CERTIFIED ACCOUNTING TECHNICIAL LEVEL 2

MODULE 2
Lesson Objectives:
At the end of this module, you should be able to:
1. Determine the breakeven point in units and in pesos
2. Calculate the required sales to earn a target profit.
3. Gain an understanding on the concept of margin of safety and operating leverage.
4. Compute the indifference point.

I. INTRODUCTION TO COST-VOLUME-PROFIT ANALYSIS

Cost-Volume-Profit (CVP) Analysis – the systematic examination of the relationships among
costs, cost driver (activity level – volume) and profit. It is used to measure the functional
relationship between the major factors affecting profits and to determine the profit structure of an
entity.

Factors Affecting Profit

Sales price Variable cost/unit Activity level Total Fixed costs Sales mix

Simplifying Assumptions (Limitations) of CVP Analysis

1. Relevant Range, Time and Linearity Assumptions are applicable to CVP analysis. When
represented graphically, the behavior of total revenues and total costs are linear (represented as
a straight line) in relation to output level within a relevant range and time period.
2. All costs are classifiable as either fixed or variable. Total costs can be separated into a fixed
component that does not vary with the output level and a component that is variable with respect
to the output level.
3. The selling price, variable cost per unit, and fixed costs are known and constant.
4. Changes in the level of revenues and costs arise only because of changes in the number of
product (or service) units produced and sold. Units produced is equal to units sold.
5. If the company sells multiple products, sales mix is constant as the level of total units sold
changes.
6. Time value of money is ignored.

Contribution Margin Statement Total Per Unit Rate

Sales (S) P xx P xx SP/unit 100%
Variable Costs (VC) (xx) (xx) VC/unit x% VC ratio (VC/S)
Contribution Margin (CM) P xx P xx CM/unit x% CM ratio (CM/S)
Fixed Costs (FC) (xx) x% FC ratio (FC/S)
Profit b4 tax (operating income) (OI) P xx x% Profit ratio (OI/S)

• Contribution Margin (Marginal income/Marginal profit/Profit contribution)

- the amount of sales that is not consumed by variable cost which will contribute to the
coverage of fixed costs and provide profits to owners.
- If selling price per unit and variable cost per unit is assumed constant, then contribution
margin per unit is also assumed constant. This is true when no specific changes in
selling price or variable cost per unit is stated in the problem.
 • Per unit cost is computed as total costs divided by number of units sold.
• Ratios are based on sales. If selling price, variable cost per unit and contribution margin
per unit is assumed constant, then variable cost ratio and contribution margin ratio will
also be constant even if there is a change in volume. Variable cost ratio and contribution
margin ratio can only change if there is a specific change in selling price or variable cost
per unit. Fixed cost ratio and profit ratio varies with changes in volume.

II. Break-even Point (BEP)

- the level of sales (in pesos or in units) where total revenue equals total costs, that is,
there is neither profit nor loss. total revenues+total costs

Under break-even point:

• Sales = Total Cost or Sales = Variable Cost + Fixed Cost
• Sales – Variable Cost – Fixed Cost = 0
• Sales – Variable Cost = Fixed Cost or Contribution Margin = Fixed Cost

Illustration:
Bebe Co. runs a manufacturing business that is involved in manufacturing and selling a single
product. The annual fixed expenses to run the business are ₱15,000 and variable expenses are
₱7.50 per unit. The selling price of the product is ₱15 per unit.
Requirement. Compute for:
1. BEP in units 2. BEP in pesos

Equation Method and Contribution Margin Approach

Break-even point in units
To compute for profit: S − VC − FC = P
At break-even: S − VC − FC = 0

To compute for break-even point in units:

S − VC − FC = 0
u SP − VCu) − FC = 0
(
u(15 − 7.5) − 15,000 = 0
7.5u = 15,000
7.5u 15,000
=
7.5 7.5
𝐁𝐄𝐏𝐮 = 𝟐, 𝟎𝟎𝟎

The formula to compute break-even point in units can be derived as:

S − VC − FC = 0
u(SP − VCu) − FC = 0
u(SP − VCu) = FC
u SP − VCu)
( FC
=
(SP − VCu) SP − VCu
𝐅𝐂
𝐁𝐄𝐏𝐮 =
𝐂𝐌𝐮

