After reviewing its cost structure (variable costs of P6.00 per unit and monthly fixed costs of P120,000) potential market, Fore Company established what it considered to be a reasonable selling price. The company expected to sell 50,000 units per month and planned its monthly results as follows:
Sales P500,000
Variable costs 300,000
Contribution Margin 200,000
Fixed costs 120,000
Income before taxes 80,000
Income taxes (40%) 32,000
Net income 48,000
Compute for the following:
1. What is the contribution margin ratio?
2. What is the breakeven point in units?
3. All other factors remain unchanged, how much increase in profit before tax would Fore expect if the number of units sold is 55,000?
4. If the company determined that a particular advertising campaign had a high probability of increasing sales by 3,000 units, how much could it pay for such campaign without reducing its planned profits?
5. A plan includes an increase in advertising cost of P20,000. What is the minimum increase in unit sales to compensate for the increase in advertising cost?
6. If the company wants a P60,000 before-tax profit, how many units must it sell?
7. If the company wants a 10% before tax return on sales, what level of sales peso does it need?
8. If the company wants a P45,000 after-tax profit, how many units must it sell?
9. If the wants an after return on sales of 9%, how many units must it sell?
10. If the company wants an after-tax profit of P45,000 on its expected sales volume of 50,000 units, what price must it charge?
11. If the company wants a before-tax return on sales of 16% on its expected sales volume of 50,000 units, what price must Fore charge?
12. The company is considering offering its sales people a 5% commission on sales. What would be the total peso sales required in order to implement the commission plan and still earn the planned pre-tax income of P80,000?
13. What is the margin of safety in peso sales and the margin of safety ratio at the expected sales of 50,000 units?
14. Assuming that the cost structure remains unchanged but the volume of sales is expected to increase to 60,000 units, what is the new margin of safety ratio and the amount of profit?
15. What is the degree of operating leverage based on the expected level of sales?
16. Assuming that the cost structure and the selling price remain constant, what is the percentage of change in profit and the new expected profit if the company can sell 55,000 units?
17. The operations manager believes variable cost will increase to P8.25 per unit. The sales manager believes increasing selling price may not be a good decision. What is the new breakeven point in units?
18. The operations manager believes variable cost will increase to P8.25 per unit. The sales manager believes that the selling price can be increased. What is the new selling price that will give the same contribution margin?