I. Ms. Sharkey started a pizza restaurant in 2003.

For this purpose a building was rented for P40,000 per month. Two women were hired to work
full time at the restaurant and six college students were hired to work 30 hours per week delivering pizza. This level of employment has been
consistent. An outside accountant was hired for tax and bookkeeping purposes, for which Ms. Sharkey pays P30,000 per month. The necessary
restaurant equipment and delivery cars were purchased with cash. Ms. Sharkey has noticed that expenses for utilities and supplies have been
rather constant. Ms. Sharkey increased her business between 2003 and 2006. Profits have more than doubled since 2003. Ms. Sharkey does not
understand why profits have increased faster than volume.
A projected income statement for the year ended December 31, 2007, prepared by the accountant, is shown below:
Sales P9,500,000
Cost of food sold P2,850,000
Wages & fringe benefits:
Restaurant help 815,000
Delivery help 1,730,000
Rent 480,000
Accounting services 360,000
Depreciation:
Delivery equipment 500,000
Restaurant equipment 300,000
Utilities 232,500
Supplies 120,000 7,387,500
Net income before taxes P2,112,500
Income taxes (40%) 845,000
Net income P1,267,500
Note: The average pizza sells for P250.

1. What is the tax shield on the noncash fixed costs?

2. What is the breakeven point in number of pizzas that must be sold?
3. What is the cash flow breakeven point in number of pizzas that must be sold?

II. Timex Sporting Goods Company, a wholesale supply company, engages independent sales agents to market the company’s products throughout
the country. These agents currently receive a commission of 20 percent of sales, but they are demanding an increase to 25 percent of sales made
during the year ending December 31, 2007. The controller already prepared the 2007 budget before learning of the agents’ demand for an increase
in commission. The budgeted 2007 income statement is shown below. Assume that cost of goods sold is 100 percent variable cost.
Sales P10,000,000
Cost of goods sold 6,000,000
Gross margin P 4,000,000
Selling and administrative
Commissions P2,000,000
Other expenses (fixed) 100,000 2,100,000
Income before taxes P 1,900,000
Income tax (30%) 570,000
Net income P 1,330,000
Timex’s management is considering the possibility of employing full-time sales personnel. Three individuals would be required, at an estimated
annual salary of P30,000 each, plus commissions of 5 percent of sales. In addition, a sales manager would be employed at a fixed annual salary of
P160,000. All other fixed costs, as well as the variable cost percentages, would remain the same as the estimates in the 2007 budgeted income
statement.
4. How much is the estimated break-even point in peso sales for the year ending December 31, 2007, based on the budgeted income statement
prepared by the controller?
5. How much is the estimated break-even point in peso sales for the year ending December 31, 2007, if the company employs its own sales
personnel?
6. How much volume in peso sales would be required for the year ending December 31, 2007, to yield the same net income as projected in the
budgeted income statement, if Timex continues to use the independent sales agents and agrees to their demand for a 25 percent sales commission?
7. How much is the estimated volume in peso sales that would generate an identical net income for the year ending December 31, 2007, regardless
of whether Timex employs its own sales personnel or continues to use the independent sales agents and pays them a 25 percent commission?

III. Step Company produces toys and other items for use in beach and resort areas. A small, inflatable toy has come onto the market that the
company is anxious to produce and sell. Enough capacity exists in the company’s plant to produce 16,000 units of the toy each month. Variable costs
to manufacture and sell one unit would be P12.50, and fixed costs associated with the toy would total P350,000 per month.
The company’s Marketing Department predicts that demand for the new toy will exceed the 16,000 units that the company is able to produce.
Additional manufacturing space can be rented from another company at a fixed cost of P10,000 per month. Variable costs in the rented facility
would total P14 per unit, due to somewhat less efficient operations than in the main plant. The new toy will sell for P30 per unit.
8. The breakeven units for the new toy would be:
9. How many units should the company need to sell in order to earn a before-tax profit of P150,000?
10. If the sales manager receives a bonus of P1.00 for each unit sold in excess of the break-even point, how many units must be sold each month to
earn a return of 25% on the monthly investment in fixed costs?
11. Assuming that Step Company will just rent a manufacturing space for a month in order to produce special order for 8,000 toys. What is the
acceptable minimum selling price to Step Company for the special sale?

