Part II. Long Problems

Problem 1 - C-V-P Analysis: Single Product (35 points)

Careless Corp. has collected the following information after its first year of

operation:

Net sales (100,000 units), P1.6 million; Direct materials, P511,000; Direct

labor, P285,000; Manufacturing overhead, P360,000 (70% variable, 30% fixed);

Selling expenses, P240,000 (40% variable, 60% fixed); Admin expenses,

P280,000 (20% variable, 80% fixed). Management has projected that unit sales

will increase by 20% next year.

Required: show proofs if necessary.

1. Using contribution margin format, prepare income statements of the

current year and the projected year.

2. The company has a target profit of P120,000. What is the required peso

sales to meet its target?

3. If the company wants a target income of 12.5% of sales, how many number

of units should be sold? What is the margin of safety?

4. If management set the increase in sales next year by 25% instead of 20%,

what is the percentage increase in profit?

5. If the company is considering a purchase of equipment that would reduce

its direct labor cost by P104,000 and would change its manufacturing

overhead cost to 30% variable and 70% fixed (assume the same amount

of manufacturing overhead cost given above). It also considering

switching to a pure commission basis for its sales staff. This would change

selling expenses to 80% variable and 20% fixed (assume same amount of

selling expenses as above). What is the new break-even point in peso

sales and in units?