ =(91 %)
S 11.000 P 275,000
BESR is the complement of MSR.

If MSR is 9%, then BESR = 100% - 9% = 91%

∗ ∗∗ CM
37. B OLF ∨DOL =
Profit before Tax
P 110,000
¿ =11
P 10,000
 *Operating Leverage Factor
** Degree of Operating Leverage
 F ×C P100,000+ 20,000
38. D New BE Pu= = =12,000
UCM P 10
Original BEPu=P10,000
Increase ∈BEPu=2,000

P 100,000
NewBE P P= =P 500,000
39.A 25 −20
25
P 100,000
Original BE P P= =P 250,000
25 − 15
25

P 100.000
40. C New BEPu= =6,666.67 units
P30 − P15
P 100,000
Original BE P U = =10,000 units
P 25 − P 15
41. B The degree of operating leverage decreases because the presence of fixed costs makes net income on a
percentage basis less and less sensitive to changes in total sales as the total sales goes up

P900,000-P800,000
42. A % Increase in Sales= =12.5%
P800,000
x Degree of Operating Leverage =5

% Increase in Profit = 62.5%

% increase∈Profit
43.C % Increase∈ sales=
Operatingleverage factor
100 %
¿
4
¿ 25 %
∴ Sales of P500,000 after the increase is 125% of original sales.

Original sales (P500,000/125%) P400,000

X CMR (100% - 40%) 60%
Original CMP 240,000
Less profit* 60,000
Fixed costs P180.000

CM
∗OIF=
ProfIt
 240,000
4=
Protit
240,000
Profit= =60,000
4

To check: New sales P500,000

x CMR 60%

New CM P300,000

-Fixed costs 180,000

Profit * P120,000

*increased by 100% from P60,000 to P120,000

44.D
Product 1 Product 2
Selling price P20 P24
-Variable cost per unit 14 20
CM per unit P6 P4
X Sales mix ratio (3:2) [3/5] 60% [2/5 40%
]
P3.60 P1.60
WaUCM =P 3.60+ P 1.60=P 5.20
Alternative Solution: Product 1 Product 2
CM per unit P6 P4
X Sales mix ratio (3:20) 3 2
P18 P8

WaUCM =P 18+ P 8=P 26.00 ÷ 5=P 5.20

F×C P 234,000
45. B BEP= =
WaUCM P 5.20
= 45,000 composite units

Breakdown: Product 1 = 45,000 × 60% = 27,000 units;

Product 2 = 45,000 × 40% = 18,000 units

46. A Product 1 Product 2 Total

Sales P60 P48 P108

Less variable cost 42 40

Contribution margin P18 P8 P 26

* P20 x 3 units (Sales); P14 x 3 (VC)

**P24 x 2 uniis (Sales); P20 x 2 (VC)

Total CM P26
WaCMR= = =24 %
Total Sales P108
 ALTERNATIVE SOLUTION: Product 1 Product 2

CMR (P6/P20) 30.00% (P4/P24) 16.67%

x Sales mix ratio (P60/ 55.56% (P48/P108) 44.44%
p108)
Composite CMR 16.67% 7.41%
WaCMR=16.67 %+7.41 %=24 %

47. B The available productive capacity for the new product is only 40,000 units, although the sales manager
estimates that the company can sell 50,000 units. Hence, the maximum sales is only 40,000 units:

Selling price P50

Less variable costs per unit:
Prime costs P15
Factory overhead 3
Selling costs 2 20
Contribution margin per unit P30
x Sales in units 40,000
Total contribution margin P1,200,000
Less fixed costs 900,000
Profit P300,000

48. D Let x = selling price per unit

Sales = variable costs + fixed costs + profit

40,000x = 40,000 (P20) + 900,000 + 20% (40,000x)

40,000x = 800,000 + 900,000 + 8,000x

32,000x = 1,700,000

x = P53.125 per unit

¿ Cost
¿
49.B Required sales in units to earn a desired profit ratio CM Profit
−
u u
P 900.000
¿
P 30 −( P 50× 20 %)
= 45,000 units

The maximum productive capacity for the new product is 40,000 units. However, to meet the target profit of
20%,45,000 units has to be sold. Selling this volume is not a problem, since the estimated sales is 50,000 units,
though the company cannot possibly produce this required sales in units because it exceeds the maximum
productive capacity.

