Exercise 11 (Break-Even and Target Profit Analysis)

Rainee Sales Company is the exclusive distributor for a revolutionary

bookbag. The product sells for P60 per unit and has CM ratio of 40%.
The company’s fixed expenses are P360,000 per year.

Required:

1. What are the variable expenses per unit?

2. Using the equation method:
a. What is the break-even point in units and in sales pesos?
b. What sales level in units and in sales pesos is required to earn
an annual profit of P90,000?
c. Assume that through negotiation with the manufacturer the
Rainee Sales Company is able to reduce its variable expenses
by P3 per unit. What is the company’s break-even point in
units and in sales pesos?
3. Repeat (2) above using the contribution margin method.
Solution

Required 1

Selling Price per unit P 60 100%

Less: Variable Expenses per unit** 36 60%
Contribution Margin per unit* P 24 40%
* 60 x 40% = P 24 per unit

**60 x 60% = P 36 per unit

60 – 24 = P 36 per unit

Required 2 (Equation Method)

a. BEP (units)
Net Income = Selling Price per unit – Variable Expenses per unit
– Fixed Costs
Let x = number of units sold
0 = 60x – 36x – 360,000
0 = 24x – 360,000
0 + 360,000 = 24x
360,000 = 24x
360,000 = 24x
24 24
X = 15,000 units
 BEP (Pesos)
BEP in units x Selling Price per unit
15,000 x P 60/unit
= P 900,000

b. Sales (units)
Net Income = Selling Price per unit – Variable Expenses per unit
– Fixed Costs
90,000 = 60x – 36x – 360,000
90,000 = 24x – 360,000
90,000 + 360,000 = 24x
450,000 = 24x
450,000 = 24x
24 24
X = 18,750 units

Sales (Pesos)
Sales in units x Selling Price per unit
18,750 x P 60/unit
= P 1,125,000
c.

Selling Price per unit P 60 100%

Less: Variable Expenses per unit* 33 55%
Contribution Margin per unit P 27 45%
*36-3 = 33

BEP (units)
Net Income = Selling Price per unit – Variable Expenses per unit
– Fixed Costs
0 = 60x – 33x – 360,000
0 = 27x – 360,000
0 + 360,000 = 27x
360,000 = 27x
360,000 = 27x
27 27
X = 13,333.3333333 units

BEP (Pesos)
BEP in units x Selling Price per unit
13,333.3333333 x P 60/unit
= P 800,000
Required 3 (Contribution Margin Method)

Selling Price per unit P 60 100%

Less: Variable Expenses per unit** 36 60%
Contribution Margin per unit* P 24 40%

¿
a. BEP (units) = Total ¿Costs Contribution Margin Per Unit
360,000
= 24

= 15,000 units

Total ¿Costs ¿
BEP (Pesos) = Variable Cost s Per Unit
1−
Selling Price Per Unit

360,000
= 1−
36
60

360,000
= 1−0.60
360,000
= 0.40

= P 900, 000

Alternative Formula:
¿
BEP (Pesos) = Total ¿Costs Contribution Margin Ratio
 360,000
= 40 %

= P 900, 000

b. Sales (units) =
Total ¿Costs+ Desired Profit B efore T ax ¿
Contribution Margin Per Unit

360,000+90,000
= 24

= 18,750 units

¿
Sales (Pesos) = Total ¿Costs+ Desired Profit Before Tax Contribution Margin Ratio

360,000+90,000
= 40 %

= P 1,125,000

c.

Selling Price per unit P 60 100%

Less: Variable Expenses per unit* 33 55%
Contribution Margin per unit P 27 45%
*36-3 = 33
 ¿
BEP (units) = Total ¿Costs Contribution Margin Per Unit

360,000
= 27

= 13,333.33333333 units

Total ¿Costs ¿
BEP (pesos) = Variable Cost s Per Unit
1−
Selling Price Per Unit

360,000
= 1−
33
60

360,000
= 1−0.55
360,000
= 0.45

= P 800,000

Alternative Formula:
¿
BEP (Pesos) = Total ¿Costs Contribution Margin Ratio

360,000
= 45 %

= P 800,000