COST ACCOUNTING AND CONTROL

SOLUTION SET FOR MIDTERM QUIZ 2

 TEST A
JAMES manufacture and sells cellular phone earphones. The companby's contribution margin format
income statement is given below:

Sales (20,000 units) 1,200,000

Variable expenses (900,000)
Contribution margin 300,000
Fixed costs (240,000)
Net operating income 60,000

1) REQUIRED: Contribution margin ratio (CMR), Variable expense ratio

 To compute for the CMR, divide the contribution margin by the total sales:
= 300,000 / 1,200,000
= .25 or 25%
 Meanwhile, to compute for the variable expense ratio, divide the variable expenses by
the total sales:
= 900,000 / 1,200,000
= .75 or 75%
OR this could also be solved simply by 1 - CMR
= 1 - 0.25
= .75 or 75%
2) REQUIRED: Break-even point (BEP) in units, BEP in pesos
 To solve for the BEP in units, use the formula: TOTAL FIXED COST / CONTRIBUTION
MARGIN PER UNIT (or CMU)
 However, the unit contribution margin must first be solved by:
TOTAL CONTRIBUTION MARGIN / SALES IN UNITS
CMU = 300,000 / 20,000
CMU = 15
 Now, solve for the BEP in units using the formula:
TOTAL FIXED COST / CMU
BEPU = 240,000 / 15
BEPU = 16,000 units
 To solve for the BEP in pesos, use the formula: TOTAL FIXED COST / CONTRIBUTION
MARGIN RATIO (or CMR).
 Using the obtained CMR from Problem Number 1, we can solve the BEP in pesos
 using the formula:
TOTAL FIXED COST / CMR
BEPP = 240,000 / 0.25
BEPP = 960,000 Php
3) REQUIRED: If sales increase by 400,000, how much willl the company's net operating
income increase:
 Since sales increased by 400,000, then the total sales will amount to 1,600,000. From this,
it can be implied that the total variable expense will vary according to its variable expense
ratio of 75%, amounting to variable expenses of 1,200,000.
Sales 1,600,000
Variable expenses (1,200,000)
Contriution margin 400,000
Fixed costs (240,000)
Net operating income 160,000

