Cost-Volume-Profit-Analysis

(with solutions and explanation)

Problem #1 (Basics of CVP Analysis; Cost Structure)

Molofox, Inc., produces memory enhancements kits for fax machines. Sales have been very erratic, with some months showing a profit and some months showing a loss. The company's income statement for the most recent month is given below:

Sales (13,500 units at P20 per unit) P270,000

Less: Variable Expenses 189,000

Contribution margin P 81,000

Less fixed expenses 90,000

Net Operating loss P (9,000)

Required:

1. Compute the company's CM ratio and it's break-even point in both units and pesos.
2. The sales manager feels that an P8,000 increase in the monthly advertising budget, combined with an intensified effort by the sales stuff will result in a P70,000 increase in monthly sales. If the sales manager is right, what will be the effect in the company's monthly net operating income or loss? ( Use the incremental approach in preparing your answer.)
3. The president is convinced that a 10% reduction in the selling price combined with an increase of P35,000 in the monthly advertising budget, will cause unit sales to double. What will the new income statement look like if these changes are adopted?
4. Refer to the original data. The company's advertising agency thinks that a new package would help sales. The new packaged being proposed would increase packaging costs by P0.60 per unit. Assuming no other changes, how many units would have to be sold each month to earn a profit of P4,500?
5. Refer to the original data. By automating certain operations, the company could slash it's variable expenses in half . However, fixed costs would increase by P118,000 per month.

a. Compute the new CM ratio and the new break-even point in both units and pesos.

b. Assume that the company expects to sell 20,000 units next month. (Prepare two income statements, one assuming that operations are not automated and one assuming that they are.)

c. Would you recommend that the company automate it's operations? Explain.