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Problem Solving Chapter 8

This document contains solved problems related to profitability, break-even analysis, contribution margin, degree of operating leverage, and degree of financial leverage. Problem 5 calculates break-even units, contribution margin, target profit units, and margin of safety. Problem 6 calculates degree of operating leverage and uses it to estimate next year's net operating income given a sales increase. Problem 10 calculates degrees of operating, financial, and combined leverage and break-even points in units.

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Kevin TW Sales
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159 views2 pages

Problem Solving Chapter 8

This document contains solved problems related to profitability, break-even analysis, contribution margin, degree of operating leverage, and degree of financial leverage. Problem 5 calculates break-even units, contribution margin, target profit units, and margin of safety. Problem 6 calculates degree of operating leverage and uses it to estimate next year's net operating income given a sales increase. Problem 10 calculates degrees of operating, financial, and combined leverage and break-even points in units.

Uploaded by

Kevin TW Sales
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

Problem 5

1 Profit=(Unit CM * Q) - Fixed expenses


P0 = ((P30−P12) × Q) − P450,000
P0 = (P18 × Q) − P450,000
P18Q = P450,000
Q = P450,000 ÷ $18 per unit
Q = 25,000 units, or at P30 per unit, P750,000

2 P450,000 is the CM or the "Contribution Margin" because the CM is equal to


the fixed expenses at the break-even point

3a Unit sold to attain target profit= (Target profit + Fixed Expenses)/ Unit CM
= (P90,000 + P450,000)/ P18 per unit
=30,000 units

Sales (30,000 units * P30 per unit) ₱ 900,000


Variable expenses ( 30,000 units * P12 per unit) -₱ 360,000
Contribution margin ₱ 540,000
Fixed expenses -₱ 450,000
Net profit ₱ 90,000

4 Margin of safety= Total sales - Break even sales


= P450,000 - P750,000
= P300,000

Margin of safety percentage = Margin of safety in dollars/ Total sales


= P300,000/ P450,000
=66.67%

5 CM ratio= (Sales - Variable expense) /sales


CM ratio is = 60%

P50,000 incremental sales * 60% CM ratio= P30,000


Increased contribution margin P30,000

Since the company's fixed expenses will not change, monthly net operating
income will increase by P30,000

Problem 6
1 Galaxy Beyond, Inc.
Contribution Income Statement

Sales ₱ 3,000,000 ₱ 200


Variable ₱ 900,000 60
Controbiton margin ₱ 2,100,000 ₱ 140
Fixed expense ₱ 1,820,000
Net operating income ₱ 280,000

Degree of operating leverage= Contribution margin / Net operating income


= P2,100,000 /P280,000
= 7.5

2 The sales of 18,000 represents a 20% increase over last year's income
because the degree of operating leverage is 7.5, the net operating
income should increase by 7.5 times as much. Then, (7.5*20%) or by 150%.

Last year's net operating income ₱ 280,000


Expected increase in net operating income next year ₱ 420,000
Total expected net operating income ₱ 700,000

Problem 10
a. Degree of DOL= Q(P-V)/Q(P-V)-F
operating =20,000(P60-P30)/20,000(P60-P30)-P400,000
leverage = 3%

b. Degree of DFL= EBIT/EBIT- interest


financial =P200,000/P200,000 - 50,000
leverage =1.33%

c. Degree of DCL= DOL * DFL


combine =3*1.33
leverage = 3.99%

d. Break-even Break-even points (units) = fixed costs / (P-V)


point in units = P400,000 / (P60-P30)
=13,333.33 units

Problem 13
N/A

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