50. B

Fixed costs:
 Guest speaker's fee P300,000
Accommodations 24,000
Plane tickets, etc. 60,000
Other fixed costs 36,000
P420,000

÷Contribution margin per participant:

Seminar fee P15,000
Less variable costs 8,000 7,000
Break-even point 60
*Variable costs:
Seminar kit P1,000
Accommodations, meals, and snacks 5,000
Other variable costs 2,000
P8.000

51.B
Number of confirmed participants 150
Less break-even point 60
Margin of safety 90

∴90 participants or 60%

52.B 50% 80% 100%

Number of attendees 75 120 150

CM per attendant P 7,000 P 7.000 P 7,000

Total CM P525,000 P840,000 P1,050,000

Fixed costs 420,000 420,000 420,000

Profit P105,000 P420.000 P630.000

53.C Incremental Analysis

Projected Income Statement (000s omitted) - "Liha”

Net sales (500,000 x P60) P30,000

Variable cost ([P360+600]x 30,000) 18,000
Manufacturing margin P12,000
Fixed manufacturing overhead (20%xP20,000) 4,000
Gross profit P8,000
Operating expenses:
Selling and delivery (P70,000x4%) P2,800
Marketing (P 30,000x10%) 3,000
General and administrative 1,000 6.800
Profit before tax P1,200
 Provision for tax 360
Profit after tax (2.8%) 840

54.A Fixed costs:

Manufacturing overhead P 4,000
Selling and delivery 2,800
General and 1,000 P 7,800
administrative
Contribution margin ratio:
Sales ` P30,000
Less variable costs:
Product costs P18,000
Marketing 3,000 21,000
Contribution margin P 9,000
÷Sales 30,000 30%
Break-even sales P26,000

55.B
Sales of 600,000 units @ P60 P36,000,000
x CM ratio 30%
Contribution margin P10,800,000
Less fixed costs 7,800,000
Profit before tax P 3,000,000

¿ Cost
¿ Cost S=
56. B S= CM Profit
CMR − PR −
u u
P 7,800,000 P 7,700,000
¿ ¿
30 % −5 % P 18 − P 3
= P31,200.00 units or 520,000 units 520,000 units

P 9,000,000
CM/unit ¿ =P 18 Profit per unit: P60 x 5% = P3
500,000
57. C
Expected sales-units 20,000
Less break-even sales:
Fixed costs* P300,000
÷ Unit contribution margin** P40 7,500
Margin of safety (in units) 12,500
Margin of safety in pesos (12,500xP1.20) P1,500.000
Margin of safety ratio (12,500+20 000) 62.5%
*20,000 x (10+5)

** 120 - (35+15+10+20)

58. B Assume total fixed costs of P120:

 ¿ P 120
Present BEPu=Total ¿ costs = = 30 units
Selling price − Unit variable costs P 20− P14
 P 120
Break-even sales if VC/u increases by P2 ¿ = 30 units
P 20 − P 16
30− 20
Increase in break-even level of activity ¿ = 50%
20

FxC P 120,000
59. D BES without the raffle ¿ ∗
=
30 %
= P400,000
CMR
Sales −Variable costs P1,000,000 − P 700,000
*CMR ¿ sales
=
P 1,000,000
= 30%

F ×C F ×C P 145.000 P145 : 000

60.A BES witℎtℎe raffle= = = = = P725,000
CMR 1 −VCR 1 −80 % 20 %

Fixed costs:
Present fixed costs P120,000
Promotions and other fixed costs 15,000
Prize 10,000
Total P145,000

Variable costs ratio:

P 700,000
Present VCR = 70%
P 1,000,000
Additional VC for the ticket (P5 ÷ P50) 10%

New VCR 80%

61. C
With the raffle Without the raffle
Sales (P1,000,000x150%) P1,500,000 P1,000,000
x CM ratio 20% 30%
Contribution margin P300,000 P 300,000
Less fixed costs 145,000 120,000
Profit P155,000 P80,000
Less profit without the raffle 180,000
Decrease in profit P25,000

¿ Costs+ Desired Profit P 145,000+(P 180,000 x 2)

62. A Required sales with Desired Profit ¿ = = P2,525,000
CMR 20 %
63. C Present Proposed

Sales P 600,000
1
P 840,000
2

Less variable costs:

