Exercise 1

Requirement 1 Total Per Unit

Sales 172,500 5.00 (30,000 units × 1.15 = 34,500 units)
Less: Variable expenses 103,500 3.00
Contribution margin 69,000 2.00
Less: Fixed expenses 50,000
Net operating income 19,000

Requirement 2
Sales 162,000 4.50 (30,000 units × 1.20 = 36,000 units)
Less: Variable expenses 108,000 3.00
Contribution margin 54,000 1.50
Less: Fixed expenses 50,000
Net operating income 4,000

Requirement 3
Sales 156,750 5.50 (30,000 units × 0.95 = 28,500 units)
Less: Variable expenses 85,500 3.00
Contribution margin 71,250 2.50
Less: Fixed expenses 60,000
Net operating income 11,250

Requirement 4
Sales 151,200 5.60 (30,000 units × 0.90 = 27,000 units)
Less: Variable expenses 86,400 3.20
Contribution margin 64,800 2.40
Less: Fixed expenses 50,000
Net operating income 14,800
In conclusion:
Sales Costs Profits
If sales volume increases Increase Increase Increase
If sales volume decreases Decrease Decrease Decrease
If the selling price increases Increase Not change increase
If the selling price decreases Decrease Not change Decrease
If the costs increase Not change Increase Decrease
If the costs decrease Not change Decrease Increase
Exercise 2

Requirement 1 Pesos %
Price per ticket 30.00 100%
Less: Variable expenses
Dinner 7.00
Favors and program 3.00 10.00 33%
Contribution margin per person 20.00 67%

Fixed costs:
Band 1,500.00
Tickets and advertising 700.00
Riverboat rental 4,800.00
Floorshow and strolling entertainers 1,000.00
Fixed costs 8,000.00

Break-even point:
Fixed costs 8,000.00 8,000.00 Alternative solution:
Contribution margin 20.00 67% Sales = Variable expenses + Fixed expense + Profits
P30Q = P10Q + P8,000 + P0
Break-even point in persons 400 P20Q = P8,000
x Price per ticket 30.00 Q = P8,000 ÷ P20 per person
Break-even point in pesos 12,000.00 12,000 Q = 400 persons

Requirement 2
Variable cost per person 10.00
Fixed cost per person 32.00 (P8,000 ÷ 250 persons)
Ticket price to break even 42.00

Requirement 3
 Persons - 200 400 600 800 1,000 2,000
Variable - 2,000 4,000 6,000 8,000 10,000 20,000
Fixed 8,000 8,000 8,000 8,000 8,000 8,000 8,000
Total 8,000 10,000 12,000 14,000 16,000 18,000 28,000
Sales - 6,000 12,000 18,000 24,000 30,000 60,000
Profits (8,000) (4,000) - 4,000 8,000 12,000 32,000

Margin of safety in units (200) - 200 400 600 1,600

x CM per unit 20 20 20 20 20 20
Net profit/(loss) (4,000) - 4,000 8,000 12,000 32,000

Margin of safety in pesos (6,000) - 6,000 12,000 18,000 48,000

x CM % 67% 67% 67% 67% 67% 67%
Net profit/(loss) (4,000) - 4,000 8,000 12,000 32,000

10000

8000

6000

4000
6000

4000

2000

0
0 100 200 300 400 500 600 700 800 900 1000 1100 1200 1300 1400 1500 1600 1700 1800 1900 2000 210
 400 %
Sales 12,000 30 100%
Less: Variable expenses (4,000) (10) -33%
Contribution margin 8,000 20 67%
Less: Fixed expenses (8,000)
Net operating income -

600 %
Sales 18,000 30 100%
Less: Variable expenses (6,000) (10) -33%
Contribution margin 12,000 20 67%
Less: Fixed expenses 8,000
Net operating income 4,000

With target profit:

Fixed costs + Target Profit
Contribution margin per unit

With target profit %:

Fixed costs
Contribution margin % - Target profit %
Variable
Linear (Variable)
Fixed
Linear (Fixed)
Total
Linear (Total)
Sales
Linear (Sales)
 Variable
Linear (Variable)
Fixed
Linear (Fixed)
Total
Linear (Total)
Sales
Linear (Sales)

