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II. Exercises Exercise 1 (Contribution Format Income Statement) Nat Company's most recent income statement is shown below: Total Per Unit Sales (30,000 units).. P150,000 PS Less variable expenses. 90,000 3 Contribution margin. 60,000 P2 Less fixed expenses 50,000 Net operating income P 10,000 Required: Prepare a new income statement under each of the following conditions (consider each case independently): 1. The sales volume increases by 15%. 2. The sales price decreases by 50 cents per unit, and the sales volume increases by 20%. 3. The selling price increases by 50 cents per unit, fixed expenses increase by P10,000, and the sales volume decreases by 5%. 4. Variable expenses increase by 20 cents per unit, the selling price increases by 12%, and the sales volume decreases by 10%. Delta Chi Sorority is planning its annual Riverboat Extravaganza. The Extravaganza committee has assembled the following expected costs for the 122 Chapter 4 Exercise 2 (Break-even Analysis and CVP Graphing) event: Dinner (per person)... Favors and program (per person) Band.... Tickets and advertising Riverboat rental... Floorshow and strolling entertainers. P 7 3 1,500 700 4,800 1,000 If the Required: The committee members would like to charge P30 per person for the evening's activities. 1. Compute the break-even point for the Extravaganza (in terms of the number of persons that must attend). last 2. Assume that only 250 persons attended the Extravaganza year. same number attends this year, what price per ticket must be charged to break even? 3. Refer to the original data (P30 ticket price per person). Prepare a CVP graph for the Extravaganza from a zero level of activity up to 600 tickets sold. Number of persons should be placed on the horizontal (X) axis, and pesos should be placed on the vertical (Y) axis. Exercise 3 (Break-even and Target Profit Analysis) Rojo Products sells camping equipment. One of the company's products, a camp lantern, sells for P900 per unit. Variable expenses are P630 per lantern, and fixed expenses associated with the lantern total P1,350,000 per month. Required: 1. Compute the company's break-even point in number of lanterns and in total sales pesos. 2. If the variable expenses per lantern increase as a percentage of the selling price, will it result in a higher or a lower break-even point? Why? (Assume that the fixed expenses remain unchanged.) Cost-Volume-Profit Relationships 123 3. At present, the company is selling 8,000 lanterns per month. The sales manager is convinced that a 10% reduction in the selling price will result in a 25% increase in the number of lanterns sold each month. Prepare two contribution income statements, one under present operating conditions, and one as operations would appear after the proposed changes. Show both total and per unit data on your statements. 4. Refer to the data in (3) above. How many lanterns would have to be sold at the new selling price to yield a minimum net operating income of P720,000 per month? Exercise 4 (Operating Leverage) Mega Doors Company sells prehung doors to home builders. The doors are sold for P600 each. Variable costs are P420 per door, and fixed costs total P4,500,000 per year. The company is currently selling 30,000 doors per year. Required: 1. Prepare a contribution format income statement for the company at the present level of sales and compute the degree of operating leverage. 2. Management is confident that the company can sell 37,500 doors next year (an increase of 7,500 doors, or 25%, over current sales). Compute the following: The expected percentage increase in net operating income for next year. b. The expected total peso net operating income for the next year. (Do not prepare an income statement; use the degree of operating leverage to compute your answer.) a. Exercise 6 (Break-even Analysis; Target Profit; Margin of Safety) Spuds Company sells a single product. The company's sales and expenses for a recent month follow: Total Per Unit Sales ........ P600,000 P40 Less variable expenses. 420,000 28 Contribution margin 180,000 P12 Less fixed expenses... 150,000 Net operating income. P 30,000 7. What is the monthly break-even point in units sold and in sales pesos? minimum 3. How many units would have to be sold each month to earn a 2. Without resorting to computations, what is the total contribution margin at target profit of P18,000? Use the contribution margin method. Verify your answer by preparing a contribution income statement at the target 124 Chapter 4 Required: the break-even point? level of sales. 4. Refer to the original data. Compute the company's margin of safety in both peso and percentage terms. 5. What is the company's CM ratio? If monthly sales increase by P80,000 and there is no change in fixed expenses, by how much would you expect monthly net operating income to increase? Exercise 7 (Changes in Variable Costs, Fixed Costs, Selling Price, and Volume) Data for Rebby and David Corporation are shown below: Per Unit Percent of Sales Selling price P75 100% Variable expenses 45 60% Contribution margin P30 40% Fixed expenses are P75,000 per month and the company is selling 3,000 units per month. Required: 1. The marketing manager argues that an P8,000 increase in the monthly advertising budget would increase monthly sales by P15,000. Should the advertising budget be increased? 2. Refer to the original data. Management is considering using higher- quality components that would increase the variable cost by P3 per unit. The marketing manager believes the higher-quality product would increase sales by 15% per month. Should the higher-quality components. Exercise 9 (Degree of Operating Leverage) Franda Company installs home theater systems. The company's most recent lume-Profit Relationships 125 monthly contribution format income statement appears below: Amount Selling price Percent of Sales Variable expenses P120,000 100% Contribution margin 84,000 70% Fixed expenses 36,000 30% 24,000 Net operating income P 12.000 Required: 1. Compute the company's degree of operating leverage. 2. Using the degree of operating leverage, estimate the impact on net operating income of a 10% increase in sales. 3. Verify your estimate from part (2) above by constructing a new contribution format income statement for the company assuming a 10% increase in sales. Exercise 11 (Break-Even and Target Profit Analysis) Rainee Sales Company is the exclusive distributor for a revolutionary bookbag. The product sells for P60 per unit and has a CM ratio of 40%. The company's fixed expenses are P360,000 per year. Required: 1. What are the variable expenses per unit? 2. Using the equation method: a. What is the break-even point in units and in sales pesos? b. What sales level in units and in sales pesos is required to earn an annual profit of P90,000? c. Assume that through negotiation with the manufacturer the Rainee Sales Company is able to reduce its variable expenses by P3 per unit. What is the company's new break-even point in units and in sales pesos? 3. Repeat (2) above using the contribution margin method