Chapter 12 - Answer

MANAGEMENT ACCOUNTING - Solutions Manual
CHAPTER 12
COST-VOLUME-PROFIT RELATIONSHIPS
I.
Questions
1. The total contribution margin is the excess of total revenue over total variable costs. The
unit contribution margin is the excess of the unit price over the unit variable costs.
2.
Total contribution margin:
Selling price - manufacturing variable costs expensed - nonmanufacturing variable costs

expensed = Total contribution margin.
Gross margin:
Selling price - variable manufacturing costs expensed - fixed manufacturing costs expensed =
Gross margin.
3. A company operating at break-even is probably not covering costs which are not recorded
in the accounting records. An example of such a cost is the opportunity cost of owner-invested
capital. In some small businesses, owner-managers may not take a salary as large as the
opportunity cost of forgone alternative employment. Hence, the opportunity cost of owner
labor may be excluded.
4. In the short-run, without considering asset replacement, net operating cash flows would be
expected to exceed net income, because the latter includes depreciation expense, while the
former does not. Thus, the cash basis break-even would be lower than the accrual break-even if
asset replacement is ignored. However, if asset replacement costs are taken into account, (i.e.,
on a cradle to grave basis), the long-run net cash flows equal long-run accrual net income, and
the long-run break-even points are the same.
5.
Both unit price and unit variable costs are expressed on a per product basis, as:
= (P1 - V1) X1 + (P2 - V2) X2 + + (Pn - Vn) Xn - F,
for all products 1 to n where:

=
P=
V
X
F=
operating profit,
average unit selling price,
= average unit variable cost,
= quantity of units,
total fixed costs for the period.
6. If the relative proportions of products (i.e., the product mix) is not held constant, products
may be substituted for each other. Thus, there may be almost an infinite number of ways to
achieve a target operating profit. As shown from the multiple product profit equation, there are
several unknowns for one equation:
13-1
Chapter 13 Cost-Volume-Profit Relationships
= (P1 - V1) X1 + (P2 - V2) X2 + + (Pn - Vn) Xn - F,

for all products 1 to n.
7. A constant product mix is assumed to simplify the analysis. Otherwise, there may be no
unique solution.
8. Operating leverage measures the impact on net operating income of a given percentage
change in sales. The degree of operating leverage at a given level of sales is computed by
dividing the contribution margin at that level of sales by the net operating income.
9. Three approaches to break-even analysis are (a) the equation method, (b) the contribution
margin method, and (c) the graphical method. In the equation method, the equation is: Sales =
Variable expenses + Fixed expenses + Profits, where profits are zero at the break-even point.
The equation is solved to determine the break-even point in units or peso sales.
10. The margin of safety is the excess of budgeted (or actual) sales over the break-even volume
of sales. It states the amount by which sales can drop before losses begin to be incurred.
11. The sales mix is the relative proportions in which a companys products are sold. The usual
assumption in cost-volume-profit analysis is that the sales mix will not change.
12. A higher break-even point and a lower net operating income could result if the sales mix
shifted from high contribution margin products to low contribution margin products. Such a
shift would cause the average contribution margin ratio in the company to decline, resulting in
less total contribution margin for a given amount of sales. Thus, net operating income would
decline. With a lower contribution margin ratio, the break-even point would be higher since it
would require more sales to cover the same amount of fixed costs.
13. The contribution margin (CM) ratio is the ratio of the total contribution margin to total sales
revenue. It can be used in a variety of ways. For example, the change in total contribution
margin from a given change in total sales revenue can be estimated by multiplying the change in
total sales revenue by the CM ratio. If fixed costs do not change, then a peso increase in
contribution margin will result in a peso increase in net operating income. The CM ratio can also
be used in break-even analysis. Therefore, knowledge of a products CM ratio is extremely
helpful in forecasting contribution margin and net operating income.
14. Incremental analysis focuses on the changes in revenues and costs that will result from a
particular action.
15. All other things equal, Company B, with its higher fixed costs and lower variable costs, will
have a higher contribution margin ratio than Company A. Therefore, it will tend to realize a
larger increase in contribution margin and in profits when sales increase.
16. (a) If the selling price decreased, then the total revenue line would rise less steeply, and the
break-even point would occur at a higher unit volume. (b) If the fixed cost increased, then both
the fixed cost line and the total cost line would shift upward and the break-even point would
occur at a higher unit volume. (c) If the variable cost increased, then the total cost line would
rise more steeply and the break-even point would occur at a higher unit volume.
13-2
Cost-Volume-Profit Relationships Chapter 13
II.
Exercises
Exercise 1 (Using a Contribution Format Income Statement)

Requirement 1
Total
Sales (30,000 units 1.15 = 34,500 units).......................................................P172,500
Less variable expenses...................................................................................... 103,500
Contribution margin.......................................................................................... 69,000
Less fixed expenses........................................................................................... 50,000
Net operating income.......................................................................................P19,000
Per Unit
P5.00
3.00
P2.00
Requirement 2
Net operating income....................................................................................... P 4,000
P4.50
3.00
P1.50
Requirement 3
Less fixed expenses (P50,000 + P10,000)........................................................ 60,000
Net operating income....................................................................................... P11,250
P5.50
3.00
P2.50
Requirement 4
Net operating income.......................................................................................P14,800
P5.60
3.20
P2.40
Exercise 2 (Break-even Analysis and CVP Graphing)