1800 1900 2000 2100

Exercise 3

Requirement 1:
Selling price 900.00 100%
Variable costs 630.00 70%
Contribution margin 270.00 30%
Fixed costs 1,350,000.00

Break-even point:
Fixed costs 1,350,000.00 1,350,000.00
Contribution margin 270.00 30%

BEP in units 5,000.00

BEP in pesos 4,500,000.00

Requirement 2:
"THE VARIABLE EXPENSES PER LANTERN INCREASE AS A PERCENTAGE OF THE SELLING PRICE"
ASSUME: The variable costs per unit increased by 2% of the selling price
Selling price 900.00 100%
Variable costs 648.00 72%
Contribution margin 252.00 28%

Break-even point:
Fixed costs 1,350,000.00 1,350,000.00
Contribution margin 252.00 28%

BEP in units 5,357.14

BEP in pesos 4,821,428.57

In conclusion, the BEP will increase because of the increase in the variable cost.
Any increase in cost (fixed or variable) will increase the BEP. Consequently, a decrease in cost (fixed or variable) will decrease the BEP.

Requirement 3:
Before After
Sales 7,200,000 8,100,000
Less: Variable expenses 5,040,000 6,300,000
Contribution margin 2,160,000 1,800,000
Less: Fixed expenses 1,350,000 1,350,000
Net operating income 810,000 450,000

Requirement 4:
Fixed costs + Target Profit 2,070,000.00
Contribution margin per unit 180.00

Required sales in units for the target profit 11,500.00

Required sales in pesos for the target profit 9,315,000.00

Proof:
Per unit Target
Sales 810 9,315,000
Less: Variable expenses 630 7,245,000
Contribution margin 180 2,070,000
Less: Fixed expenses 1,350,000
Net operating income 720,000
will decrease the BEP.
Exercise 4
Decrease in Increase in
Requirement 1: Fixed Costs Sales
Sales 600.00 18,000,000.00 18,000,000.00 36,000,000.00
Less: Variable expenses 420.00 12,600,000.00 12,600,000.00 25,200,000.00
Contribution margin 180.00 5,400,000.00 5,400,000.00 10,800,000.00
Less: Fixed expenses 4,500,000.00 2,250,000.00 4,500,000.00
Net operating income 900,000.00 3,150,000.00 6,300,000.00

Degree of operating leverage

Contribution margin 5,400,000.00 5,400,000.00 10,800,000.00
÷ Net operating income 900,000.00 3,150,000.00 6,300,000.00
DOL 6.00 1.71 1.71

Requirement 2:
Manual Computation - If Sales Doubled:
Sales 600.00 22,500,000.00 36,000,000.00
Less: Variable expenses 420.00 15,750,000.00 25,200,000.00
Contribution margin 180.00 6,750,000.00 10,800,000.00
Less: Fixed expenses 4,500,000.00 4,500,000.00
Net operating income 2,250,000.00 6,300,000.00
Less: Current operating income 900,000.00 900,000.00
Increase in operating income 1,350,000.00 5,400,000.00

Computation using the DOL:

DOL 6.00 6.00
x Increase in volume 25% 100%
% increase in profits 150% 600%
Current profits 900,000.00 900,000.00
Increase in operating income 1,350,000.00 5,400,000.00
Expected operating profti 2,250,000.00 6,300,000.00
Exercise 6

Total Per Unit %

Sales 600,000 40.00 100%
Less: Variable expenses 420,000 28.00 70%
Contribution margin 180,000 12.00 30%
Less: Fixed expenses 150,000
Net operating income 30,000

Requirement 1:
Break-even point:
Fixed costs 150,000.00 150,000.00
Contribution margin 12.00 30%

BEP in units 12,500.00

BEP in pesos 500,000.00

Requirement 2:
At BEP, the contribution margin is equal to the fixed costs.
Therefore, the fixed cost is equal to P150,000.
Proof: Total
Sales 500,000
Less: Variable expenses 350,000
Contribution margin 150,000
Less: Fixed expenses 150,000
Net operating income - (break-even)

Requirement 3:
Fixed costs + Target Profit 168,000.00
Contribution margin per unit 12.00

