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STRATEGIC COST MANAGEMENTSCM03- Cost-Volume-Profit Analysis Drill Terminology on Break-Even Chart. A traditional break-even chart is illustrated below. Required: Identify each letter on the chart, using the proper terminology. A cost area B. Variable cost area C. Net income area D. Break-even point ...

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STRATEGIC COST MANAGEMENT SCM03- Cost-Volume-Profit Analysis Drill 1. Terminology on Break-Even Chart. A traditional break-even chart is illustrated below. Required: Identify each letter on the chart, using the proper terminology.

A.Fixed cost area B. C. D. E. F. G. H. I. J.

Variable cost area Net income area Break-even point Net loss area Total cost line Sales line Fixed cost line Y-axis (pesos) X-axis (units)

2. A company producing widgets expects to incur fixed costs during the next year of P3 million. It also expects to incur handling costs of P1 per widget, labor costs of P3 per widget, and materials costs of P2 per widget. The company produces widgets only when ordered and, therefore, does not incur any carrying costs. It sells widgets for P10 each. The number of widgets that must be sold next year in order to break even is: P3,000,000/(P10 – P6) = P750,000 3. RA Co.'s operating percentages were as follows: Sales ......................................................................................... Cost of sales: Variable.................................................................................. Fixed...................................................................................... Gross profit ......................................................................................... Other operating expenses: Variable.................................................................................. Fixed...................................................................................... Operating income............................................................................... RA's sales totaled P2,000,000. At what sales level would RA break even? BEP is fixed cost divided by CMR Total fixed cost - P2,000,000 x 0.25 = P500,000 Total cost variable ratio – 50% + 20% = 70% ; therefore, CMR is 30% The BEP in pesos is: BEP (pesos) = P500,000/30% = P1,666,667

100% 50% 10 40 20% 15

60 %

35 5%

4. The following information pertains to Phillip Co.'s cost-volume-profit relationships: Break-even point in units sold.......................................................................... 1,000 Variable costs per unit...................................................................................... P500 Total fixed costs................................................................................................ P150,000 How much will be contributed to profit when unit 1,001 is sold? Contribution Margin/Unit = Contribution Margin/Units P150,000/1,000 = P150/unit 5. During June, a company expects sales revenue from its only product to be P300,000, fixed costs to be P90,000, and variable costs to be P120,000. If the company's actual sales revenue during June is P350,000, its profit would be: P140,000 6. The management of Regine Coast Products Co. is presented with the following data: Sales............................................................................................ P500,000 Direct materials........................................................................... P 60,000

SCM3- Cost-Volume-Profit Analysis

1

Direct labor.................................................................................. 90,000 Factory overhead......................................................................... 100,000 250,000 Gross profit.................................................................................. P250,000 Marketing expenses..................................................................... P 70,000 General expenses........................................................................ 100,000 170,000 Net income.................................................................................. P 80,000 Fifty percent of factory overhead is fixed, while 40% of marketing expenses and all general expenses are fixed. Required: (1) Compute the contribution margin ratio.

Sales−Variable Cost Sales = (2)

P 500,000−( P 60,000+ P 90,000+P50,000+P 42,000) P 500,000 P 258,000 = 51.60% P 500,000

=

Compute the break-even point in sales pesos.

¿Costs CM Ratio

=

P 50,000+ P 28,000+ P100,000 0.516

=

P 178,000 0.516

= P344,961

(3) New factory equipment may be purchased that will not affect total costs at this sales level but will increase fixed factory overhead costs to 75% of factory overhead. Assuming that this purchase is made, show its effect by recomputing the answer to (1).

Sales−Variable Cost Sales =

P 500,000−( P 60,000+ P 90,000+P25,000+P 42,000) P 500,000 P 283,000 = 56.60% P 500,000

=

(4) Assuming that the new factory equipment is purchased, show its effect by recomputing the answer to (2). (Round all percentages to the nearest tenth of a percent and all peso amounts to the nearest whole peso.)

¿Costs CM Ratio

=

P 75,000+ P 28,000+ P100,000 0.566

=

P 203,000 0.566

= P358,657

7.

Expected Profits; Break-Even Point in Units; Margin of Safety; Effect of an Increase in Sales. BabyGirl's Pickles Inc. estimates sales of 500,000 units at P5 per unit. Variable costs generally equal P1 per unit. Fixed expenses for this planned sales level would equal P2 per unit. Required: Compute the following (round all answers to the nearest whole number): (1) Estimated profit for the planned level of sales 500,000 units x Unit profit = 500,000 x (P5 - P2 - P1) = P1,000,000 Estimated profit (2) Break-even point in units and pesos Total fixed expenses 500,000 units x P2 = P1,000,000 = Contribution margin per unit P5 - P1 = P4 = 250,000 Breakeven point in units 250,000 x P5 = P1,250,000 Break-even point in pesos (3) Margin of safety ratio (M/S) Planned sales Breakeven sales P2,500,000/ P1,250,000 = Planned sales P2,500,000 = 50% Margin of safety (M/S) ratio (4) Increase in profit that would result from a 10% increase in sales Contribution margin per unit x Unit increase = P4 x (500,000 x 10%) = P200,000 (5) Profit as a percentage of the planned level of sales Profit = C/M ratio x M/S ratio = 80% x 50% = 40% 8. Break-Even Point in Units and Pesos. Miguel Products Inc. manufactures two products CType A and Type B. Relevant budgeted sales and cost data for the coming year are: Variable Expenses Product Unit Sales Unit Price per Unit Type A.................................................... 100,000 P15 P6 Type B.................................................... 150,000 10 7 The fixed costs for the company amounted to P1,000,000. Required: Compute the break-even point in units and in pesos for Type A and Type B. Type B 150,000 = 1.5 or 3:2 Type A 100,000 Contribution margin per hypothetical package SCM3- Cost-Volume-Profit Analysis

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