Requirement 1
The contribution margin per person would be:
Price per ticket..............................................................................................
13-3
P30
Less variable expenses:

Dinner........................................................................................................
Favors and program...................................................................................
Contribution margin per person....................................................................
P7
3
10
P20
The fixed expenses of the Extravaganza total P8,000; therefore, the break-even point would be
computed as follows:
Sales
= Variable expenses + Fixed expense + Profits
P30Q
P20Q
Q
Q
=
=
=
=
P10Q + P8,000 + P0
P8,000
P8,000 P20 per person
400 persons; or, at P30 per person, P12,000
Alternative solution:
Break-even point
in unit sales
Fixed expenses
Unit contribution margin
P8,000
P20 per person
400 persons
or, at P30 per person, P12,000.

Requirement 2
Variable cost per person (P7 + P3)...............................................................
P10
Fixed cost per person (P8,000 250 persons)..............................................
32
Ticket price per person to break even...........................................................
P42
13-4
Requirement 3
Cost-volume-profit graph:
P22,000
P20,000
P18,000
Total Sales
P16,000
Break-even point: 400 persons,
or P12,000 in sales
Pesos
P14,000
P12,000
P10,000
Total Expenses
Fixed Expenses
P8,000
P6,000
P4,000
P2,000
P0
0
100
200
300
400
500
600
Number of Persons
Exercise 3 (Break-even
and Target Profit Analysis)
Requirement 1
Sales
P900Q
P270Q
Q
=
=
=
=
Variable expenses + Fixed expenses + Profits

P630Q + P1,350,000 + P0
P1,350,000
P1,350,000 P270 per lantern
5,000 lanterns, or at P900 per lantern, P4,500,000 in
Q = sales
13-5
Break-even point
in unit sales
Fixed expenses
P1,350,000
P270 per lantern
5,000 lanterns
or at P900 per lantern, P4,500,000 in sales

Requirement 2
An increase in the variable expenses as a percentage of the selling price would result in a higher
break-even point. The reason is that if variable expenses increase as a percentage of sales, then the
contribution margin will decrease as a percentage of sales. A lower CM ratio would mean that more
lanterns would have to be sold to generate enough contribution margin to cover the fixed costs.
Requirement 3
Sales
Less variable expenses
Contribution margin
Less fixed expenses
Net operating income
Present:
Proposed:
8,000 Lanterns
10,000 Lanterns*
Total
Per Unit
Total
Per Unit
P7,200,000 P900
P8,100,000 P810**
5,040,000
630
6,300,000 630
2,160,000 P270
1,800,000 P180
1,350,000
1,350,000
P810,000
P450,000
*8,000 lanterns 1.25 = 10,000 lanterns

** P900 per lantern 0.9 = P810 per lantern
As shown above, a 25% increase in volume is not enough to offset a 10% reduction in the selling
price; thus, net operating income decreases.
Requirement 4
Sales
P810Q
P180Q
Q
Q
=
=
=
=
=

P630Q + P1,350,000 + P720,000
P2,070,000
P2,070,000 P180 per lantern
11,500 lanterns
13-6
Unit sales to attain

target profit
Fixed expenses + Target profit

P1,350,000 + P720,000
P180 per lantern
=
=
11,500 lanterns
Exercise 4 (Operating Leverage)

Requirement 1
Sales (30,000 doors)
Contribution margin
Less fixed expenses
Degree of
operating leverage
P18,000,000
12,600,000
5,400,000
4,500,000
P 900,000
=
Contribution margin
P5,400,000
P900,000
P600
420
P180
Requirement 2
a. Sales of 37,500 doors represents an increase of 7,500 doors, or 25%, over present sales of
30,000 doors. Since the degree of operating leverage is 6, net operating income should increase
by 6 times as much, or by 150% (6 25%).
b. Expected total peso net operating income for the next year is:
Present net operating income........................................................................
P 900,000
Expected increase in net operating income next year
(150% P900,000)....................................................................................
1,350,000
Total expected net operating income............................................................
P2,250,000
Exercise 5 (Multiproduct Break-even Analysis)
Requirement 1
Sales
Model E700 Model J1500

Total Company
Amount % Amount %
Amount
%
P700,000 100 P300,000 100 P1,000,000 100
280,000
40
90,000
30
370,000
37
60 P210,000
70
630,000
63 *
Contribution margin
P420,000
13-7
Less fixed expenses

598,500
P
31,500
* 630,000 P1,000,000 = 63%.
Requirement 2
The break-even point for the company as a whole would be:
Break-even point
in total peso sales
Fixed expenses
Overall CM ratio
P598,500
0.63
P950,000 in sales
Requirement 3
The additional contribution margin from the additional sales can be computed as follows:
P50,000 63% CM ratio = P31,500
Assuming no change in fixed expenses, all of this additional contribution margin should drop to the
bottom line as increased net operating income.
This answer assumes no change in selling prices, variable costs per unit, fixed expenses, or sales mix.
Exercise 6 (Break-even Analysis; Target Profit; Margin of Safety)
Requirement 1
Sales
P40Q
P12Q
Q
Q
=
=
=
=
=