 From 60,000 to 160,000, therefore, the net operating income of the company increased
by 100,000.
4) REQUIRED: Number of units to be sold if target profit is 90,000
 Using the CMU obtained from Problem Number 2, we can solve the the number of units
to be sold given the target profit:
= (TOTAL FIXED COST + TARGET PROFIT) / CMU
= (240,000 + 90,000) / 15
= 330,000 / 15
= 22,000 units
4) REQUIRED: Margin of safety in peso (MOS), MOS in percentage form (MOSR)
 To compute for the MOS, use the formula: ACTUAL SALES - BREAK EVEN SALES.
 The actual sales in pesos given is 1,200,000, and the break even sales obtained
from Problem Number 2 is 960,000.
MOS = 1,200,000 - 960,000
MOS = 240,000
 To compute for the MOSR, use the formula (ACTUAL SALES - BREAK EVEN SALES) / ACTUAL
SALES, or simply: MOS / ACTUAL SALES.
MOSR = 240,000 / 1,200,000
MOSR = 0.2 or 20%
4) REQUIRED: Degree of operating leverage (DOL) using present sales
 To compute for the DOL for single year, use the formula: TOTAL CONTRIBUTION MARGIN
/ PROFIT.
  Substituting the given values on the formula:
DOL = 300,000 / 60,000
DOL = 5
4) REQUIRED: Percentage increase in net income given that the sales will increase 8%
 At times, the DOL is used to easily predict the net income of a company given its target
sales, or vice versa, with the formula:
(% Change in SALES IN PESOS)(DOL) = % Change in NET INCOME
 Since sales increased by 8%, and the DOL obtained from Problem Number 6 is 5:
= (0.08)(5)
= 0.4 or 40%
 Hence, the net income will increase by 40% if the sales increased by 8%.
8) REQUIRED: Income statement based on Problem Number 7
 Since sales increased by 8%, then the total sales will amount to 1,296,000. From this, it
can be implied that the total variable expense will vary according to its variable expense
ratio of 75%, amounting to variable expenses of 972,000.
Sales 1,296,000
Variable expenses (972,000)
Contriution margin 324,000
Fixed costs (240,000)
Net operating income 84,000
 Therefore, from the original 60,000 net income to 84,000, it can be implied that it
increased by 40%.
9) REQUIRED: Income statement showing the following changes:
 Variable costs increase by Php 3 per unit
 Decrease of Php 30,000 from salaries (fixed costs)
 Annual sales will increase by 20%
 One easy way to solve this is that since the variable cost per unit increased by Php 3, it is
implied that the variable expense ratio, as well as the CMR, will vary.
 The original problem is as follows, showing also the SELLING PRICE, VARIABLE
EXPENSE, and CONTRIBUTION MARGIN per unit:
PER UNIT
Sales (20,000 units) 1,200,000 60
Variable expenses (900,000) 45
Contribution margin 300,000 15
Fixed costs (240,000)
Net operating income 60,000
 Since sales increased by 20%, then the total sales will amount to 1,440,000, implying that
there were a total of 24,000 units sold (1,440,000 / 60). Also, since variable costs per unit
(VCU) increased by Php 3, we multiply the updated VCU — Php 48, that is — to the
 number of units sold to get the total variable expenses, amounting to variable expenses
of 1,152,000.
 With regards to the elimination of a salary by Php 30,000, we decrease this amount to
the company's fixed costs, from 240,000 to 210,000.
Sales 1,440,000
Variable expenses (1,152,000)
Contriution margin 288,000
Fixed costs (210,000)
Net operating income 78,000
10) REQUIRED: BEP in units and pesos based on Problem Number 9
 To solve for the BEP in units, use the formula: TOTAL FIXED COST / CONTRIBUTION
MARGIN PER UNIT (or CMU)
 However, the unit contribution margin must first be solved. Since the VCU was
already solved on Problem Number 9, which is at Php 48, and the selling price
per unit (SPU) remains unchanged at Php 60:
CMU = SPU - VCU
CMU = 60 - 48
CMU = 12
 Now, solve for the BEP in units using the formula:
TOTAL FIXED COST / CMU
BEPU = 210,000 / 12
BEPU = 17,500 units
 To solve for the BEP in pesos, use the formula: TOTAL FIXED COST / CONTRIBUTION
MARGIN RATIO (or CMR).
 First, we solve for the CMR using the CMU we have solved recently in this
problem, which is Php 12:
CMR = CMU / SPU
CMR = 12 / 60
CMR = 0.2 or 20%
 Using the obtained CMR, we can solve the BEP in pesos using the formula:
TOTAL FIXED COST / CMR
BEPP = 210,000 / 0.20
BEPP = 1,050,000 Php
 ● TEST B
Albert Rivera sells a product for Php 16 and has a variable cost per unit of Php 12. Fixed costs are Php
120,000.
1) REQUIRED: BEP in pesos
 To solve for the BEP in pesos, use the formula: TOTAL FIXED COST / CONTRIBUTION
MARGIN RATIO (or CMR).
Solving for the CMR using the formula: (SPU - VCU) / SPU
= (16 - 12) / 16
= 4 / 16
= 0.25 or 25%
 Using the obtained CMR, we can solve the BEP in pesos using the formula:
TOTAL FIXED COST / CMR
BEPP = 120,000 / 0.25
BEPP = 480,000 Php
2) REQUIRED: Number of units to be sold to earn a target profit of Php 30,000.
 Since the CMU is set at Php 4, which is 16 - 12, we can solve the the number of units to
be sold given the target profit:
= (TOTAL FIXED COST + TARGET PROFIT) / CMU
= (120,000 + 30,000) / 4
= 150,000 / 4
= 37,500 units
3) REQUIRED: Selling price to charge to earn a target profit of Php 36,000 and sell 32,000 units
 To solve for the selling price to set in order to earn a target profit, given the number of
units the company plans to sell, we use the formula:
(SPU)(UNITS TO BE SOLD) - (VCU)(UNITS TO BE SOLD) - FIXED COSTS = PROFIT
 Since the SPU is unknown, we substitute the given values to the formula:
(SPU)(30,000) - (12)(30,000) - 120,000 = 36,000
(SPU)(30,000) - 360,000 - 120,000 = 36,000
(SPU)(30,000) - 480,000 = 36,000
(SPU)(30,000) = 516,000
SPU = 516,000 / 30,000
SPU = 17.20 Php
4) REQUIRED: Number of units to be sold to earn a 10% return on sales with its selling price still at
Php 16
 To solve for the number of units to be sold, given a percentage return on sales with its
 selling price set at Php 16, we use the formula:
TOTAL FIXED COST / [ CMU - (PERCENTAGE RETURN ON SALES)(SPU) ]
= 120,000 / [ 4 - (0.10)(16) ]
= 120,000 / [ 4 - 1.6 ]
= 120,000 / 2.4
= 50,000 units