IV. Bolton Company’s income statement for last month is given below:
Sales (15,000 units @ P30) P450,000
Less variable expenses 315,000
Contribution margin 135,000
Less fixed expenses 90,000
Net income P 45,000
The industry in which Bolton Company operates is quite sensitive to cyclical movements in the economy. Thus, profits vary considerably from year
to year according to general economic conditions. The company has a large amount of unused capacity and is studying ways of improving profits.
A new equipment has come onto the market that would allow Bolton Company to automate a portion of its operations. Variable costs would be
reduced by P9 per unit. However, fixed costs would increase to a total of P225,000 each month.
12. How much income for the month would the company earn if the new equipment is purchased?
13. How many units are required as increase or decrease in breakeven point if the new equipment is purchased?
14. The degree of operating leverage during the month where the new equipment is used is:
15. Refer to the original data. Rather than purchase a new equipment, the president is thinking about changing the company’s marketing method.
Under the new method, sales would increase by 20% each month and net income would increase by one-third. Fixed costs could be slashed to only
P48,000 per month. Compute the break-even point for the company after the change in marketing method.
Prob1
.Answer: A
Tax shield in non cash expenses
40% x 800,000 = P320,000

.Answer: A
Breakeven in number of pizzas (traditional)
4,537,500/(250 – 75) = 25,929

Units sold: P9,500,000/250 = 38,000

Unit variable cost (cost of food)

2,850,000 ÷ 38,000 = P75.00

Fixed cost = 7,387,500 – 2,850,000 P4,537,500

.Answer: A
Cash Flow Breakeven:
3,417,500 ÷ 175 19,529

Total fixed cost: P4,537,500

Less: Noncash fixed cost ( 800,000)
Tax shield on noncash
Fixed costs ( 320,000)
Fixed cash flow P3,417,500

Prob 2
.Answer: A
Breakeven sales based on 20% commission:
P100,000 ÷ 0.20 P500,000

Contribution margin ratio:

(10M – 8M) ÷ 10M 20%

.Answer: D
Breakeven sales if the company employs its own salesmen:
(P350,000 ÷ 0.35) P1,000,000

The new contribution margin ratio is (20% + 15%) 35%

0
Fixed costs are expected to be P350,000
(100,000 + 90,000 + 160,000)

.Answer: D
The required peso sales to earn net income of P1,330,000 if the commission is raised to 25%:

(P100,000 + P1,900,000) ÷ 0.15 P13,333,333

.Answer: B
The indifference point, the level of sales where the alternatives will have equal profits:
.15S- 100,000 = .35S – 350,000
2S = 250,000
S = P1,250,000

.Answer: C
The problem illustrates a calculation of breakeven point for a company with a step variable and step fixed cost.

Contribution Margin per Unit:

60,000 or less (P30 – P12.50) P17.50
Units above 60,000 (P30 – P14.00) P16.00

Total contribution margin from the first

60,000 (60,000 x P17.50) P280,000

Let X = Number of units above 16,000

0 = 280,000 + 16X -360,000

X = 80,000 ÷ 16
X = 5,000 units
 Breakeven units: 16,000 + 5,000 21,000

Alternative Solution:

Total fixed costs P360,000

Less Contribution margin from 60,000 units 280,000
Remaining fixed costs to be covered by
additional units, each with CM of P16 P 80,000

Breakeven units: 16,000 + (80,000 ÷ 16) 21,000

.Answer: B
The units that will generate the desired profit of P150,000 for the company, contributes P16 each. These units are the excess of 21,000
units to breakeven.

Unit sales required:

21,000 + (150,000 ÷ P16) 30,375

.Answer: B
The bonus plan of P1.00 per unit on sales made in excess of breakeven point (21,000 units) will necessarily decrease the contribution
margin to P15.

The desired profit based on fixed cost:

25% x P360,000 P90,000

Units required: 21,000 + (P90,000 ÷ 15) 27,000

.Answer: B
In determining the minimum selling price for the 8,000 units should consider the increased variable cost per unit and the additional fixed
cost. Any cost and losses on the first 16,000 units are irrelevant:
Variable cost per unit P14.00
Additional fixed cost per unit (10,000 ÷ 8,000) 1.25
Minimum selling price P15.25

.Answer: A
The net income for the month if the new equipment is acquired:
Contribution margin based on the present system P135,000
Add increase in contribution margin due to
decrease in variable cost (15,000 x 9) 135,000
Increased contribution margin 270,000
Less Increased fixed costs 225,000

Net income P 45,000

.Answer: B
The increase in breakeven point would be:
(12,500 – 10,000) 2,500 units
Breakeven, present (P90,000 ÷ P9) 10,000 units
Breakeven, proposed (P225,000 ÷ P18) 12,500 units

.Answer: C
The degree of operating leverage (DOL)
during the month that the new
equipment would be used: (270,000 ÷ 45,000) 6X

(Please see solution for No. 94)

.Answer: A
Breakeven units if there is a change in marketing method:
P48,000 ÷ 6 8,000 units

Contribution margin per unit:

(Fixed cost + profit) ÷ Units sold

(P48,000 + P60,000) ÷ 18,000 units P6.00