P28Q + P150,000 + P0
P150,000
P150,000 P12 per unit
12,500 units, or at P40 per unit, P500,000
Alternatively:
Break-even point
in unit sales
Fixed expenses
P150,000
P12 per unit
12,500 units
or, at P40 per unit, P500,000.
13-8
Requirement 2
The contribution margin at the break-even point is P150,000 since at that point it must equal the fixed
expenses.
Requirement 3
target profit

P150,000 + P18,000
P12 per unit
14,000 units
Sales (14,000 units P40 per unit)

(14,000 units P28 per unit)
Contribution margin
(14,000 units P12 per unit)
Less fixed expenses
Total
P560,000
Unit
P40
392,000
28
168,000
150,000
P18,000
P12
Requirement 4
Margin of safety in peso terms:
Margin of safety in pesos
= Total sales
= P600,000
Break-even sales
P500,000 = P100,000
Margin of safety in percentage terms:

Margin of safety
percentage
=
=

Total sales
P100,000
P600,000
= 16.7% (rounded)
Requirement 5
The CM ratio is 30%.
13-9
Expected total contribution margin: P680,000 30%..................................

P204,000
Present total contribution margin: P600,000 30%.....................................
180,000
P24,000
Increased contribution margin.......................................................................
P80,000 incremental sales 30% CM ratio = P24,000
Since in this case the companys fixed expenses will not change, monthly net operating income will
increase by the amount of the increased contribution margin, P24,000.
Exercise 7 (Changes in Variable Costs, Fixed Costs, Selling Price, and Volume)
Requirement (1)
The following table shows the effect of the proposed change in

monthly advertising budget:
Sales.........................................
Variable expenses.....................
Contribution margin.................
Fixed expenses.........................
Net operating income...............
Current
Sales
P225,000
135,000
90,000
75,000
P 15,000
Sales With
Additional
Advertising
Budget
P240,000
144,000
96,000
83,000
P 13,000
Difference
P15,000
9,000
6,000
8,000
P(2,000)
Assuming that there are no other important factors to be considered, the increase in the
advertising budget should not be approved since it would lead to a decrease in net operating income
of P2,000.
Alternative Solution 1
Expected total contribution margin:
P240,000 40% CM ratio.....................................
Present total contribution margin:
P225,000 40% CM ratio.....................................
Incremental contribution margin...............................
Change in fixed expenses:
Less incremental advertising expense.....................
Change in net operating income................................
13-10
P96,000
90,000
6,000
8,000
P(2,000)
Alternative Solution 2
Incremental contribution margin:
P15,000 40% CM ratio......................................
Less incremental advertising expense.......................
Change in net operating income................................
P 6,000
8,000
P(2,000)
Requirement (2)
The P3 increase in variable costs will cause the unit contribution margin to decrease from P30 to
P27 with the following impact on net operating income:
Expected total contribution margin with the higher-quality components:
3,450 units P27 per unit........................................................
3,000 units P30 per unit........................................................
Change in total contribution margin............................................
P93,150
90,000
P 3,150
Assuming no change in fixed costs and all other factors remain the same, the higher-quality
components should be used.
Exercise 8 (Compute the Margin of Safety)
Requirement (1)
To compute the margin of safety, we must first compute the break-even unit sales.
Sales= Variable expenses + Fixed expenses + Profits
P25Q= P15Q + P8,500 + P0
P10Q= P8,500
Q= P8,500 P10 per unit
Q= 850 units
Sales (at the budgeted volume of 1,000 units)......................... P25,000
Break-even sales (at 850 units)................................................ 21,250
Margin of safety (in pesos)...................................................... P 3,750
Requirement (2)
The margin of safety as a percentage of sales is as follows:
Margin of safety (in pesos).............................................
P3,750
Sales............................................................................
P25,000
Margin of safety as a percentage of sales........................
15.0%
Exercise 9 (Compute and Use the Degree of Operating Leverage)
13-11
Requirement (1)
The companys degree of operating leverage would be computed as follows:
Contribution margin.............................
Net operating income.......................
Degree of operating leverage...............
P36,000
P12,000
3.0
Requirement (2)
A 10% increase in sales should result in a 30% increase in net operating income, computed as
follows:
Degree of operating leverage...............................................................
Percent increase in sales...................................................................
Estimated percent increase in net operating income............................
3.0
10%
30%
Requirement (3)
The new income statement reflecting the change in sales would be:
Sales.........................................
Variable expenses.....................
Fixed expenses.........................
Percent of
Amount
Sales
P132,000
100%
92,400
70%
39,600
30%
24,000
P 15,600
Net operating income reflecting change in sales...............................

