Spuds Company sells a single product. The company's sales and expenses for a recent month follow:

Total Per Unit

Sales P600,000 P 40

Less variable expenses 420,000 28

Contribution margin 180,000 P 12

Less fixed expenses 150,000

Net operating income P 30,000

Required:

1. What is the monthly break-even point in units sold and in sales pesos?
2. Without resorting to computations, what is the total contribution margin at the break-even point?
3. How many units would have to be sold each month to earn a minimum target profit of P18,000? Use the contribution margin method. Verify your answer by preparing a contribution income statement at the target 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?

B. Problem 1 (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:

a. 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.)

C. Problem 2 (Degree of Operating Leverage)

Franda Company installs home theater systems. The company's most recent monthly contribution format income statement appears below:

Amount Percent of Sales

Selling price P 120,000 100%

Variable expenses 84,000 70%

Contribution margin 36,000 30%

Fixed expenses 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.

Answer rating: 100% (QA)

Here are the calculations for the problems 1A Breakeven point in units Fixed expenses Contribution margin per unit P150000 P12 12500 units Breakeven p... View the full answer