Using the derived formula, the break-even point in units can simply be computed as:
 𝐅𝐂
𝐁𝐄𝐏𝐮 =
𝐂𝐌𝐮
15,000
BEPu =
7.5
𝐁𝐄𝐏𝐮 = 𝟐, 𝟎𝟎𝟎
Break-even point in pesos
Break-even point in pesos can simply be computed as:
BEPp = BEPu ∗ SP
BEPp = 2,000 ∗ 15
𝐁𝐄𝐏𝐩 = ₱𝟑𝟎, 𝟎𝟎𝟎

Break-even point in pesos can also be computed using a formula:

𝐅𝐂
𝐁𝐄𝐏𝐩 =
𝐂𝐌𝐑
15,000
BEPp =
50%
𝐁𝐄𝐏𝐩 = ₱𝟑𝟎, 𝟎𝟎𝟎
The formula was based on the concept:
At breakeven point: CM – FC = 0 or CM = FC
CM CM
If: = 100% or =S
CMR CMR
𝐹𝐶 𝑭𝑪
Therefore, at break-even point: = 100% or = 𝐁𝐄𝐏𝐩
𝐶𝑀𝑅 𝐂𝐌𝐑
Legend:
S = Sales u = units BEPu = Break-even point in units
VC = Variable cost SP = Selling price / Sales price per unit BEPp = Break-even point in pesos
FC = Fixed cost VCu = Variable cost per unit CMR = Contribution margin ratio
P = Profit CMu = Contribution margin per unit

For further illustration of equation method and contribution margin approach, read your book on pages
6–10.

Graphical Approach
The graphical presentation of pesos and unit sales needed to break-even is known as break-
even chart or CVP graph:
Explanation of the graph:
1. The number of units have been presented on the X-axis (horizontally) whereas peso amounts
have been presented on Y-axis (vertically).
2. The straight horizontal line in represents the total annual fixed expenses of ₱15,000.
3. The line that starts with ₱15,000 represents the total expenses. Notice that the line has a
positive or upward slope that indicates the effect of increasing variable expenses with the increase
in production.
4. The line that starts at 0 with positive or upward slope is the total revenue line. It indicates that
every unit sold increases the total sales revenue.
5. The total revenue line and the total expenses line cross each other. The point at which they
cross each other is the break-even point. The break-even point in the above graph is 2,000 units
or ₱30,000 that agrees with the break-even point computed using the equation above.
6. The difference between the total expenses line and the total revenue line before the point of
intersection (BE point) is the loss area. Notice that this area reduces as the number of units sold
increases. It means every additional unit sold before the break-even point reduces the loss.
7. The difference between the total expenses line and the total revenue line after the point of
intersection (BE point) is the profit area. Notice that this area increases as the number of units
sold increases. It means every additional unit sold after the break-even point increases the profit
of the business.

FAQ
Question: Is it favorable to have a higher break-even point?
Answer: The lower the break-even point, the better. Lower break-even point means companies
can earn profit much quicker because they just have to sell fewer units.

III. Required Sales (units and pesos) to Earn a Desired Profit (OI)
Illustration:
Meme Co. runs a manufacturing business that is involved in manufacturing and selling a single
product. The annual fixed expenses to run the business are ₱50,000 and variable expenses are
₱15 per unit. The selling price of the product is ₱25 per unit. The company’s tax rate is 30%.
Requirement. Compute for:
1. Sales in units and pesos to earn a target profit before tax of ₱25,000.
2. Revenue to earn a target profit after tax of ₱14,000.
3. Revenue to earn a target profit before tax of 20% of revenues.

Requirement 1
The required sales in units to earn a desired profit before tax can be computed as:
𝐅𝐂 + 𝐃𝐏
𝐑𝐒𝐮 =
𝐂𝐌𝐮
50,000 + 25,000
RSu =
10
75,000
RSu =
10
𝐑𝐒𝐮 = 𝟕, 𝟓𝟎𝟎
The required sales in pesos to earn a desired profit before tax can simply be computed as:
RSp = RSu ∗ SP
RSp = 7,500 ∗ 25
 𝐑𝐒𝐩 = ₱𝟏𝟖𝟕, 𝟓𝟎𝟎

The required sales in pesos to earn a desired profit before tax can also be computed using the
formula:
𝐅𝐂 + 𝐃𝐏
𝐑𝐒𝐩 =
𝐂𝐌𝐑
50,000 + 25,000
RSp =
40%
75,000
RSp =
40%
𝐑𝐒𝐩 = ₱𝟏𝟖𝟕, 𝟓𝟎𝟎
Requirement 2
The required sales in units to earn a desired profit after tax can be computed as:
𝐃𝐏
𝐅𝐂 + ( )
𝐑𝐒𝐮 = 𝟏 − 𝐓𝐑
𝐂𝐌𝐮
14,000
50,000 + ( )
1 − 30%
RSu =
10
50,000 + 20,000
RSu =
10
70,000
RSu =
10
𝐑𝐒𝐮 = 𝟕, 𝟎𝟎𝟎
Note: The formula to compute required sales in units in requirement 1 can also be used but make
sure to make the desired profit before tax before using it in the formula.