Original net operating income...........................................................
Percent change in net operating income...........................................
Exercise 10 (Compute the Break-Even Point for a Multiproduct Company)

Requirement (1)
The overall contribution margin ratio can be computed as follows:
Overall CM ratio
=
=
Total contribution margin

Total sales
P120,000
P150,000
= 80%
13-12
P15,600
P12,000
30%
Requirement (2)
The overall break-even point in sales pesos can be computed as follows:
Overall break-even
=
=
Total fixed expenses

Overall CM ratio
P90,000
80%
= P112,500
Requirement (3)
To construct the required income statement, we must first determine the relative sales mix for
the two products:
Original peso sales...................
Percent of total........................
Sales at break-even..................
Ping
P100,000
67%
P75,000
Pong
P50,000
33%
P37,500
Total
P150,000
100%
P112,500
Ping
Pong
P37,500
3,750
P33,750
Total
P112,500
22,500
90,000
90,000
P
0
Sales.........................................
Variable expenses*...................
Fixed expenses.........................
P75,000
18,750
P56,250
*Ping variable expenses: (P75,000/P100,000) P25,000 = P18,750

Pong variable expenses: (P37,500/P50,000) P5,000 = P3,750
Exercise 11 (Break-Even and Target Profit Analysis)
Requirement (1)
Variable expenses: P60 (100% 40%) = P36.
Requirement (2)
13-13
a. Selling price.........................................
Variable expenses.................................
Contribution margin.............................
P60
36
P24
100%
60%
40%
Let Q = Break-even point in units.

Sales
P60Q
P24Q
Q
Q
= Variable expenses + Fixed expenses + Profits

= P36Q + P360,000 + P0
= P360,000
= P360,000 P24 per unit
= 15,000 units
In sales pesos: 15,000 units P60 per unit = P900,000

Let X
X
0.40X
X
X
b.
= Break-even point in sales pesos.

= 0.60X + P360,000 + P0
= P360,000
= P360,000 0.40
=P900,000
In units: P900,000 P60 per unit = 15,000 units

P60Q = P36Q + P360,000 + P90,000
P24Q = P450,000
Q = P450,000 P24 per unit
Q = 18,750 units
In sales pesos: 18,750 units P60 per unit = P1,125,000
X
0.40X
X
X
=
=
=
=
0.60X + P360,000 + P90,000

P450,000
P450,000 0.40
P1,125,000
In units: P1,125,000 P60 per unit = 18,750 units

c. The companys new cost/revenue relationships will be:
Selling price...........................................................
Variable expenses (P36 P3)................................
Contribution margin..............................................
P60Q =
P27Q =
Q =
P33Q + P360,000 + P0
P360,000
13-14
P60
33
P27
100%
55%
45%
Q =
13,333 units (rounded).
In sales pesos: 13,333 units P60 per unit = P800,000 (rounded)

X
0.45X
X
X
=
=
=
=
0.55X + P360,000 + P0
P360,000
P360,000 0.45
P800,000
In units: P800,000 P60 per unit = 13,333 units (rounded)

Requirement (3)
a.
Break-even point
in unit sales
Fixed expenses
= P360,000 P24 per unit = 15,000 units
In sales pesos: 15,000 units P60 per unit = P900,000

Break-even point
in sales pesos
Fixed expenses
CM ratio
= P360,000 0.40 = P900,000
In units: P900,000 P60 per unit = 15,000 units

b.

target profit

= (P360,000 + P90,000) P24 per unit

= 18,750 units
In sales pesos: 18,750 units P60 per unit = P1,125,000

Peso sales to
attain target profit

CM ratio
= (P360,000 + P90,000) 0.40

= P1,125,000
13-15
In units: P1,125,000 P60 per unit = 18,750 units
c.
Break-even point
in unit sales
Fixed expenses
= P360,000 P27 per unit

= 13,333 units (rounded)
In sales pesos: 13,333 units P60 per unit = P800,000 (rounded)

Break-even point
in sales pesos
Fixed expenses
CM ratio
= P360,000 0.45
= P800,000
In units: P800,000 P60 per unit = 13,333 (rounded)

Exercise 12 (Operating Leverage)
Requirement (1)
Sales (30,000 doors).........................
Variable expenses..............................
Contribution margin..........................
Fixed expenses..................................
Net operating income........................
Degree of operating
leverage
P1,800,000
1,260,000
540,000
450,000
P 90,000
Contribution margin
= P540,000 P90,000 = 6
Requirement (2)
13-16
P60
42
P18
a. Sales of 37,500 doors represents an increase of 7,500 doors, or 25%, over present sales of
30,000 doors. Since the degree of operating leverage is 6, net operating income should increase
by 6 times as much, or by 150% (6 25%).
b. Expected total peso net operating income for the next year is:
Present net operating income......................................................
Expected increase in net operating income next year (150% P90,000)
Total expected net operating income...........................................
P90,000
135,000
P225,000
III. Problems
Problem 1 (CVP Relationships)
Requirement 1
CM ratio
Variable expense ratio
Contribution margin
Selling price
P15
P60
25%
Variable expense
Selling price
P45
P60
75%
Requirement 2
Sales
P60Q
P15Q
Q
Q
=
=
=
=
=

P45Q + P240,000 + P0
P240,000
16,000 units, or at P60 per unit, P960,000
X
0.25X
X
X
=
=
=
=
0.75X + P240,000 + P0
P240,000
P240,000 0.25
P960,000; or at P60 per unit, 16,000 units
Requirement 3
Increase in sales.......................................................... P400,000
Multiply by the CM ratio............................................ x 25%
Expected increase in contribution margin................... P100,000
Since the fixed expenses are not expected to change, net operating income will increase by the entire
P100,000 increase in contribution margin computed above.
13-17
Requirement 4
Sales
P60Q
P15Q
Q
Q
=
=
=
=
=

P45Q + P240,000 + P90,000
P330,000
22,000 units
Contribution margin method:

Contribution margin per unit
P240,000 + P90,000
P15 per unit
= 22,000 units
Requirement 5
= Total sales Break-even sales
= P1,200,000
Margin of safety
=
percentage
P960,000 = P240,000

Total sales
P240,000
= P1,200,000 = 20%
Requirement 6
Degree of operating leverage = Contribution margin = P300,000
P60,000
a.
b.
Expected increase in sales..............................

