Problem 1

Patricia Company produces a product that has the following data:

Unit Sales Price P 40
Unit Variable Cost P 24
Total Fixed Costs P 320,000/year
Units Sold during the year 25,000 units
Required:
1. Unit contribution margin, contribution margin ratio and variable cost ratio
a. Contribution margin per unit = Unit Selling Price – Unit Variable Costs
= P 40 – 24
= P 16

b. Contribution Margin Ratio = Contribution margin per unit/SP per unit

= P 16/ P 40
= 40%

c. Variable Cost Ratio = VC per unit/ SP per unit

= P 24/ P 40
= 60%

2. Break-even point in units and pesos

a. Break-even point in units = Total Fixed Cost/ Contribution Margin per unit
= P 320,000/ 16
= 20,000 units

b. Break-even point in pesos= Fixed costs/ Contribution Margin Ratio

= P 320,000/ .40
= P 800,000

3. Margin of safety in units and pesos, and margin of safety ratio

a. Margin of Safety in Units = Actual Sales in units – Break-even Sales in units
= 25,000 units – 20,000 units
= 5,000 units

b. Margin of Safety in Pesos = Actual Sales – Break-even Sales

= P 1,000,000 – P 800,000
= P 200,000

c. Margin of Safety Ratio = Margin of Safety in Pesos/ Actual Sales

= P 200,000/ 1,000,000
= 20%

4. Net profit ratio = (Units Sold x Contribution Margin per unit – Fixed Costs)/ Sales
 = (25,000 units x 16 – 320,000)/ 1,000,000
=8%

5. The amount of profit using the margin of safety is P 80,000 ( 20%).

Margin of Safety
In peso = Sales – (Variable cost + Fixed Cost)
= 1,000,000 – ((25,000x 24) + 320,000)
= P 80,000

6. If sales increase by P 150,000, how much would you expect income to increase?
Income increase = P 150,000 x CMR
= P 150,000 x 40%
= P 60,000

Problem 2
Francesca Company manufactures and sells a single product that has a retail price of P
75, unit variable cost of P 60 and total fixed cost of P 450,000. It expects to sell 50,000 units in
the coming year.

Required:
1. The CMR, BEP in units and pesos and the expected income before tax (IBIT) in the
coming year.
Base Case
Variable Values
Sales Price per Unit P 75
Variable Cost per Unit P 60
Fixed Cost 450,000
Volume of Sales 50,000

CVP PERCETAGE
Sales P 3,750,000 100%
Less: Variable Cost 3,000,000 80%
Contribution Margin 750,000 20%
Less: Fixed Cost 450,000
Expected Income P 300,000
 a. Contribution Margin Ratio = Contribution margin per unit/SP per unit
= P 15/ P 75
= 20%

b. Break-even point in units and pesos

Break-even point in units = Total Fixed Cost/ Contribution Margin per unit
= P 450,000/ 15
= 30,000 units

Break-even point in pesos= Fixed costs/ Contribution Margin Ratio

= P 450,000/ 20%
= P 2,250,000

c. Income before Tax = Units Sold x Contribution Margin per unit – Fixed Costs
= 50,000 units x 15 – 450,000
= P 300,000

2. The new CMR, BEP in units and pesos and the expected income before tax (IBIT) in the
coming year if:

a. Unit sales price increase by 10%

b. Unit variable cost decrease by 20%
c. Total fixed costs increase to P 720,00
d. The number of units sold increases to 65,000
e. If unit sales price decreases by P 2, unit variable cost decreases by 10% and total
fixed costs increase by P 50,000
SOLUTION OF SENSITIVITY ANALYSIS:

Base Case Unit sales Unit variable Total fixed The number of Changes in A,
price increase cost decrease costs increase units sold B, C, D
by 10% by 20% to P 720,00 increases to
65,000
Variable Values
Sales Price per Unit P 75 82.5 82.5
Variable Cost per Unit P 60 P 48 48
Fixed Cost 450,000 720,000 720,000
Volume of Sales 50,000 65,000 65,000