Manufacturing P 300,000
3
P 315,000
4

Selling and administrative 45,000 63,000

5

Total variable cost P345,000 P378,000

Contribution margin P255,000 P462,000

Fixed costs:

Manufacturing P150,000 P 225,000

6

Selling and administrative 39,000 39,000

Total fixed costs P189,000 P264,000

Profit P 66,000 P198.000

Break-even point 11,117.64

7
12,000
8

CM per unit P 17
9
P 22
10

1. P1,5000@P40 6. P150,000x150%
2. (15,000x140%=21,000) x P40 7. P189,000÷17
3. 15,000@P20 8. P264,000÷22
4. 21,000xP15 9. P255,000-15,000
5. (P45,000+15,000) x21,000 10. P462,000÷21,000
 The break-even point will increase to 12,000 units.
 The expected maximum income is P198,000,
 The contribution margin per unit will increase by P5.
 The margin of safety ratio will be:

BES 21,000 −12,000

MSR = =¿ =42.86 %
S 21,000

64. C Fixed costs:

. Rent-hall P 3,000

Decoration-head table 300

Singer 350

Dance band 1,000

Program printing cost 410 P5,060

Variable costs:

Decoration-tables:
 Number of persons guaranteed 224

Less non-reviewee special guests 16

Number of persons to occupy 208

tables

Number of persons per table ÷8

Number of tables 26

x Decor cost per table P 50

P 1,300

Meals [(224-25) x P200] 49,800 51,100

Total cost P56.160

65. B Total cost P56,160

Paying guests:

Number of persons guaranteed 224

Less non-reviewee special guests 16 ÷208

66. D Selling price to break-even P270

Total cost P56,160

Add desired profit 19,760

Total sales P75,920

÷Number of paying guests 280

Selling price 365

FxC P 300,000
67. C BEP ¿ = = 1,000 tests
CM /test 300
FxC FxC P 660,000
68. BEP P= = = = P1,100,000
CMR CM / S P 300/ P500
69. B At the low range of activity:

FxC=DP P 300,000 − P 500,000

RSW / DP= = = 2,666.67 tests
CM /test P 500− P 200
 The result, 2,636.67 tests is not within the low range of 0to 1,999. Therefore, this cannot be the answer. If
P500,000 profit is desired, fixed cost cannot be P300,000(low range) because the resulting BEP is outside the
range

At the high range of activity:

 FxC + DP P660,000+ P 500,000
RSW / DP= = = 3,866.67 tests
CM /test P 300
 This is the feasible solution. To earn the desired profit of P500,000, fixed cost must be P660,000, the amount
of fixed costs for the high range of activity, because the resulting BEP is within such high range.

70. A Compared to industry averages at the low range of activity. Medilab's selling price is lower, fixed cost is
higher, and break-even point is the same.

¿ cos ts
BEP ¿
SP −V C /u
¿
Same BEP ¿ Higℎer ¿ costs Lower selling price −? variable costs

High fixed cost increases the break-even point. To offset this effect, CM per test must increase (an increase in
CM will decrease the BEP). Since selling price is lower, variable cost must be even lower so that CM may be
higher than average.

71. A Compared to industry averages, at the high range of activity, Medilab's selling price is the same, fixed cost is
the same, and variable cost is lower.
¿
?BEP ¿ Same¿ costs
Same selling price − lower variable costs
If variable cost is lower, CM is higher, and therefore the break-even point is lower.

72. D
Sales P300,000
Less margin of safety 120,000
Break-even sales P180,000
X CMR (100%-80%) 20%
Contribution margin at break-even level 36,000

At break-even, contribution margin is equal to fixed costs.

73. B
Sales P500,000
x Margin of safety ratio (100%-60%) 40%
Margin of safety P200,000
x CMR (100%-70%) 30%
Profit P 60,000

Margin of safety is the amount of sales over and above the break-even sales. The contribution margin earned
from the margin of safety represents profit, assuming there is no change in total fixed costs.