Degree of operating leverage...............................
Expected increase in net operating income..........
= 5
8%
x 5
40%
c. If sales increase by 8%, then 21,600 units (20,000 x 1.08 = 21,600) will be sold next year.
The new income statement will be as follows:
Sales (21,600 units)...........
Less variable expenses.......
Contribution margin...........
Less fixed expenses...........
Net operating income.........
Total
P1,296,000
972,000
324,000
240,000
P 84,000
Per Unit
P60
45
P15
13-18
Percent of
Sales
100%
75%
25%
Thus, the P84,000 expected net operating income for next year represents a 40% increase over
the P60,000 net operating income earned during the current year:
P84,000 P60,000
=
P60,000
P24,000
P60,000
= 40% increase
Note from the income statement above that the increase in sales from 20,000 to 21,600 units has
resulted in increases in both total sales and total variable expenses. It is a common error to
overlook the increase in variable expense when preparing a projected income statement.
Requirement 7
a. A 20% increase in sales would result in 24,000 units being sold next year: 20,000 units x
1.20 = 24,000 units.
Sales (24,000 units)...........
Less variable expenses.......
Contribution margin...........
Less fixed expenses...........
Net operating income.........
Total
P1,440,000
1,152,000
288,000
210,000
P 78,000
Per Unit
P60
48*
P12
Percent of
Sales
100%
80%
20%
* P45 + P3 = P48; P48 P60 = 80%.
P240,000 P30,000 = P210,000.
Note that the change in per unit variable expenses results in a change in both the per unit
contribution margin and the CM ratio.
b.
Break-even point
in unit sales
Fixed expenses
P210,000
P12 per unit
=
Break-even point
in peso sales
=
=
17,500 units
Fixed expenses
CM ratio
P210,000
0.20
P1,050,000
c. Yes, based on these data the changes should be made. The changes will increase the
companys net operating income from the present P60,000 to P78,000 per year. Although the
changes will also result in a higher break-even point (17,500 units as compared to the present
16,000 units), the companys margin of safety will actually be wider than before:
13-19
= Total sales Break-even sales
P1,440,000
P1,050,000
= P390,000
As shown in requirement (5) above, the companys present margin of safety is only P240,000.
Thus, several benefits will result from the proposed changes.
Problem 2 (Basics of CVP Analysis; Cost Structure)
Requirement 1
The CM ratio is 30%.
Total
Per Unit Percentage
P270,000
P20
100%
189,000
14
70
P81,000
P6
30%
Sales (13,500 units)

Contribution margin
The break-even point is:

Sales
P20Q
P 6Q
Q
Q
=
=
=
=
=

P14Q + P90,000 + P0
P90,000
P90,000 P6 per unit
15,000 units
15,000 units P20 per unit = P300,000 in sales
Break-even point
in unit sales
=
=
Break-even point
in sales pesos
=
=
=
=
Fixed expenses
P90,000
P6 per unit
15,000 units
Fixed expenses
CM ratio
P90,000
0.30
P300,000 in sales
13-20
Requirement 2
Incremental contribution margin:
P70,000 increased sales 30% CM ratio..................................................
P21,000
Less increased fixed costs:
Increased advertising cost.........................................................................
8,000
Increase in monthly net operating income.....................................................
P13,000
Since the company presently has a loss of P9,000 per month, if the changes are adopted, the loss
will turn into a profit of P4,000 per month.
Requirement 3
Sales (27,000 units P18 per unit*).............................................................
P486,000
(27,000 units P14 per unit)......................................................................
378,000
Contribution margin......................................................................................
108,000
Less fixed expenses (P90,000 + P35,000)....................................................
125,000
Net operating loss.........................................................................................
P(17,000)
*P20 (P20 0.10) = P18
Requirement 4
Sales
P 20Q
P5.40Q
Q
Q
=
=
=
=
=
Variable expenses + Fixed expenses +

Profits
P14.60Q* + P90,000 + P4,500
P94,500
P94,500 P5.40 per unit
17,500 units
* P14.00 + P0.60 = P14.60.

target profit
=
=
=

CM per unit
P90,000 + P4,500
P5.40 per unit**
17,500 units
13-21
** P6.00 P0.60 = P5.40.