The required sales in pesos to earn a desired profit after tax can simply be computed as:
RSp = RSu ∗ SP
RSp = 7,000 ∗ 25
𝐑𝐒𝐩 = 𝟏𝟕𝟓, 𝟎𝟎

The required sales in pesos to earn a desired profit after tax can also be computed using the
formula:
𝐃𝐏
𝐅𝐂 + ( )
𝐑𝐒𝐩 = 𝟏 − 𝐓𝐑
𝐂𝐌𝐑
14,000
50,000 + ( )
1 − 30%
RSp =
40%
50,000 + 20,000
RSp =
40%
70,000
RSp =
40%
𝐑𝐒𝐩 = ₱𝟏𝟕𝟓, 𝟎𝟎𝟎
Requirement 3
The required sales in pesos to earn a desired profit as percentage of sales can be computed as:
𝐅𝐂
𝐑𝐒𝐩 =
𝐂𝐌𝐑 − 𝐏𝐑
50,000
RSp =
40% − 20%
50,000
RSp =
20%
Pesos Units Rate
Sales (S) P xx xx S/SP 100% Sales ratio (SR)
Break Even Sales (BES) (xx) (xx) BES/SP x% BES ratio (BESR)
Margin of Safety (MS) P xx xx MS/SP x% MS ratio (MSR)
𝐑𝐒𝐩 = ₱𝟐𝟓𝟎, 𝟎𝟎𝟎
Note: If the given profit rate is after tax, make sure to get the before tax profit rate before using it
in the formula.

The required sales in units to earn a desired profit as percentage of sales can simply be computed
as:
RSu = RSp ÷ SP
RSu = 250,000 ÷ 25
𝐑𝐒𝐮 = 𝟏𝟎, 𝟎𝟎𝟎
The required sales in units to earn a desired profit as percentage of sales can also be computed
as:
𝐅𝐂
𝐑𝐒𝐮 =
𝐂𝐌𝐮 − 𝐏𝐮
50,000
RSu =
10 − 5
50,000
RSu =
5
𝐑𝐒𝐮 = 𝟏𝟎, 𝟎𝟎𝟎
Note: Profit per unit (Pu) is computed as Selling Price multiplied by Profit ratio (25 x 20% = 5).

Legend:
RSu = Required sales in units CMu = Contribution margin per unit TR = Tax rate
FC = Fixed cost RSp = Required sales in pesos PR =
Profit ratio
DP = Desired profit / Target profit CMR = Contribution margin ratio Pu = Profit per
unit

IV. Margin of Safety

Margin of safety (MOS) - the level of sales (in pesos or in units) by which actual or budgeted
sales may be decreased without resulting into a loss. In other words, it is the cushion by which
actual or budgeted sales may be decreased without resulting in any loss.
- measure of the difference between the actual (or budgeted sales) and the break-even
sales.
Sensitivity analysis – “what-if” technique managers use to examine how a result will change if
original predicted data not achieved or if an underlying assumption changes

Under CVP analysis:

Selling price per unit, variable cost per unit and fixed costs is assumed constant. This is true when
no specific changes are stated in the problem.

What if there is a change in sales?

If it is stated that there is a change in sales, that change is referring to a change in volume
(units), not change in selling price. If there is a change in volume (units), total variable cost
will also change but fixed will remain constant. To summarize, if there is a 30% increase in
sales, there will also be a 30% increase in total variable cost. Total fixed cost will remain the
same.

What if there if a change in total variable cost, would this also mean a change in sales?
The answer would be yes. For example, if variable cost increases by 30%, the main reason
for that increase would be an increase in volume (units), not an increase in variable cost per
unit. Therefore, that increase in variable cost would also be reflected as a 30% increase in
sales. Total fixed cost remains constant. The same concept will apply as discussed above.

What if there is a change in selling price, would variable cost be affected?

The answer would be no. A change in selling price will be reflected as an increase or decrease
in sales but it would not affect variable cost because volume would not be affected. This would
also apply when there is a change variable cost per unit. When variable cost per unit changes,
only variable cost would increase or decrease because volume would not be affected.

