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Solution To Assignment 6

1. The document provides cost information for Dennis Company and calculates selling prices using different markup ratios on various cost bases. 2. It also provides information on Negros Corporation's new product including costs and investment, and calculates the target selling price needed to achieve a 12% ROI. 3. The last case gives contribution margin information for Boy Corporation in two years, and calculates variances in sales price, sales quantity, variable cost price and variable cost quantity between the two years.

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Khyla Divinagracia
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300 views3 pages

Solution To Assignment 6

1. The document provides cost information for Dennis Company and calculates selling prices using different markup ratios on various cost bases. 2. It also provides information on Negros Corporation's new product including costs and investment, and calculates the target selling price needed to achieve a 12% ROI. 3. The last case gives contribution margin information for Boy Corporation in two years, and calculates variances in sales price, sales quantity, variable cost price and variable cost quantity between the two years.

Uploaded by

Khyla Divinagracia
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Strategic Business Analysis

Assignment 6

Case 1. Cost-based pricing. Dennis Company's cost structure for a certain item at a level of20,000 units per month is as
follows:
Manufacturing costs:
Direct materials P 1.00
Direct labor 1.20
Variable indirect cost 0.80
Fixed indirect cost 0.50
Selling and others:
Variable 1.50
Fixed 0.90

Required: Determine the selling price per unit if the markup ratio is
1. 50% based on conversion costs.
2. 40% based on full production costs.
3. 45% based on variable production costs.
4. 30% based on total (full) costs.
5. 35% based on total variable costs.
6. 60% based on prime costs.

Solution:
1. 50% based on conversion costs. Conversion costs = Cost based 1.2 + 0.80 + .50 = 2.50 + Mark up is equal to
2.50 x 50 % = 1.25 therefore total Selling price is P3.75 or 2.5 x 150% = P3.75
2. 40% based on full production costs. Full production costs = 1 + 1.2 + 0.80 + .50 = 3.5 x 140% = P4.90
3. 45% based on variable production costs. DM P1 + DL 1.20 and VOH. 0.80 = P3 x 145% = P4.35
4. 30% based on total (full) costs. DM P1 + DL 1.20 + VOH. 0.80 + FOH 0.50 + 1.50 + 0.90 = 5.90 x 130% = P7.67
5. 35% based on total variable costs. DM P1 + DL 1.20 + VOH. 0.80 + VE 1.50 = 4.50 x 135% = P6.075
6. 60% based on prime costs. DM P1 + DL 1.20 = 2.2 x 1.6 = 3.52

Case 2. Mark-up ratio, target sales price. Negros Corporation is considering the production of a new product that needs
P2.5 million investment. The company wants a 12% ROI on all products and uses the contribution margin approach to
pricing. The costs shown below are traceable to the new product.
Variable factory costs per unit P 30
Fixed factory overhead 600,000
Variable expenses per unit 6
Fixed expenses 150,000

The company expects to sell 50,000 units a year.

Required:
1. Mark-up ratio. 21/36 = 58.33%
2. Target unit sales price. Answer P57/unit
3. Assuming the expected sales 30,000 units instead of 50,000 units, what is the mark up ratio? P35/P36 =
97.22%
Solution:
Profit = ROI x investment = .12 x P2.5 M = P300,000 so profit per unit = P300,000/50,000= P6 per unit
1 and 2. Mark-up ratio. Contribution margin is equal to Profit P300,000 plus Fixed costs P600,000 + P150,000 =
P1,050,000/50,000 = P21 Contribution Margin per unit

Sales 57 Target Sales Price


Less VC (30+6) 36
Contribution margin P1,050,000 / 50,000 = P21
Less FC 750,000
Profit 300,000

3. Sales 71 Target Sales Price


Less VC (30+6) 36
Contribution margin P1,050,000 / 30,000 = P35
Less FC 750,000
Profit 300,000

Case 3. Sales and costs variances with incomplete data. The contribution margin of Boy Corporation for 20PY and 20CY
are given below:
20PY 20CY
Sales P 8,000,000 P12,000,000.
Less: Variable costs 6,000,000 8,000,000
Contribution margin P2,000,000 P4,000.000

The number of units sold increased by 5%.

Required: Compute the following for the year 20CY:


1. Sales price variance and sales price variance ratio. Sales Price variance is P3,600,000 favorable and the Sales
Price variance ratio is 3,600,000/8,400,000 = 42.86%
2. Sales quantity variance. Sales quantity variance rate is 5% given so the Sales quantity variance is P8,000,000 x
5% = P400,000 favorable
3. Variable cost price variance and variable cost price variance ratio. Variable cost price variance is P1,700,000 U
and the variable cost price variance ratio is 1,700,000/6,300,000 = 26.98%
4. Variable cost quantity variance. P6,000,000 x 105% = 6,300,000 CTY @ UCPLY so variable cost quantity
variance is P6,300,000 – 6,000,000= P300,000 U

Solution:
Sales Price variance
Sales this year P12,000,000
Sales this year at unit sales price last year 8,400,000 3,600,000 F

Sales Quantity variance


Sales this year at unit sales price last year 8,400,000
Sales last year 8,000,000 400,000 F

Variable Cost price variance


Cost this year 8,000,000
Cost this year at unit prices last year 6,300,000 1,700,000 U

Variable Cost Quantity variance


Cost this year at unit prices last year 6,300,000
Cost last year 6,000,000 300,000 U

Contribution margin variance P2,000,000 F

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