The document provides an income statement and cost analysis for the Terri and Jerry partnership for 2019. It also presents two alternative plans - Terri's plan to increase quality and price, and Jerry's plan to increase advertising and decrease price. Both plans aim to increase sales volume and profits. Computations show that Terri's plan results in higher net income of P86,000 and a lower break-even point, so her plan should be accepted. Non-financial factors like each partner's needs and relationship should also be considered.
The document provides an income statement and cost analysis for the Terri and Jerry partnership for 2019. It also presents two alternative plans - Terri's plan to increase quality and price, and Jerry's plan to increase advertising and decrease price. Both plans aim to increase sales volume and profits. Computations show that Terri's plan results in higher net income of P86,000 and a lower break-even point, so her plan should be accepted. Non-financial factors like each partner's needs and relationship should also be considered.
The document provides an income statement and cost analysis for the Terri and Jerry partnership for 2019. It also presents two alternative plans - Terri's plan to increase quality and price, and Jerry's plan to increase advertising and decrease price. Both plans aim to increase sales volume and profits. Computations show that Terri's plan results in higher net income of P86,000 and a lower break-even point, so her plan should be accepted. Non-financial factors like each partner's needs and relationship should also be considered.
The document provides an income statement and cost analysis for the Terri and Jerry partnership for 2019. It also presents two alternative plans - Terri's plan to increase quality and price, and Jerry's plan to increase advertising and decrease price. Both plans aim to increase sales volume and profits. Computations show that Terri's plan results in higher net income of P86,000 and a lower break-even point, so her plan should be accepted. Non-financial factors like each partner's needs and relationship should also be considered.
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Managerial Analysis: CVP 01
The condensed income statement for the Terri and Jerry partnership for 2011 is as follows.
TERRI AND JERRY COMPANY
Income Statement For the Year Ended December 31, 2019
Sales (200,000 units) P1,200,000
Cost of goods sold 800,000 Gross profit 400,000 Operating expenses Selling P280,000 Administrative 160,000 440,000 Net loss (P 40,000)
A cost behavior analysis indicates that 75% of the cost of goods sold are variable, 50% of the selling expenses are variable, and 25% of the administrative expenses are variable.
Instructions: Round to nearest unit, pesos, and percentage, where necessary. Use the CVP income statement format in computing profits. a. Compute the break-even point in total sales pesos and in units for 2019. b. Terri has proposed a plan to get the partnership "out of the red" and improve its profitability. She feels that the quality of the product could be substantially improved by spending P0.25 more per unit on better raw materials. The selling price per unit could be increased to only P6.25 because of competitive pressures. Terri estimates that sales volume will increase by 30%. What effect would Terri's plan have on the profits and the break-even point in pesos of the partnership? (Round the contribution margin ratio to two decimal places.) c. Jerry was a marketing major in college. He believes that sales volume can be increased only by intensive advertising and promotional campaigns. He therefore proposed the following plan as an alternative to Terri's. (1) Increase variable selling expenses to P0.79 per unit, (2) lower the selling price per unit by P0.30, and (3) increase fixed selling expenses by P35,000. Jerry quoted an old marketing research report that said that sales volume would increase by 60% if these changes were made. What effect would Jerry's plan have on the profits and the break-even point in pesos of the partnership? d. Which plan should be accepted based on the computations? Explain your answer. e. What other considerations should you consider aside from the computations? Explain why.
Cost of goods sold (P600,000 ÷ 200,000) P3.00 Selling expenses (P140,000 ÷ 200,000) 0.70 Administrative expenses (P40,000 ÷ 200,000) 0.20 Total P3.90 Fixed Costs are: Cost of goods sold (P800,000 X 0.25) P200,000 Selling expenses (P280,000 X 0.50) 140,000 Administrative expenses (P160.000 X 0.75) 120,000 P460,000
The break-even points are:
BEP (Dollars/ Peso) X = (P3.90 ÷ P6.00) X + P460,000 X = 0.65X + P460,000 0.35X = P460,000 X = P1,314,286 (rounded)
BEP (Units) P6.00X = P3.90X + P460,000 P2.10X = P460,000 X = 219,048 units (rounded)
(b) Variable unit cost of goods sold = P3.25
(P600,000 ÷ 200,000 = P3.00; P3.00 + P0.25) Sales volume = 260,000 units (200,000 X 130%) Total sales = 260,000 X P6.25 = P1,625,000
Net income computation:
Sales P1,625,000 Variable expenses Cost of goods sold P845,000 (260,000 X $3.25) Selling expenses 182,000 (260,000 X $.70) Administrative expenses (260,000 X $.20) 52,000 Total variable expenses 1,079,000 Contribution margin 546,000 Fixed expenses Cost of goods sold P200,000 Selling expenses 140,000 Administrative expenses 120,000 Total fixed expenses 460,000 Net income P 86,000
X = (P1,079,000 ÷ P1,625,000)X + P460,000
X = 0.66X + P460,000 .34X = P460,000 X = P1,352,941 (rounded)
Profits and the break-even point would both increase.
(c) Sales [320,000 (1) X (P6.00 – $.30)] P1,824,000
Variable expenses Cost of goods sold P960,000 (320,000 X $3.00) Selling expenses (320,000 X $.79) 252,800 Administrative expenses (320,000 X $.20) 64,000 Total variable expenses 1,276,800 Contribution margin 547,200 Fixed expenses Cost of goods sold P200,000 Selling expenses 175,000 ($140,000 + $35,000) Administrative expenses 120,000 Total fixed expenses 495,000 Net income P 52,200
(1) Sales volume = 200,000 X 160% = 320,000
X = (P1,276,800 ÷ P1,824,000)X + P495,000
X = 0.70X + P495,000 .30X = P495,000 X = P1,650,000
Profits and the break-even point would both increase.
(d) Terri’s plan should be accepted. It produces a higher net income and a lower break-even point than Jerry’s plan. (e) Possible computations for the partnership between Terri and Jerry: Net Profit Gross Income Operating Income