When further analyzed, the following relationships can be observed:

Changes (Individual) CM/u & CMR BEP Operating Income MOS
1. Increase* in SP/u Increase Decrease Increase Increase
2. Increase* in VC/u Decrease Increase Decrease Decrease
3. Increase* in total FC No effect (NE) Increase Decrease Decrease
* and vice versa

V. Operating Leverage
Operating Leverage – measures the extent of change in profit before tax resulting from change
in sales.
• it basically answers the question: "By how many times will operating profit increase or
decrease in relation to the increase or decrease in sales?"
The degree of operating leverage (DOL) of operating leverage factor (OLF) can be computed as:
CM % change in operating income
DOL = or DOL =
OI % change in sales

• The higher the CM, the greater will be the degree of operating leverage (DOL) or operating
leverage factor (OLF).
• A company with high fixed costs will still have operating leverage if it has a very high
contribution margin (CM).

FAQs
Question: Does having higher operating leverage good for a business?
Answer: Firms with a lower fraction of variable costs and a higher fraction of fixed costs have a
higher operating leverage, which means many costs can’t be scaled down in periods of declining
sales. This increases the risk of loss and makes the operating profit less predictable. However,
operating leverage is not necessarily bad. Though it magnifies losses when sales decline, it can
increase profit in periods of sales growth.

Illustration:
Beybi Co. is in business since 2008, makes swimwear for professional athletes. Analysis of the
firm's financial records for the current year reveals the following:
Average swimsuit selling price ₱80 Number of units sold 3,000 units
Variable swimsuit expenses: Annual fixed cost:
Direct material 30 Selling ₱26,000
Direct labor 12 Administrative 34,000
Variable overhead 8
Requirement:
a. Compute for the margin of safety in units and pesos.
b. What is the degree of operating leverage?
c. Using the DOL computed above, what will be amount of net income if the sales increase by
20%?.
d. Disregarding the information in requirement (c), a marketing consultant told Beybi Co.
managers that they could increase the sales by 30 percent if the selling price was reduced by 10
percent and the company spent ₱10,000 on advertising. How much would be the additional
profit/(loss) if the changes are made?

Requirement 1
FC
BEPu =
CMu
60,000
BEPu =
30
BEPu = 2,000

BEPp = BEPu ∗ SP
BEPp = 2,000 ∗ 80
BEPp = ₱160,000

SP = ₱80 Pesos Units

Sales 240,000 3,000
Break-even point 160,000 2,000
Margin of safety 80,000 1,000
Requirement 2
units = 3,000
Sales ₱ 240,000
Variable cost 150,000
Contribution margin 90,000
Fixed cost 60,000
Operating income 30,000

CM
DOL =
OI
 90,000
DOL =
30,000
𝐃𝐎𝐋 = 𝟑

Requirement 3
Under the concept of DOL:
With a DOL of 3, operating income will change by 3 times the percentage change in sales.
Meaning, with a 20% increase in sales, the operating income will increase by 60% (3*20%). To
answer requirement 3, the operating income will increase by 18,000 (₱30,000 * 60%).
To check:
Current Change After 20% Increase
units = 3,000 units = 3,600 (3,000*1.2)
Sales ₱ 240,000 ₱ 48,000 ₱ 288,000
Variable cost (150,000) (30,000) (180,000)
Contribution margin 90,000 18,000 108,000
Fixed cost (60,000) - (60,000)
Operating income 30,000 *60% 18,000 48,000

Requirement 4
Answer: Profit would decrease by ₱14,200

Current Proposed Difference

Sales 240,000 280,800 40,800
Variable Cost (150,000) (195,000) (45,000)
Contribution Margin 90,000 85,800 (4,200)
Fixed Cost (60,000) (70,000) (10,000)
Operating Income 30,000 15,800 (14,200)

SP = 80 SP = 72 (80*0.90)
VC/u = 50 VC/u = 50
units = 3,000 units = 3,900 (3,000*1.3)
FC = additional 10,000

Note: If we are to observe the relationship of ratios, the following equation can be derived:
𝐏𝐑 = 𝐂𝐌𝐑 ∗ 𝐌𝐒𝐑

Let us try and use the figures in the problem above to study the equation:
Ratios Ratios
Sales ₱ 240,000 100.00% Sales ₱ 240,000 100.00%
Break-even
Variable cost 150,000 62.50% point 160,000 66.67%
Contribution margin 90,000 37.50% Margin of safety 80,000 33.33%
Fixed cost 60,000 25.00%
Operating income 30,000 12.50%
PR = CMR ∗ MSR
PR = 37.5% ∗ 33.33%
PR = 12.50%
 VI. Indifference Point
Indifference Point – the level of volume at which total costs, and hence profits, are the same
under both cost structures. If the company operated at that level of volume, the alternative used
would not matter because income would be the same in either way.

