GROSS PROFIT VARIATION

ANALYSIS
 FACTORS CAUSING GROSS PROFIT VARIATION
• Change in volume or quantity of product sold
• Change in selling prices
• Change in purchasing prices or product sold
• Change in Sales mix
• Other factors:
• Purchasing and merchandising Policies
• Markups and Markdowns; and
• Credit Extension Policies.
 ANALYZING GROSS PROFIT VARIATION
• One Product:
Quantity Factor
Price Factor
Cost Factor
• Two or more products:
Sales Mix Factor
 PROBLEM 1
The Dawn Mining Company
Gross Profit Variation Analysis
For 2016

Increase in Sales:
Quantity Factor [(24,000) x P8] P (192,000)
Price Factor (105,000 x P3) 315,000
Quantity/Price Factor [(24,000) x P3] (72,000) P 51,000
Less: Increase (decrease) in Cost of Sales:
Quantity Factor [(24,000) x P9] P (216,000)
Cost Factor [105,000 x (P.50)] ( 52,500)
Quantity/Cost Factor [(24,000) x (P.50)] 12,000 ( 256,500)
Increase in Gross Profit P 307,500
 PROBLEM II
1. Selling Price Factor
Sales in 2016 P210,000
Less: Sales in 2006 at 2015 prices
(P210,000  105%) 200,000
Favorable P 10,000

2. Cost Factor
Cost of Sales in 2016 P164,000
Less: Cost of Sales in 2016 at 2015 costs 176,000
Favorable P(12,000)
 PROBLEM II
3. Quantity Factor
Increase in Sales
Sales in 2016 at 2015 prices P200,000
Less: Sales in 2015 150,000
Favorable P 50,000
Less: Increase in Cost of Sales
Cost of Sales in 2016 at 2015 costs
(P132,000 x 133-1/3%) P176,000
Less: Cost of Sales in 2015 132,000
Unfavorable P 44,000
Net favorable quantity factor 6,000*
Increase in Gross Profit P 28,000
 Tony Corporation
PROBLEM
Statement Accounting for Gross Profit Variation
III
For 2016

Increase (Decrease) in Sales accounted for as follows:

Price Factor
Sales this year P210,210
Less: Sales this year at last year’s prices 269,500
Favorable (Unfavorable) P(59,290)
Quantity Factor
Sales this year at last year’s
prices (P210,210  78%) P269,500
Less: Sales last year 192,500
Favorable (Unfavorable) P 77,000
Net Increase (decrease) in sales P 17,710
 PROBLEM III
Increase (decrease) in Cost of Sales accounted for as follows:
Cost Factor
Cost of Sales this year P 165,400
Less: Cost of Sales this year at last
year’s costs 161,700
(Favorable) Unfavorable P 3,700
Quantity Factor
Cost of Sales this year at last year’s
costs (115,500 x 140%) P 161,700
Less: Cost of Sales last year 115,500
(Favorable) Unfavorable P 46,200
Net increase (decrease) in Cost of Sales P 49,900
Net increase (decrease) in Gross Profit P (32,190)
 PROBLEM III
• Requirement B:

(1) Change in Quantity = P 77,000 = 40% increase

P192,500

(2) Change in Unit Costs = P 3,700 = 2.38%increase

P161,700
 SEATWORK
The gross profit of M Corporation for 2005 and 2006 are
given below:
2005 2006
Sales P 8,000,000 P 12,000,000 10
11
0
1
2
3
4
5
6
7
8
9
Less: COGS 6,000,000 10,800,000
MINUTES
Gross Profit P 2,000,000 P 1,200,000

Units Sold 50,000 48,000

Analyze the Gross Profit Variation of the Company.
(Quantity Factor, Sales Price Factor, Cost Factor)
 SEATWORK
Quantity Factor:
(48,000 – 50,000) x 160 =(P 320,000)
(48,000 – 50,000) x 120 =( 240,000) (P 80,000)
Sales Price Factor
(250 – 160) x 50,000 = P 4,500,000
(250 – 160) x (48,000 – 50,000) =( 180,000) 4,320,000
Cost Price Factor
(225 – 120) x 50,000 = P 5,250,000
(225 – 120) x (48,000 – 50,000) =( 210,000) 5,040,000
Decrease in Gross Profit P 800,000
EARNINGS PER SHARE
 BASIC EARNINGS PER SHARE
• BASIC EPS = Net Income after preference dividends
/ Ordinary Shares outstanding
• Preference dividend only for the CURRENT YEAR if
cumulative, deduct if declared only when
NONCUMULATIVE.
• Stock Dividend / Share split – as if it occurred at the start
of the year.
 DILUTED EARNINGS PER SHARE
• Potential Ordinary Shares
• Financial instrument that represents future issuance of
ordinary shares
• Major Types of potential ordinary shares:
• Convertible bond payable
• Convertible preference share
• Share option and warrant
• Dilution:
• As if shares are issued as a result of conversion / exercise
 CONVERTIBLE BONDS PAYABLE
• Add the ordinary shares that will be issued as a result of
conversion
• ADD BACK interest expense in net income, net of tax
• IF BONDS ARE ACTUALLY CONVERTED:
• Basic earning per share will be affected, FROM THE DATE
OF CONVERSION.
 CONVERTIBLE PREFERENCE SHARE
• As if preference shares are converted to ordinary shares
• DO NOT DEDUCT preference dividend in net income
ANYMORE.
• IF ACTUALLY CONVERTED:
• BEPS will only be affected starting on the date of
conversion.
 OPTIONS AND WARRANTS
• Dilutive only if the exercise price is less than the average
market price of the ordinary share.
• Assumed treasury shares:
• (Option shares x Option Price) / Average market price
• Resulting shares from options:
• Option shares – Assumed Treasury shares.
• If Actually exercised:
• DEPS – assumed TS averaged up to date of exercise
• BEPS – affected starting date of exercise.
Image Company’s capital structure at December 31, 2017 is
shown below:
Shares issued and outstanding:
Ordinary share 100,000
Nonconvertible preference share 25,000
On October 1, 2017, Image issued a 10% share dividend
on its ordinary shares, and paid P100,000 cash dividends on
the preference shares. Net income for the year ended
December 31,2017 was P960,000. How much should be the
2017 earnings per share of Image Company?

P7.82 per share

Fame Company’s capital structure is shown below:
12/31, 2017 12/ 31, 2016
Outstanding shares of stock:
Ordinary 110,000 110,000
Convertible preference10,000 10,000

During 2016, Fame paid dividends of P3.00 per share on its

preference share. The preferred shares are convertible into
20,000 shares of ordinary share. Net income for 2016 was
P850,000.Assume that the income tax rate is 32%, how much
is the diluted earnings per share for 2017?
.
P6.54 per share