EXERCISE 4 ONLY

Exercise 3 (Break-even and Target Profit Analysts) 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.) 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 482 Chapter 13 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: a. The expected percentage increase in net operating income for next year. % A in Profit = /. A in Sales * OLF b. The expected total peso not operating income for the next year. (Do not prepare an income statement; use the degree of operating