Illustration:
Model A: Variable costs, ₱8.00 per unit Model B: Variable costs, ₱6.40 per
unit
Annual fixed costs, ₱1,971,200 Annual fixed costs,
₱2,227,200
The selling price is ₱32 per unit for each unit, which is subject to a 5 percent sales commission.
(In the following requirements, ignore income taxes.)

Required: At what volume level will management be indifferent between the acquisition of Model
A and Model B?

Indifference point can be calculated as follows:

(SP − VCu1)x − FC1 = (SP − VCu2)x − FC2

Let us try to compute the value of ‘x’ on the problem above.

(SP − VCu1)x − FC1 = (SP − VCu2)x − FC2
(32 − 9.6)x − 1,971,200 = (32 − 8)x − 2,227,000
22.4x − 1,971,200 = 24x − 2,227,200
2,227,200 − 1,971,200 = 24x − 22.4x
256,000 = 1.6x
x = 160,000

Note: VCu for both alternative will have an additional ₱1.6 (32*5%) because of sales commission.
Legend:
SP = Selling Price x = number of units
VCu1 = Variable cost per unit at alternative 1 FC1 = Fixed cost at alternative 1
VCu2 = Variable cost per unit at alternative 2 FC2 = Fixed cost at alternative 2

VII. Break-even Point for Multiple Products

The determination of the break-even point in CVP analysis is easy once the variable and fixed
components of costs have been determined. A problem arises when the company sells more than
one type of product. Break-even analysis may be performed for each type of product if fixed costs
are determined separately for each product. However, fixed costs are normally incurred for all the
products hence a need to compute for the composite or multi-product break-even point.
In computing for the multi-product break-even point, same computation applies. However, the
CM/u and CMR must be converted to weighted average (waCM/u and waCMR) of the products.
FC FC
BEPu = and BEPp =
waCMu waCMR

waCMu and waCMR is computed as follows:

Product 1 Product 2 Product 3 Total
CMu ₱ xx ₱ xx ₱ xx
Mul: Sales Mix Ratio xx% xx% xx%
waCM/u ₱ xx + ₱ xx + ₱ xx = ₱ xx
 Product 1 Product 2 Product 3 Total
CM (CMu x sales mix) ₱ xx ₱ xx ₱ xx ₱ xx
Sales (SP x sales mix) ₱ xx ₱ xx ₱ xx ₱ xx
waCMR (total CM / Total Sales) xx%

Illustration:
Belle Company manufactures and sells three products: Products A, B, and C. The following data
has been provided by the company:
A B C
Selling price ₱100 ₱120 ₱50
Variable cost per unit 60 90 40
Contribution margin per unit 40 30 10
Contribution margin ratio 40% 25% 20%

The company sells 5 units of C for every unit of A and 2 units of B for every unit of A. The company
incurred in ₱120,000 total fixed costs.
Required: Compute the BEP in units and pesos of each product.

BEP in units
To compute for the BEP in units of each product, we have to determine the sales mix. Based on
the information provided in the problem, the sales mix would be [Link] for product A, B, and C
respectively. The sales mix ratio would be: Product A = 1/8 or 12.5%
Product B = 2/8 or 25%
Product C = 5/8 or 62.5%
Product 1 Product 2 Product 3 Total
CMu ₱ 40 ₱ 30 ₱ 10
Mul: Sales Mix Ratio 12.5% 25% 62.5%
waCM/u ₱5 + ₱ 7.5 + ₱ 6.25 = ₱ 18.75

120,000
BEPu =
18.75
BEPu = 6,400
The break-even point in units of each product is:
Product A (6,400 units x 12.5%) 800 units
Product B (6,400 units x 25%) 1,600 units
Product C (6,400 units x 62.5%) 4,000 units
Total 6,400 units
BEP in pesos
To compute for the BEP in pesos of each product, the weighted average contribution margin ratio
must first be determined. Sales mix is [Link].
Product 1 Product 2 Product 3 Total
CM (CMu x sales mix) ₱ 40 ₱ 60 ₱ 50 ₱ 150
Sales (SP x sales mix) ₱ 100 ₱ 240 ₱ 250 ₱ 590
waCMR (total CM / Total Sales) 150/590