Requirement 5
a.
The new CM ratio would be:

Per Unit
P20
7
P13
Sales
Contribution margin
Percentage
100 %
35
65 %
The new break-even point would be:

Break-even point
in unit sales
Break-even point
in sales pesos
=
=
P208,000
P13 per unit
16,000 units
Fixed expenses
CM ratio
P208,000
0.65
b.
Fixed expenses
P320,000 in sales
Comparative income statements follow:

Not Automated
Automated
Total Per Unit %
Total
Per Unit %
P400,000 P20
100 P400,000 P20
100
Sales (20,000 units)

Less variable
expenses
280,000
Contribution margin
120,000
Less fixed expenses
90,000
Net operating
P30,000
income
14
P 6
70
30
140,000
260,000
208,000
P52,000
13-22
7
P13
35
65
c. Whether or not one would recommend that the company automate its operations depends on
how much risk he or she is willing to take, and depends heavily on prospects for future sales.
The proposed changes would increase the companys fixed costs and its break-even point.
However, the changes would also increase the companys CM ratio (from 30% to 65%). The
higher CM ratio means that once the break-even point is reached, profits will increase more
rapidly than at present. If 20,000 units are sold next month, for example, the higher CM ratio
will generate P22,000 more in profits than if no changes are made.
The greatest risk of automating is that future sales may drop back down to present levels (only
13,500 units per month), and as a result, losses will be even larger than at present due to the
companys greater fixed costs. (Note the problem states that sales are erratic from month to
month.) In sum, the proposed changes will help the company if sales continue to trend upward
in future months; the changes will hurt the company if sales drop back down to or near present
levels.
Note to the Instructor: Although it is not asked for in the problem, if time permits you may want
to compute the point of indifference between the two alternatives in terms of units sold; i.e., the
point where profits will be the same under either alternative. At this point, total revenue will be
the same; hence, we include only costs in our equation:
Let Q
P14Q + P90,000
P7Q
Q
Q
=
=
=
=
=
Point of indifference in units sold

P7Q + P208,000
P118,000
16,857 units (rounded)
If more than 16,857 units are sold, the proposed plan will yield the greatest profit; if less than
16,857 units are sold, the present plan will yield the greatest profit (or the least loss).
Problem 3 (Sales Mix; Multiproduct Break-even Analysis)
Requirement 1
Sinks
Products
Mirrors
Vanities
Total
Percentage of total sales

Sales
Contribution margin
Less fixed expenses
(loss)
32%
40%
28%
100%
P160,000 100% P200,000 100% P140,000 100% P500,000 100
%
48,000
P112,000
30 160,000
70% P 40,000
80
77,000
20% P 63,000
55 285,000
45% 215,000
223,600
P ( 8,600)
* P215,000 P500,000 = 43%.
13-23
57
43
%*
Requirement 2
Break-even sales:
Break-even point
in total peso sales
Fixed expenses
CM ratio
P223,600
0.43
P520,000 in sales
Requirement 3
Memo to the president:
Although the company met its sales budget of P500,000 for the month, the mix of products sold
changed substantially from that budgeted. This is the reason the budgeted net operating income was
not met, and the reason the break-even sales were greater than budgeted. The companys sales mix
was planned at 48% Sinks, 20% Mirrors, and 32% Vanities. The actual sales mix was 32% Sinks,
40% Mirrors, and 28% Vanities.
As shown by these data, sales shifted away from Sinks, which provides our greatest contribution per
peso of sales, and shifted strongly toward Mirrors, which provides our least contribution per peso of
sales. Consequently, although the company met its budgeted level of sales, these sales provided
considerably less contribution margin than we had planned, with a resulting decrease in net
operating income. Notice from the attached statements that the companys overall CM ratio was
only 43%, as compared to a planned CM ratio of 52%. This also explains why the break-even point
was higher than planned. With less average contribution margin per peso of sales, a greater level of
sales had to be achieved to provide sufficient contribution margin to cover fixed costs.
Problem 4 (Basic CVP Analysis)
Requirement 1
The CM ratio is 60%:
Selling price
Contribution margin
Requirement 2
Break-even point
in total sales pesos
P150
60
P 90
=
Fixed expenses
CM ratio
P1,800,000
0.60
P3,000,000 in sales
13-24
100
%
40
60
%
Requirement 3
P450,000 increased sales 60% CM ratio = P270,000 increased contribution margin. Since fixed
costs will not change, net operating income should also increase by P270,000.
Requirement 4
a.
Degree of operating leverage = Contribution margin = P2,160,000 = 6

P360,000
b. 6 15% = 90% increase in net operating income.

Requirement 5
Sales
Less variable
expenses
Contribution margin
Less fixed expenses
Last Year:
28,000 units
Total
Per Unit
P4,200,000 P150.00
1,680,000
60.00
2,520,000
1,800,000
P90.00
P720,000
Proposed:
42,000 units*
Total
Per Unit
P5,670,000 P135.00
**
2,520,000
60.00
3,150,000 P 75.00
2,500,000
P650,000
* 28,000 units 1.5 = 42,000 units

** P150 per unit 0.90 = P135.00 per unit
No, the changes should not be made.

Requirement 6
Expected total contribution margin:
28,000 units 200% P70 per unit*
28,000 units P90 per unit
Incremental contribution margin, and the amount by
which advertising can be increased with net operating
income remaining unchanged
* P150 (P60 + P20) = P70
13-25
P3,920,000
2,520,000
P1,400,000
Problem 5 (Break-Even and Target Profit Analysis)

