COST ACCOUNTING NAPAROTA 2019

NEGROS ORIENTAL STATE UNIVERSITY

College of Business Administration
Accountancy Department

BREAK-EVEN POINT AND COST- VOLUME-PROFIT ANALYSIS

Problem 1

Minju, Wonyoung and Yujin, Ltd., is studying the acquisition of two electrical component insertion systems for
producing its sole product, the universal gismo. Data relevant to the systems follow.

Model A

Variable costs, P8.00 per unit

Annual fixed costs, P1, 971,200

Model B

Variable costs, P6.40 per unit

Annual fixed costs, P2, 227,200

The selling price is P32 per unit for the universal gismo, which is subject to a 5 percent sales commission. (In the
following requirements, ignore income taxes.)

Required:

a. How many units must the company sell to break even if Model A is selected?
b. Which of the two systems would be more profitable if sales and production are expected to average 184, 000 units
per year?
c. Assume Model B requires the purchase of additional equipment that is not reflected in the preceding figures. The
equipment will cost P900, 000 and will be depreciated over a five-year life by the straight line method. How many units
must the company sell to earn P1, 912,000 of income if Model B is selected? As in requirements (b), sales and
production are expected to average 184, 000 units per year.
d. Ignoring the information presented in requirement (3), at what volume level will management be indifferent between
the acquisition of Model A and Model B? In other word, at what volume level will the annual total cost of each system
be equal?

Problem 2

Sakura Corporation, a company that manufactures plastic balls. It has a ball that sells for P25. At present, the ball is
manufactured in a small plant that relies heavily on direct labor workers. Thus, variable costs are high, totaling P15 per
ball, of which 60% is direct labor.

Last year, the company sold 30, 000 units of these balls, with the following results:

Sales (30, 000 balls) P750,000

Variable costs 450,000
Contribution margin 300,000
Fixed costs 210,000
Profit P90,000
Required:

1. Compute (a) the CM ratio and the breakeven point in balls, and (b) the degree of operating leverage at last year’s
sales level.
2. Due to an increase in labor rates, the company estimates that variable costs will increase by P3 per ball next year. If
this change takes place and the selling price per ball remains constant at P25, what will be the new CM ratio and
break-even point in balls?
3. Refer to the data in (2) above. If the expected change in variable costs takes place, how many balls would have to
be sold next year to earn the same profit as last year?
4. Refer again to data in (2) above. The president feels that the company must raise the selling price of its plastic balls.
If the company wants to maintain the same CM ratio as last year, what selling price per ball must it charge next year to
cover the increased labor cost?
5. Refer to the original data. The company is discussing the construction of a new, automated manufacturing plant. The
new plant would slash variable costs per ball by 40% but it would cost fixed cost per year to double. If the new plant is
built, what would be the company’s new CM ratio and new breakeven points in balls?
6. Refer to the data in (5) above.
a. If the new plant is built, how any balls will have to be sold next year to earn the same profit (P90, 000) as
last year?

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COST ACCOUNTING NAPAROTA 2019

b. Assume the new plant is built and that next year the company manufactures and sells 30, 000 balls (the
same number as sold last year). Compute the profit and degree of operating leverage.
c. If you were a member of top management, would you have been in favor of constructing the new plant?
Explain.

Problem 3

Bloomiz Company produces a single product. The projected income statement for the coming year is as follows:

Sales (50, 000 units ) P2,500,000

Less: Variable costs 1,440,000
Contribution margin 1,060,000
Less: Fixed costs 816,412
Operating income P243,588

Required:

1. Compute the unit contribution margin and the units that must be sold at breakeven? Supposed that 30, 000 units are
sold above breakeven, what is the profit?
2. Compute the contribution margin ratio and the break-even point in pesos. Suppose that revenues are P200, 000
more than expected. What would the total profit be?
3. Compute the margin of safety.
4. Compute the operating leverage. Compute the net profit level if sales are 20 percent higher than expected.
5. How many units must be sold to earn a profit equal to 10 percent of sales?
6. Assume that the tax is 40 percent. How many units must be sold to earn an after-tax profit of P180, 000?

Problem 4

HOYA Company, a wholesaler of jeans, had the following income statement for last year:

Sales (40, 000 pairs) P1,400,000

Less: Cost of sales   800,000
Gross margin 600,000
Selling expenses 350,000
Administrative
expenses 190,000 540,000
Income   P60,000

Mr. Hoya informs you that the only variables cost are cost of sales and P2 per unit selling costs. All administrative
expenses are fixed. In planning for the coming year, Mr. Hoya expects his selling price to remain constant, with unit
volume increasing by 20%. He also forecasts the following changes in costs and is concerned about how they will
affect profitability.

Variable costs:
Cost of goods sold up P1.50 per unit
Selling costs up P0.10 per unit
Fixed costs:
Selling costs up P40, 000
Administrative costs up P30, 000

Required:

1. Compute the expected income for the coming year, assuming that all forecast are met.
2. Determine the number of units that Hoya will have to sell in the coming year to ear the same profit as the current
year.
3. Mr. Hoya is disturbed at the results of requirements 1 and 2. He asks you how much he must raise his selling price
to earn P60, 000 selling 48, 000 units.

-END OF DISCUSSION-

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