120,000
BEPp =
150/590
𝐁𝐄𝐏𝐩 = 𝟒𝟕𝟐, 𝟎𝟎𝟎
The break-even point in pesos of each product is:
Product A (₱472,000 x 100/590) ₱ 80,000
Product B (₱472,000 x 240/590) ₱ 192,000
Product C (₱472,000 x 250/590) ₱ 200,000
Total ₱ 472,000

Alternatively, BEP in units of each product can be multiplied with their individual selling price to
compute the BEP in pesos of each product. BEP in pesos of each product will then be added to
compute the BEP in pesos of the company as a whole.
Product A 800 units x 100 = 80,000 units
Product B 1,600 units x 120 = 192,000 units
Product C 4,000 units x 50 = 200,000 units
Total 6,400 units 472,000 units
EXERCISES
E1:
Wow, Inc., in business since 2008, makes swimwear for professional athletes. Analysis of the
firm's financial records for the current year reveals the following:
Average swimsuit selling price ₱80
Variable swimsuit expenses: Annual fixed cost: 16,000
Direct material 28 30 Selling
₱16,000
Direct labor 12 Administrative 29,000
29,000
Variable overhead 8
The company's tax rate is 40 percent. Samantha Waters, company president, has asked you to
help her answer the following questions.
Required:
1. What is the break-even point (a) in number of swimsuits and (b) in pesos?
2. a. How much revenue must be generated to produce ₱45,000 of pre-tax earnings?
b. How many swimsuits would this level of revenue represent?
3. a. How much revenue must be generated to produce ₱45,000 of after-tax earnings?
b. How many swimsuits would this represent?
4. If the company wants the business to earn a pre-tax profit of 25 percent of revenues, how many
swimsuits must be sold?

E2:
Sivin Even manufactures diapers. The company incurs average variable costs of ₱60. Sivin
Even has annual fixed costs of ₱702,000. The company currently sells an average of 10,000 units
and has break-even point of 7,800 units.
Required. Calculate:
a. Selling Price b. BEP in pesos

E3:
Sivin Even manufactures diapers. The company incurs average variable costs of ₱60. Sivin
Even has annual fixed costs of ₱702,000. The company currently sells an average of 10,000 units
and has break-even point of ₱1,170,000 and 7,800 in units. Determine the net income if variable
costs per unit increase by ₱5 resulting to an increase in total sales by 10%.

E4:
Thompson Company is considering the development of two products: no. 65 or no. 66.
Manufacturing cost information follows.
No. 65 No. 66
Annual fixed costs ₱220,000 ₱340,000
Variable cost per unit 33 25
Regardless of which product is introduced, the anticipated selling price will be ₱50 and the
company will pay a 10% sales commission on gross dollar sales. Thompson will not carry an
inventory of these items. At what unit-volume level will the profit/loss on product no. 65 equal the
profit/loss on product no. 66?
E5
Determine the effect of the following changes to the break-even point when other things being
equal. Write I for increase, D for decrease, and N for No effect.
1. Increase in selling price 5. Decrease in variable cost per unit
2. Increase in variable cost per unit 6. Increase in profit
3. Decrease in fixed cost 7. Increase in fixed cost
4. Increase of units sold 8. Decrease in selling price

E6
Racine Tire Co. manufactures tires for all-terrain vehicles. The tires sell for P60 and variable cost
per tire is P30; monthly fixed cost is P450,000. The company current sells 20,000 tires monthly.
Requirement. Compute for:
1. Margin of safety in units and in pesos.
2. Degree of operating leverage
3. New net income if the company can increase sales volume by 15 percent above the current
level

E7
Alphabet Corporation sells three products: J, K, and L. The following information was taken
from a recent budget:
J K L
Unit sales 40,000 130,000 30,000
Selling price $60 $80 $75
Variable cost 40 65 50

Total fixed costs are anticipated to be $2,450,000.

Required:
A. Determine Alphabet's sales mix.
B. Determine the weighted-average contribution margin.
C. Calculate the number of units of J, K, and L that must be sold to break even.

E8
Boise Company manufactures and sells three products: Good, Better, and Best. Annual fixed
costs are $3,315,000, and data about the three products follow.

Good Better Best

Sales mix in units 30% 50% 20%
Selling price $250 $350 $500
Variable cost 100 150 250

Required:
A. Determine the weighted-average unit contribution margin.
B. Determine the break-even volume in units for each product.
C. Determine the total number of units that must be sold to obtain a profit for the
company of $234,000.