74. A
Actual sales 77,500
Less margin of safety 15,500
Break-even sales-units 62,000
x Selling price (P65,875 - 15,500 units) P4.25
Break-even sales-pesos P263,500
Less fixed costs 189,100
Variable cost P 74,400
+ Number of units to break-even 62,000
Variable cost per unit P 1.20
75. D
Last year: Profit P 300,000
Add fixed cost 1,500,000
Contribution margin P1,800,000
÷Units sold 120,000
CM per unit P15
Selling price P180
Less CM per unit 15
Variable cost per unit P165
Next year: Profit P 300,000
Add fixed costs 2,100,000
(P1,500,000x140%)
Contribution margin P2,400,000
76.B A
÷Units to be sold B C 120,000
CM per unit P 20
CM Add variable cost per unit 165 per unit P2 P3 P6

x Selling price P185 Sales mix ratio 1 6 43

Composite CM P2 P18 P18 P38

÷ Number of units per mix(1+6+3 10

Weighted-average UCM P3.8

1. 2x150%
2. P3x2
3. 2x3

¿ costs P 760,000
Break-even point ¿ = = 200,000 composite units
WaUCM P 3.8
Breakdown:

Product A = 200,000x1/10=20,000 units

Product B = 200,000x6/10= 120,000
Product C=200,000×3/10= 60,000
200,000 composite units

77. A CVP analysis assumes that no material change in inventory occurs (production. = sales).

78. B
Digicam Videocam Total

Sales (break-even) P1,620,000 P3,420,000 P5,040,000

Less variable costs 810,000 1,200,000 2,010,000

Contribution margin P 810,000 P2,220,000 P3,030,000

÷ Total units (360 + 240) ÷600

Weighted-average UCM 5.050

ALTERNATIVE SOLUTION: Digicam Videocam

CM per unit (SP--VC) P2,250 P9,250

x Sales mix ratio 60% 40%

Weighted-average UCM P1,350 + P3,700 = P5,050

1. 360xP4,500 5. 360 ÷ (360+240)

2. 240xP14,250 6. 240÷600
3. 360xP2,250
4. 240xP5,000
 Fi × edCost
79.A BEP=
WaUCM
Fi×ed costs = BEP × WaUCM

= (360+240)× P5,050 ¿ P 3.030.000

ALTERNATIVE SOLUTION:

Total fixed costs is equal to the total CM computed in Item #78. At break-even fixed costs = CM.

FixedCosts + Desired Profit P 3.030 .000+ P 1.515 .000

80. D Required sales to earn desired profit ¿ =
WaUCM P 5,050
= 900 composite unit

BREAKDOWN: Digicam (900 x60%) 540 units

Videocam (900x40%) 360 units

81. C Product A Product B

CM per unit P4.80 P10.00

62.5 % 37.5 %
x Sales mix ratio (5:3) + =P 6.75WaUCM
F 3.00 P 3.75
F ×C P 202.500
Break ⋅evenpaim= = =30,000 composite units
WaUCM P 6.75

82. D The weighted average UCM will change from P6.75 to P8.05

Product A Product B

CM per unit P4.80 P10.00

x Sales mix ratio 37.5 % 62.5 % ¿ P 8.05

+ =¿
F 1.80 6.25
F ×C P 202.500
Break − even point = = =25.155.28units
Wal /CM P 8.05
Despite the above changes, total fixed costs will remain the same.

83. D Pambundok Pangkarera

Fixed costs P3,696,000 P3,168,000

+CMR 40%1 34%2

Break-even point P9,240,000 P9,317,647

1(4,400-2,640)+4,400

2 (4,000-2,640)+4,000

84. B Let B=units of Pambundok

K=units of Pangkarera

Total sales = 4,400B or 4,000K*

if 4,400B = 4,000K, then

E=(4,000 K)+4,400

On these sales levels, profits/losses from the two products are the same.

Profits =Sales-Variable cost--Fixed cost

Pambundok's Profit = 4,400B-2,640B-3,696,000

Pangkarera's Profit =4,000K-2,640K-3,168,000

If profits from the two models are equal:

4,400B-2,640B-3,696,000=4,000K-2,640K--3,168,000

1,760B-3,696,000=1,360K-3,168,000

1,760B=1,360K+528,000

Substitute value of B:

1.760(4.000K÷4.400)=1.360K+528.000

1.600K=1.360K+528.000

240K=528,000

K=2.200 units

B=4,000K÷4.400

=(4,04,000×2,200)÷4,400

=22.000units

TOTAL PESO SALES:

Pambundok 2,000 units x P4,400) P.8,800,000

or Pangkarera (2,200 units x P4,000) P8,800,000

PROOF: Pambundok Pangkarera

Sales P8,800,000 P8,800,000

Less variable costs 5,280,000 5,808,000 2

Contribution margin P3,520,000 P2,992,000

Less fixed costs 3,696,000 3,168,000

Loss P 176,000 P 176,000

2,000 x P2,640

2,200 x P2,640

85. C Pambundok Pangkarera

Sales P26,400,000 1 P24,000,000 2

Less variable costs 15,840,000 3 15,840,000

Contribution margin P10,560,000 P 8,160,000

Less fixed costs 3,696,000 3,168,000

Loss P 6,864,000 P 4,992,000

16,000xP4,400

26,000xP4,000

3 6,000xP2,640

86. A From Item #85, Pambundok should be chosen because it is more profitable at the sales level of 6,000 units.

Its margin of safety would be

Sales (from ltem #85) P26,400,000

Less break-even sales (from item #83) 9,240,000

Margin of safety P17.160.000

87. D Pambundok Pangkarera

Selling price P4,400 P4,000

x Desired profit ratio 25% 25%

Profit per unit P1,100 P1.000

 Fi × edCost
Required sales in units to earn desired profit per unit
CM /u − P /u
Pambundok Pangkarera

Total fixed costs P3,696,000 P3,168,000

÷CM/u-P/u

(4,400-2,640-1,100) 660

(4,000-2,640-1,000) 360

Required sales in units 5,600 8.800

Accordingly, the projected sales per year is between 4,500 units and 6,500 units of either model. If the desired profit
ratio is 25%,the company has to sell 5,600 units of Pambundok Bike, which is within the projected sales range.
Pangkarera, however, requires sales of 8,80O units, a figure that is not within the range. Hence, the company will be
obliged to sell Pambundok.

88. A Old New Change

CM per unit P55 P50 P(5)*

Fixed costs P742,500 P762,500 P20,000**

* Variable cost per unit will increase by P5 because of the use of the higher-priced component. An increase in unit
variable cost decreases the unit contribution margin by the same peso-amount.

** If the new equipment is acquired, depreciation, a fixed cost, will increase by P20,000 per year (P200,000
÷10years).

NP
Fi ×edCosts+ p 175.000
Required sales in units 1− T × Rate /u ¿ P 762,50070 ÷ P50 = 20,250 units
¿ %
C M1

89. C Fixed costs P148,500

Add desired profit (P23,100+[1-0.30]) 33,000

Total P181,500

÷ CMR ({60-[22.50+4.50]}÷60) 55%

Required sales to earn desired profit P330.000

90. B Fixed costs:

Manufacturing (148,500 x 60% x 120%) P106,920

Non-manufacturing (148,500x40% x 110%) 65,340

 Total fixed costs P172.260

Contribution margin ratio:

Seiling price P75.00

Less variable costs:

Manufacturing (P22.50 + P4.50) P27.00

Selling and administrative 4.50 31.50

Contribution margin per unit P43.50

÷ Selling price 75.00

Contribution margin ratio P 58%

Required peso-sales to earn a desired profit ratio:

Fi × edCoSt P 172.260 P358.875

RS= = =
CM F 1 − PR 58 % − 10 % CM F 1 − PR
' '

91. D Sales P358,875 VCR is

Less break-even sales (P172,260+58%) 297,000 60%,therefore,CMR,its
Margin of safety P 61.875 complement,is 40%.
Margin of safety in units (P61,875+P75) 825 units

Margin of safety rat o (P61,875 + P358,875) 17.24%

92. B

P 358.875 ×58 %
¿
P 358.875 ×10 %
P 208.147 .50
¿ =5.8
P 35.887 .50
93. B Profit ratio(PR) =CMR×MSR

=40%×25%  VCR is 60%,therefore,CMR,its

complement, is 40%.
=10%
 F × C P150.000 P 375.000
Break − evensales= = =
CMR 40 % ❑
⋆
Sales=BES÷ BESR (P 375,000÷ 75 % ) P500,000

x CMR 40%

CM P200,000

Less fixed costs 150,000

Profit (10% of sales of P500,000) P 50.000

*MS R is 25%, therefore, its complement, BESR, is 75%.

94. C The change in the VCR is due to the change in unit selling price. It may therefore be assumea that the 200A
volume in units and the unit variable cost remained the same in 200B.

