Discussion Questions

Problem 1
Atlas Company’s projected profit for the coming year is as follows:
Total Per unit
Sales P200,000 P20
Less: Variable Expenses 120,000 12
Contribution Margin P 80,000 P 8
Less: Fixed Expenses 64,000
Operating Income P 16,000

Required:
1. Compute the break-even point in units.
2. How many units must be sold to earn profit of P30,000?
3. Compute the contribution margin ratio. Using this ratio, compute the
additional profit that Atlas would earn if sales were P25,000 more than
expected.
4. Suppose Atlas would like to earn operating income equal to 20 percent of
sales revenue. How many units must be sold for this goal to be realized?
5. For the projected level of sales, compute the margin of safety.
6. For the projected level of sales, compute the degree of operating leverage.
What is the percent change in profit if sales increase by 15 percent?

Page 1 of 2
Problem 2
Volt Company manufactures and sells a specialized cordless telephone for high
electromagnetic radiation environments. The company’s contribution format
income statement for the most recent year is given below:
Total Per unit
Sales (20,000 units) P1,200,000 P60
Variable expenses 900,000 45
Contribution margin 300,000 P15
Fixed expenses 240,000
Net operating income P 60,000

Management is anxious to increase the company’s profit and has asked for an
analysis of a number of items.

Required:
1. Compute the company’s CM ratio and variable expense ratio.
2. Compute the company’s break-even point in both units and in pesos.
3. Assume that sales increase by P400,000 next year. If cost behavior patterns
remain unchanged, by how much will the company’s net operating income
increase?
4. Refer to the original data. Assume that next year management wants the
company to earn a profit of at least P90,000. How many units will have to be
sold to earn the target profit?
5. Refer to the original data. Compute the company’s margin of safety both in
pesos and in percentage.
6. Compute the company’s degree of operating leverage at the present level of
sales.

Assume that the company’s sales increase by 8%, by what percentage would
you expect net operating income to increase?
7. Refer to the original data. In an effort to increase sales and profits,
management is considering the use of a higher-quality part. The higher-
quality part would increase variable costs by P3 per unit, but management
could eliminate one quality inspector who is paid a salary of P30,000 per
year. It is also expected that this change would increase annual sales by at
least 20%. Would you recommend the change?

Page 2 of 2