Required sales in units for the target profit 14,000.00

Required sales in pesos for the target profit 560,000.00 (14,000 units x P40 selling price per unit)

Proof: Total
Sales 560,000
Less: Variable expenses 392,000
Contribution margin 168,000
Less: Fixed expenses 150,000
Net operating income 18,000

Requirement 4: Pesos % Units

Sales 600,000 100.00% 15,000
Less: Break-Even Sales 500,000 83.33% 12,500
Margin of safety 100,000 16.67% 2,500

Requirement 5:
Total Per Unit % %
Sales 600,000 40.00 100% 100%
Less: Variable expenses 420,000 28.00 70% 70% This is the variable cost ratio
Contribution margin 180,000 12.00 30% 30% This is the contribution margin ratio
Less: Fixed expenses 150,000
Net operating income 30,000 Note:
Variable cost ratio + Fixed cost ratio
Solution 1: Solution 2:
(in pesos) (in units)
Sales increase 80,000 2,000
x Contribution margin % 30% 12.00
Increase in operating income 24,000 24,000
Proof: Total
Sales 680,000
Less: Variable expenses 476,000
Contribution margin 204,000
Less: Fixed expenses 150,000
Net operating income 54,000
Less: Present operating income 30,000
Increase in operating income 24,000
ble cost ratio
ibution margin ratio

tio + Fixed cost ratio = 100% (always)

Exercise 7

Requirement 1 Per unit % Current With Ads Inc/(Dec)

Sales 75 100% 225,000 240,000 15,000
Less: Variable expenses 45 60% 135,000 144,000 9,000
Contribution margin 30 40% 90,000 96,000 6,000
Less: Fixed expenses 75,000 83,000 8,000
Net operating income 15,000 13,000 (2,000)

Though the increase in advertising budget will increase sales by P15,000, it will only increase the contribution margin by P6,000.
In advertising, the fixed cost will increase by P8,000. Since CM will increase only P6,000. It will result to a decrease of P2,000 in profits.

Requirement 2 Current With High Quality Material

Per unit Pesos Per unit Pesos Inc/(Dec)
Sales 75 225,000 75 258,750 33,750
Less: Variable expenses 45 135,000 48 165,600 30,600
Contribution margin 30 90,000 27 93,150 3,150
Less: Fixed expenses 75,000 75,000 -
Net operating income 15,000 18,150 3,150

Current sales volume (P225,000 ÷ 75) 3,000

x 100% + 15% sales increase 115%
Expected sales volume 3,450
x Selling price 75
Expected total sales 258,750
by P6,000.
P2,000 in profits.
Exercise 9

Requirement 1
Contribution margin 36,000.00
÷ Net operating income 12,000.00
Degree of operating leverage 3.00

Requirement 2
DOL 3.00
x Increase in volume 10%
% increase in profits 30%
Current profits 12,000.00
Increase in operating income 3,600.00
Expected operating profti 15,600.00

Requirement 3
Current Projected Inc/(Dec) %
Sales 120,000 132,000 12,000 10%
Less: Variable expenses 84,000 92,400 8,400 10%
Contribution margin 36,000 39,600 3,600 10%
Less: Fixed expenses 24,000 24,000 - 0%
Net operating income 12,000 15,600 3,600 30%
Exercise 11

Requirement 1:
Sales 60.00
Less: Variable expenses 36.00 (P60 x 60%)
Contribution margin 24.00 (P60 x 40%)
Fixed expenses 360,000

The answers in requirement 2 is the same as requirement 3.

In answering this type of questions, it is easier to answer using the contribution margin method.
You should understand the equation method BUT you should be able to COMPUTE using the contibution margin method.

Requirement 3a:
Break-even point:
Fixed costs 360,000.00 360,000.00
Contribution margin 24.00 40%

BEP in units 15,000.00

BEP in pesos 900,000.00

Requirement 3b:
Required Sales =
Fixed costs + Target Profit 450,000.00 450,000.00
Contribution margin per unit 24.00 40%

BEP in units 18,750.00

BEP in pesos 1,125,000.00
Requirement 3c:
Break-even point:
Fixed costs 450,000.00 450,000.00
Contribution margin 27.00 40%

BEP in units 16,666.67

BEP in pesos 1,125,000.00