Requirement 1
The contribution margin per patch would be:
Selling price
Less variable expenses:
Purchase cost of the patches
Commissions to the student salespersons
Contribution margin
P30
P15
6
21
P9
Since there are no fixed costs, the number of unit sales needed to yield the desired P7,200 in profits
can be obtained by dividing the target profit by the unit contribution margin:
Target profit
800 patches x P30 per patch =
P7,200
P9 per patch
800 patches
P24,000 in total sales
Requirement 2
Since an order has been placed, there is now a fixed cost associated with the purchase price of
the patches (i.e., the patches cant be returned). For example, an order of 200 patches requires a
fixed cost (investment) of P3,000 (200 patches P15 per patch = P3,000). The variable costs
drop to only P6 per patch, and the new contribution margin per patch becomes:
Selling price...................................................................................................
P30
Less variable expenses (commissions only)...................................................
6
Contribution margin......................................................................................
P24
Since the fixed cost of P3,000 must be recovered before Ms. Morales shows any profit, the
break-even computation would be:
Break-even point
=
in unit sales
Fixed expenses
P3,000
= P24 per patch
= 125 patches
125 patches x P30 per patch = P3,750 in total sales

If a quantity other than 200 patches were ordered, the answer would change accordingly.
Problem 6
13-26
Requirement 1: Break-even chart

TR
600,000
500,000
TC
400,000
(P)
300,000
Break-even
point
200,000
FC
100,000
5,000
10,000 15,000 20,000 25,000 30,000

(units)
Requirement 2: Profit-volume graph
13-27
250,000
P 200,000
R
O
F 150,000
I
T
100,000
50,000
Break-even
point
0
5,000 10,000 15,000 20,000 25,000 30,000
50,000
100,000
L
O
S
S
150,000
200,000
250,000
Problem 7 (Sales Mix; Break-Even Analysis; Margin of Safety)

Requirement (1)
a.
Hun
13-28
Yun
Total
Sales.........................................
Variable expenses......................
Contribution margin..................
Fixed expenses..........................
Net operating income................
b.
Pesos
P80,000
48,000
P32,000
%
100
60
40
P
P48,000
9,600
P38,400
%
100
20
80
Euros
P128,000
57,600
70,400
66,000
P 4,400
%
100
45
55
Break-even sales = Fixed expenses CM ratio

= P66,000 0.55 = P120,000
Margin of safety
=
in pesos
Actual sales Break-even sales
P128,000 P120,000
P8,000
Margin of safety
= Margin of safety in pesos Actual sales
percentage
=
P8,000 P128,000
6.25%
Requirement (2)
a.
Sales
Variable expenses
Contribution margin
Hun
Yun
Pesos
%
Pesos %
P80,000 100 P48,000 100
48,000 60
9,600 20
HY143
Pesos
%
P32,000 100
2,4000
75
P32,000
P 8,000
40 P38,400
80
Fixed expenses
Net operating
income
b.
25
Total
Pesos
%
P160,000 100
81,600
51
78,400
66,000
P 12,400
Break-even sales = Fixed expenses CM ratio

= P66,000 0.49 = P134,700 (rounded)
Margin of safety
=
in pesos
Actual sales Break-even sales
P160,000 P134,700
P25,300
Margin of safety
=
percentage
=
P25,300 P160,00013-29
15.81%
49
Margin of safety in pesos Actual sales
Requirement (3)
The reason for the increase in the break-even point can be traced to the decrease in the companys
average contribution margin ratio when the third product is added. Note from the income statements
above that this ratio drops from 55% to 49% with the addition of the third product. This product,
called HY143, has a CM ratio of only 25%, which causes the average contribution margin ratio to
fall.
This problem shows the somewhat tenuous nature of break-even analysis when more than one
product is involved. The manager must be very careful of his or her assumptions regarding sales mix
when making decisions such as adding or deleting products.
It should be pointed out to the president that even though the break-even point is higher with the
addition of the third product, the companys margin of safety is also greater. Notice that the margin
of safety increases from P8,000 to P25,300 or from 6.25% to 15.81%. Thus, the addition of the
new product shifts the company much further from its break-even point, even though the break-even
point is higher.
13-30
Problem 8 (Break-Even Analysis with Step Fixed Costs)

Requirement (1)
The total annual fixed cost of the Pediatric Ward can be computed as follows:
Annual
Patient-Days
Aides
Nurses
@ P360,000 @ P580,000
10,000-12,000 P2,520,000 P8,700,000
12,001-13,750 P2,880,000 P8,700,000
13,751-16,500 P3,240,000 P9,280,000
16,501-18,250 P3,600,000 P9,280,000
18,251-20,750 P3,600,000 P9,860,000
20,751-23,000 P3,960,000 P10,440,000
Supervising
Nurses
@ P760,000
P2,280,000
P2,280,000
P3,040,000
P3,040,000
P3,800,000
P3,800,000
Total
Personnel
P13,500,000
P13,860,000
P15,560,000
P15,920,000
P17,260,000
P18,200,000
Other Fixed
Cost
P27,400,000
P27,400,000
P27,400,000
P27,400,000
P27,400,000
P27,400,000
Total Fixed
Cost
P40,900,000
P41,260,000
P42,960,000
P43,320,000
P44,660,000
P45,600,000
Requirement (2)
The break-even can be computed for each range of activity by dividing the total fixed
cost for that range of activity by the contribution margin per patient-day, which is P3,000
(=P4,800 revenue P1,800 variable cost).
Annual
Patient-Days
10,000-12,000
12,001-13,750
13,751-16,500
16,501-18,250
18,251-20,750
20,751-23,000
(a)
Total Fixed
Cost
P40,900,000
P41,260,000
P42,960,000
P43,320,000
P44,660,000
P45,600,000
(b)
Contribution
Margin
P3,000
P3,000
P3,000
P3,000
P3,000
P3,000
Break-Even Within Relevant

