EXERCISE 4: BREAK-EVEN ANALYSIS; TARGET PROFIT; MARGIN OF SAFETY; CM RATIO

Melody Company manufactures and sells a single product. The company's sales and expenses for last quarter follow:
TOTAL PER UNIT
Sales ₱ 450,000 ₱ 30
Less: Variable Expense 180,000 12
Contribution Margin ₱ 270,000 ₱ 18
Less: Fixed Expenses 216,000
Net Operating Income ₱ 54,000

REQUIRED:
1. What is the quarterly break-even point in units sold and in peso sales?
Fixed Expense ₱ 216,000
Break-even Point in Units Sold= = = 12,000 units
Unit CM ₱ 18

Fixed Expense ₱ 216,000

Break-even Point in Peso Sales= = = ₱ 360,000
CM Ratio 0.60

2. Without resorting to computations, what is the total contribution margin at the break-even point?
ANSWER: The total contribution margin at the break-even point is P216,000

3. How many units would have to be sold each quarter to earn a target profit of P90,000? Use the contribution
margin method. Verify your answer by preparing a contribution format income statement at the target sales level.
Melody Company, Inc.
Contribution Income Statement
For the Last Quarter
TOTAL PER UNIT % OF SALES
Sales ₱ 510,000 ₱ 30 100%
Less: Variable Expense 204,000 12 40%
Contribution Margin ₱ 306,000 ₱ 18 60%
Less: Fixed Expenses 216,000
Net Operating Income ₱ 90,000
 Unit Sales to Attain the Target Profit = Fixed Expense + Target Profit
Unit Contribition Margin
P216,000 + P90,000
P18 per unit
P306,000
= 17,000 units
P18 per unit

4. Refer to the original data. Compute the company's margin of safety in both and peso percentage terms.

Margin of Safety in Peso = Fixed Expenses 216,000

= = ₱ 360,000
CM Ratio 0.6

Margin of Safety in Percentage = Sales (at the current volume of 15,000 units) (a) ₱ 450,000
Break-even Sales (at 12,000 units) 360,000
Margin of Safety in Peso (b) ₱ 90,000
Margin of Safety as a Percentage of Sales [(b)/(a)] 20%

5. What is the company's CM ratio? If sales increase by P50,000 per quarter and there is no change in fixed expenses,
by how much would you expect quarterly net operating income to increase?
PRESENT EXPECTED INCREASE % OF SALES
Sales ₱ 450,000 ₱ 500,000 ₱ 50,000 100%
Less: Variable Expense 180,000 200,000 20,000 40%
Contribution Margin ₱ 270,000 ₱ 300,000 ₱ 30,000 60%
Less: Fixed Expenses 216,000 216,000 0
Net Operating Income ₱ 54,000 84,000 ₱ 30,000

SOLUTION:
Expected Sales= P450,000 + P50,000 = P500,000 Net Operating Income= P84,000 - P54,000 = P30,000
Expected Variable Expenses = P500,000/30 = 16,000.67 × 12 = P200,000 % Variable Expenses = P200,000/P500,000 = 0.40 or 40%
Expected Contribution Margin= P500,000 × 0.60 = P300,000 % Contribution Margin = P300,000/P500,000 = 0.60 or 60%