CVP
Sales P 3,750,000 P 3,750,000 P 5, 362, 500
Less: Variable Cost 3,000,000 3,120,000
Contribution Margin 750,000 2,242,500
Less: Fixed Cost 450,000 720,000
Expected Income P 300,000 1,522,500

Changes in A, B, C, D
Contribution Margin Ratio = Contribution margin per unit/SP per unit
= P 34.5/ P 82.5
= 42%
Break-even point in units = Total Fixed Cost/ Contribution Margin per unit
= P 720,000/ 34.5
= 20,870 units
Break-even point in pesos = Fixed costs/ Contribution Margin Ratio
= P 720,000/ 42%
= P 1,714, 286

Income before Tax = Units Sold x Contribution Margin per unit – Fixed Costs
= 65,000 units x 34.5 – 720,000
= P 1,522,500

A. Unit Selling Price = P 75 x 1.10 = 82.5

Contribution Margin Ratio = Contribution margin per unit/SP per unit
= P 22.5/ P 82.5
 = 27%
Break-even point in units = Total Fixed Cost/ Contribution Margin per unit
= P 450,000/ 22.5
= 20,000 units

Break-even point in pesos = Fixed costs/ Contribution Margin Ratio

= P 450,000/ 20%
= P 2,250,000

Income before Tax = Units Sold x Contribution Margin per unit – Fixed Costs
= 50,000 units x 22.5 – 450,000
= P 675,000

B. Unit Variable Cost = P 60 x .80 = P 48

Contribution Margin Ratio = Contribution margin per unit/SP per unit
= P 27/ P 75
= 36%

Break-even point in units = Total Fixed Cost/ Contribution Margin per unit
= P 450,000/ 27
= 16,667 units

Break-even point in pesos= Fixed costs/ Contribution Margin Ratio

= P 450,000/ 36%
= P 1,250,000

Income before Tax = Units Sold x Contribution Margin per unit – Fixed Costs
= 50,000 units x 27 – 450,000
= P 900,000

C. Fixed Cost = 720,000

Contribution Margin Ratio = Contribution margin per unit/SP per unit
= P 15/ P 75
= 20%

Break-even point in units = Total Fixed Cost/ Contribution Margin per unit
= P 720,000/ 15
= 48,000 units

Break-even point in pesos= Fixed costs/ Contribution Margin Ratio

= P 720,000/ 20%
 = P 3,600,000

Income before Tax = Units Sold x Contribution Margin per unit – Fixed Costs
= 50,000 units x 15 – 720,000
= P 30,000

D. Units Sold = 65,000

Contribution Margin Ratio = Contribution margin per unit/SP per unit
= P 15/ P 75
= 20%

Break-even point in units = Total Fixed Cost/ Contribution Margin per unit
= P 450,000/ 15
= 30,000 units

Break-even point in pesos= Fixed costs/ Contribution Margin Ratio

= P 450,000/ 20%
= P 2,250,000

Income before Tax = Units Sold x Contribution Margin per unit – Fixed Costs
= 65,000 units x 15 – 450,000
= P 525,000

Changes in E
Base Case Changes in E
Variable Values
Sales Price per Unit P 75 73
Variable Cost per Unit P 60 54
Fixed Cost 450,000 500,000
Volume of Sales 50,000 50,000

CVP
Sales P 3,750,000 P 3, 650, 000 100%
Less: Variable Cost 3,000,000 2,700,000 74%
Contribution Margin 750,000 950,000 26%
Less: Fixed Cost 450,000 500,000
Expected Income P 300,000 P 450, 000
 Unit Sales Price = P 75- 2 = P 73
Unit Variable Cost = P 60 x .90 = P 54
Total Fixed Cost = P 450,000 + 50,000 = 500,000
Volume Sales = 50,000

Contribution Margin Ratio= Contribution margin per unit/SP per unit

= P 19/ P 73
= 26%
Break-even point in units = Total Fixed Cost/ Contribution Margin per unit
= P 500,000/ 19
= 26, 316 units

Break-even point in pesos= Fixed costs/ Contribution Margin Ratio

= P 500,000/ 26%
= P 1,923,077

Income before Tax = Units Sold x Contribution Margin per unit – Fixed Costs
= 50,000 units x 19 – 500,000
= P 450,000