(a) (b)
Range?
13,633
No
13,753
No
14,320
Yes
14,440
No
14,887
No
15,200
No
While a break-even can be computed for each range of activity (i.e., relevant range), all
but one of these break-evens is bogus. For example, within the range of 10,000 to 12,000
patient-days, the computed break-even is 13,633 (rounded) patient-days. However, this level
of activity is outside this relevant range. To serve 13,633 patient-days, the fixed costs would
have to be increased from P40,900,000 to P41,260,000 by adding one more aide. The only
break-even that occurs within its own relevant range is 14,320. This is the only legitimate
break-even.
Requirement (3)
13-31
The level of activity required to earn a profit of P7,200,000 can be computed as follows:
Annual
Patient-Days
10,000-12,000
12,001-13,750
13,751-16,500
16,501-18,250
18,251-20,750
20,751-23,000
Total
Fixed Cost
P40,900,000
P41,260,000
P42,960,000
P43,320,000
P44,660,000
P45,600,000
Target
Profit
P7,200,000
P7,200,000
P7,200,000
P7,200,000
P7,200,000
P7,200,000
(a)
Total Fixed Cost +
Target Profit
P48,100,000
P48,460,000
P50,160,000
P50,520,000
P51,860,000
P52,800,000
Activity
to
Attain
(b)
Target
Within
Contribution
Profit
Relevant
Margin
(a) (b) Range?
P3,000
16,033
No
P3,000
16,153
No
P3,000
16,720
No
P3,000
16,840
Yes
P3,000
17,287
No
P3,000
17,600
No
In this case, the only solution that is within the appropriate relevant range is 16,840
patient-days.
13-32
IV. Multiple Choice Questions

1.
2.
3.
4.
5.
B
B
B
C
C
6.
7.
8.
9.
10.
B
D
B
A
D
11.
12.
13.
14.
15.
B
A
A
C
D
16.
17.
18.
19.
20.
D
D
D
C
D
13-33
21.
22.
23.
24.
25.
A
D
C
B
C
26.
27.
28.
29.
30.
A
B
C
B
A

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MANAGEMENT ACCOUNTING - Solutions Manual

Total contribution margin:

Selling price - manufacturing variable costs expensed - nonmanufacturing variable costs

for all products 1 to n where:

Chapter 13 Cost-Volume-Profit Relationships

= (P1 - V1) X1 + (P2 - V2) X2 + + (Pn - Vn) Xn - F,

Cost-Volume-Profit Relationships Chapter 13

Exercise 1 (Using a Contribution Format Income Statement)

Exercise 2 (Break-even Analysis and CVP Graphing)

Chapter 13 Cost-Volume-Profit Relationships

Less variable expenses:

= Variable expenses + Fixed expense + Profits

or, at P30 per person, P12,000.

Cost-Volume-Profit Relationships Chapter 13

Variable expenses + Fixed expenses + Profits

Chapter 13 Cost-Volume-Profit Relationships

or at P900 per lantern, P4,500,000 in sales

*8,000 lanterns 1.25 = 10,000 lanterns

Variable expenses + Fixed expenses + Profits

Cost-Volume-Profit Relationships Chapter 13

Unit sales to attain

Fixed expenses + Target profit

Exercise 4 (Operating Leverage)

Model E700 Model J1500

Chapter 13 Cost-Volume-Profit Relationships

Less fixed expenses

* 630,000 P1,000,000 = 63%.

Variable expenses + Fixed expenses + Profits

or, at P40 per unit, P500,000.

Cost-Volume-Profit Relationships Chapter 13

Fixed expenses + Target profit

Sales (14,000 units P40 per unit)

Margin of safety in percentage terms:

Margin of safety in pesos

Chapter 13 Cost-Volume-Profit Relationships

Expected total contribution margin: P680,000 30%..................................

The following table shows the effect of the proposed change in

Cost-Volume-Profit Relationships Chapter 13

Chapter 13 Cost-Volume-Profit Relationships

Net operating income reflecting change in sales...............................

Exercise 10 (Compute the Break-Even Point for a Multiproduct Company)

Total contribution margin

Cost-Volume-Profit Relationships Chapter 13

Total fixed expenses

*Ping variable expenses: (P75,000/P100,000) P25,000 = P18,750

Chapter 13 Cost-Volume-Profit Relationships

Let Q = Break-even point in units.

= Variable expenses + Fixed expenses + Profits

In sales pesos: 15,000 units P60 per unit = P900,000

= Break-even point in sales pesos.

In units: P900,000 P60 per unit = 15,000 units

0.60X + P360,000 + P90,000

In units: P1,125,000 P60 per unit = 18,750 units

Cost-Volume-Profit Relationships Chapter 13

13,333 units (rounded).

In sales pesos: 13,333 units P60 per unit = P800,000 (rounded)

In units: P800,000 P60 per unit = 13,333 units (rounded)

= P360,000 P24 per unit = 15,000 units

In sales pesos: 15,000 units P60 per unit = P900,000

= P360,000 0.40 = P900,000

In units: P900,000 P60 per unit = 15,000 units

Unit sales to attain

Fixed expenses + Target profit

= (P360,000 + P90,000) P24 per unit