CONTRIBUTION APPROACH

A. 3 Ways of Conducting Cost-Volume-Profit Analysis or Breakeven

Analysis
1. Contribution Approach
2. Algebraic or Formula Approach
3. Graphical Approach

.
Req.:
Assume the following: 1. Compute the profit.
2. Prepare the income statement using:
Creative Bottles Company produces high-quality bottles that are sold P8 per bottle.
Variable and fixed costs are as follows: a. Functional form (traditional)
b. Contribution margin form
Variable Cost Fixed Costs per Month
Manufacturing: Factory overhead P5,000
Direct materials P1.00 Selling & Administrative 10,000
Direct labor 0.50 Total P15,000
Factory overhead 0.50 P2.00 =======
Selling & Administrative 1.00
Total P3.00
======

C.
Condensed contribution income statement
% of
Total Per Unit Sales
Sales (4,000 units) 32,000 8 100.0%
Variable costs 12,000 3 37.5%
 Contribution margin 20,000 5 62.5%
Fixed costs 15,000
Net income 5,000
Contribution
Margin Ratio
or CMR

Contribution
Margin Per
Unit or CMU

D. CASE: Hansen Manufacturing Company. At a monthly sales volume of P20,000, Solution:

Hansen incurs variable costs of P8,000 and fixed costs of P9,000. Selling price is P5 per
unit. S (U) 1 unit %
Req.:
1. Variable cost ratio S (P) 5 100%
2. Contribution margin VC 2 40%
3. Contribution margin ratio CM 3 60%
3. Monthly break-even sales in pesos.
4. Monthy break-even sales in units FC
NI

E. TRY THESE!

CASE: Quiano Manufacturing Company sells its product at P12 per unit. It incurs a Solution:
variable cost of P5 per unit and fixed costs of P50,000.
Req.: Using the contribution approach, determine the following: #1&2
1. Variable cost ratio S (U) 1 unit %
2. Contribution margin ratio
3. Break-even sales (BES) in pesos S (P) 12 100.00%
4. Break-even sales in units VC 5 41.67%
5. Sales in P and in U if the target net profit is P120,000. CM 7 58.33%
6. Total variable costs if there were 8,000 units sold. FC
7. Unit contribution margin and the net profit if the Quiano sold one unit more
than the break-even. NI
8. BES in P if the variable cost per unit decreased by 20%.
9. Net profit if Quiano sold 10,000 units after increasing the variable cost to P6
per unit.
10. Using the original BES as basis, determine the margin of safety if target sales is
P90,000. (Margin of safety is the difference between the target or actual sales
and the BES.)
11. Using the original BES as basis, determine the net income after tax assuming a
tax rate of 20% and the contribution margin amounted to P75,000.
 6. Total variable costs if there were 8,000 units sold.
7. Unit contribution margin and the net profit if the Quiano sold one unit more
than the break-even.
8. BES in P if the variable cost per unit decreased by 20%.
9. Net profit if Quiano sold 10,000 units after increasing the variable cost to P6
per unit.
10. Using the original BES as basis, determine the margin of safety if target sales is
P90,000. (Margin of safety is the difference between the target or actual sales
and the BES.)
11. Using the original BES as basis, determine the net income after tax assuming a
tax rate of 20% and the contribution margin amounted to P75,000.
12. Using the original BES as basis, determine the desired sales in P and U if the
targetted after-tax profit is P50,000. Assume a tax rate of 25%.

F. SALES MIX

Notes:
* Sales mix is the relative proportion in which a company’s products are sold.
* Different products have different selling prices, cost structures, and contribution
margins.

CASE: Racing Bycylce Company. Let’s assume that Racing Bicycle Company sells bikes
and carts and that the sales mix between the two products remains steady. The
following information are given:

Bicycles Cart Total

S 250,000 100% 300,000 100% 550,000 100.0%
VC 150,000 60% 135,000 45% 285,000 51.8%
CM 100,000 40% 165,000 55% 265,000 48.2%
FC 170,000
NI 95,000

Sales Mix 250,000 45% 300,000 55% 550,000 100%

BES
 Bicycles Cart Total
S 160,377 100% 192,453 100% 352,830 100.0%
VC 96,226 60% 86,604 45% 182,830 51.8%
CM 64,151 40% 105,849 55% 170,000 48.2%
FC 170,000
NI -

Sales Mix 160,377 45% 192,453 55% 352,830 100%

G. TRY THIS!
140
CASE: Brandy Company. Let’s assume that Brandy Company sproduces and sells
bDeluxe and Regular brands of wine. The company 's sales mix for these wine is 1:1
between the two products remains steady. The following information are given:

Deluxe Regular Average

Unit selling price 12 4 8
Unit variable costs 3 3 3
Unit contribution margin 9 1 5

Fixed costs per month 15,000

Req.:
1. Compute the required sale in P and in U if the desired profit is P5,000.
2. BES in P and in U.
3. BES in P and in U if the sales mix chagned from 1:1 to 1:3.
 4,000 3,000 1. Variable cost ratio = 40%
20,000 15,000 2. Contribution margin/unit = P 3.00
3. Contribution margin ratio = 60%
8,000 6,000 3. Monthly break-even sales in pesos =
12,000 9,000 P15,000
9,000 9,000 4. Monthy break-even sales in units = 3,000
units
3,000 0

#3&4 #5 #6 #7 #8 #9 #11 #12

7,143 24,286 8,000 7,144 6,250 10,000 S(U)
85,714 291,429 85,726 12 100% 75,000 12 100% 120,000 S(P) 100.00% 128,571
40,000 35,719 4 33% 25,000 6 50% 60,000 VC 41.67%
50,000 170,000 50,007 8 67% 50,000 6 50% 60,000 CM 58.33% 75,000
50,000 50,000 50,000 50,000 50,000 FC 50,000
- 120,000 7 - 10,000 NI1 100% 25,000 100%
TAX 20% 5,000 25%
NI2 80% 20,000 75%
 #10
Targetted sales 90,000
BES 85,714
Margin of Safety 4,286
#12
16,667
200,000

116,667
50,000
66,667
16,667
50,000