● TEST C
Jeser Javier Company sells a product for Php 20, variable costs are Php 8 per unit, and fixed costs are
Php 32,000.
1) REQUIRED: BEP in units
 To solve for the BEP in units, use the formula:
TOTAL FIXED COST / CONTRIBUTION MARGIN PER UNIT (or CMU)
 Since the CMU is set at Php 12, which is 20 - 8:
BEPU = 32,000 / 12
BEPU = 2,666.67 ≈ 2,667 units
2) REQUIRED: Selling price to charge to earn a target profit of Php 8,000 and sell 1,600 units
 To solve for the selling price to set in order to earn a target profit, given the number of
units the company plans to sell, we use the formula:
(SPU)(UNITS TO BE SOLD) - (VCU)(UNITS TO BE SOLD) - FIXED COSTS = PROFIT
 Since the SPU is unknown, we substitute the given values to the formula:
(SPU)(1,600) - (8)(1,600) - 32,000 = 8,000
(SPU)(1,600) - 12,800 - 32,000 = 8,000
(SPU)(1,600) - 44,800 = 8,000
(SPU)(1,600) = 52,800
SPU = 52,800 / 1,600
SPU = 33 Php

● TEST D
Bee Jay De Leon’s product sells for Php 32 and has a variable cost per unit of Php 20. Fixed costs are
Php 120,000. The effective tax rate is 40%.
1) REQUIRED: BEP in units
 To solve for the BEP in units, use the formula:
TOTAL FIXED COST / CONTRIBUTION MARGIN PER UNIT (or CMU)
 Since the CMU is set at Php 12, which is 32 - 20:
BEPU = 120,000 / 12
 BEPU = 10,000 units
2) REQUIRED: Number of units to be sold to earn an after-tax target profit of Php 30,000
 First, we need to solve for the before-tax target profit:
BEFORE-TAX PROFIT - (BEFORE-TAX PROFIT)(TAX RATE) = AFTER TAX-PROFIT
or (BEFORE-TAX PROFIT)(1 - TAX RATE) = AFTER-TAX PROFIT
 Therefore:
(BEFORE-TAX PROFIT)(1 - 0.40) = 30,000
(BEFORE-TAX PROFIT)(0.60) = 30,000
BEFORE-TAX PROFIT = 30,000 / 0.60
BEFORE TAX PROFIT = 50,000
 Since the CMU is set at Php 12, which is 32 - 20, we can solve the the number of units to
be sold, given the obtained before-tax target profit:
= (TOTAL FIXED COST + TARGET PROFIT) / CMU
= (120,000 + 50,000) / 12
= 170,000 / 12
= 14,166.67 ≈ 14,167 units
3) REQUIRED: Selling price to charge to earn an after-tax target profit of Php 36,000 and sell 20,000
units
 First, we need to solve for the before-tax target profit:
BEFORE-TAX PROFIT - (BEFORE-TAX PROFIT)(TAX RATE) = AFTER TAX-PROFIT
or (BEFORE-TAX PROFIT)(1 - TAX RATE) = AFTER-TAX PROFIT
 Therefore:
(BEFORE-TAX PROFIT)(1 - 0.40) = 36,000
(BEFORE-TAX PROFIT)(0.60) = 36,000
BEFORE-TAX PROFIT = 36,000 / 0.60
BEFORE TAX PROFIT = 60,000
 To solve for the selling price to set in order to earn a target profit, given the number of
units the company plans to sell, we use the formula:
(SPU)(UNITS TO BE SOLD) - (VCU)(UNITS TO BE SOLD) - FIXED COSTS = PROFIT
 Since the SPU is unknown, we substitute the given values to the formula:
(SPU)(20,000) - (20)(20,000) - 120,000 = 60,000
(SPU)(20,000) - 400,000 - 120,000 = 60,000
(SPU)(20,000) - 520,000 = 60,000
(SPU)(20,000) = 580,000
SPU = 580,000 / 20,000
SPU = 29 Php