The correctness of the other statements may be verified by preparing comparative income statements in the
contribution margin format, as follows:

Increase

200A 200B (Decrease) from

Sales P300,000 P312,500 P12,500

Less VC 225,000 72% 225,000

CM 25% P 75,000 28% P 87,500 P12,500

Less fixed costs 45,000 43,750 (1,250)

Profit P 30.000 P 43.750 P13.750

Profit ratio 10% 14% 4%

Margin of safety ratio (PR/CMR) 40% 50%

Suggested sequence of procedures to find the missing items:

1. CM,200A= P300,000x25%=P75,000

2. VC,200A=P300,000-P75,000=P225,000

3. Profit,200A=P75,000-P45,000=P30,000

4. Profit ratio, 200A=P30,000÷P300,000=10%

5. MSR,200A=:10%÷25%=40%

6. PR,200B=10%+4%=14%

7. MSR,200B=14%÷28%=50%
8. VCR, 200B = 72%, the complement of the CMR of 28%.

9. VC,200B=P225,000.

There is no change in total variable cost because the problem does not state that unit variable cost and sales volume
in units changed.

10. Sales,200B=P225,000-72%=P312,500

11. CM,200B=P312,500-P225,000=P87,500

12. Profit,200B::P312,500x14%=P43,750

13. Fixed costs,200B=P87,500-P43,750=P43,750

95. B In 200B, sales increased by 20% or P100,000 from the 200A level of P500,000. Since no mention was made
about any change in selling price, the increase in sales is assumed to be due to increase in units. As a result, both the
total variable costs and contribution margin will increase by 20%.

There was no change in fixed costs, but profit in 200B was P30,000 higher than the 200A profit. This increase in profit
was therefore caused by the increase in contribution margin.

When the change in sales is due to the change in units, the contribution margin ratio may be computed as follows:

Cℎange ∈CM P 30.000

CMR= = =30 %
CℎangemSales P 100.000

96. A Sales (P500,000x2) P1,000,000

x CMR 30%

Contribution Margin P 300,000

Less fixed costs 100,000

Profit 200.000

97. D Based on the given data, only the break-even point in pesos can be computed:

98. B

Original BES New BES Change

BE Sales P600,000 P840,000 40% P240,000

Less VC

CM ↑P 60,000

Less FxC 60,000*

Profit 0 0 0

*10%xP600,000

Profit is zero because the sales figures are at the break-even level. With no change in profit, the change in fixed cost
is equal to the change in contribution margin. Since there is no mention about any change in selling price, the change
in sales is assumed to be due to change in units. CMR may therefore be computed as:

Cℎange ∈CM P 60.000

CMR=一 = =25 %
Cℎainge ∈ Sales P 240.000
VCR=100%-CMR=100%-25%=75%

99. D At break-even, CM=Fixed cost:

New BES (P600,000 x 140%) P840,000

xCMR 25%

Contribution Margin or Fixed cost P210.000

100.C Do not Acquire Acquire New

New Equipment Equipment

Fixed costs P216,000 P240,000

Selling price P60.00 P60.00

Variable cost per unit 28.80 24.00*

Contribution margin per unit P31.20 P36.00

Contribution margin ratio 52% 60%

Break-even point-units

(FxC÷CM/u) 6,923.08 6,666.67

*P28.80-4.80

The break-even point will decrease if the new equipment is acquired.

INDIFFERENCE POINT:

Let x=indifference point between the two cost structures

Total cost = variable cost + fixed cost

28.80x-216.000=24x+240.000

4.8x=24.000

x=5000

If the new equipment is acquired, the CMR will increase from 52% to 60%. Hence if the expected sales is above the
indifference point, the company is better off if it acquires the new equipment.
To check, compare profit from the two alternatives (acquire or do not acquire), assuming two sales volumes - 4,000
and 7,000

1. Expected sales=4,000 (below the indifference point)

Do not Acquire Acquired

Contribution margin:

(4,000xP31.20) P124,800

(4,000xP36) P144,000

Less fixed costs 216,000 240,000

Loss P 91.200 P 96.000

Loss is lower if new equipment is not acquired.

2. Expected sales=7,000 (above the indifference point)

Do not Acquire Acquired

Contribution margin:

(7,000xP31.20) P218,400

(7,000x P36) P252,000

Less fixed costs 216,000 240,000

Profit 2,400 P 12.000

Profit is higher if the new equipment is acquired. This is because of the higher CMR of 'acquire alternative. Beyond
the indifference point, this alternative accumulates profits faster than the other alternative that has a lower CMR.