Question

1. Sole Company manufactures running shoes. The selling price per pair of shoes (one unit) averages Php80 and variable costs per pair are Php47.50. The sales volume of Php776,000 produces Php100,750 of net income before taxes.

             

           Required:

     a.   Compute total fixed costs.

     b.   Compute total variable costs.

     c.   Compute the break‑even point in units.

     d.   Compute the quantity of units above breakeven to reach targeted net income before taxes.

Answer 1

Answer:

Given data:

Selling price per unit	Php80
Variable cost per unit	Php47.5
Sales volume	Php776,000
Net income before taxes	Php100,750

Number of units sold = Sales volume / selling price per unit = 776,000 / 80 = 9,700 units

a. Calculation of total fixed costs

	Workings	Amount(Php)
Sales	(given in the question)	776,000
Less: total variable costs	Total variable costs = Number of units sold*variable cost per unit =9,700*47.5	(460,750)
Contribution margin	Sales - variable costs	315,250
Less total fixed cost		?
Net income before taxes	Contribution margin - total fixed costs (given in the question)	100,750

Net income before taxes = contribution margin - total fixed costs

= 100,750 = 315,250 - total fixed costs

so, total fixed costs = contribution margin - net income = 315,250 - 100,750 = Php214,500

b. Total Variable costs

Total variable costs = number of units sold * variable cost per unit

= 97,00*47.5 = Php460,750

c. Break-even point in unit

Break-even point in units = total fixed costs / contribution margin per unit

Total fixed cost is already calculated = Php214,500

Contribution margin per unit = selling price per unit - variable cost per unit

= 80 - 47.5 = Php32.5

Now, break-even point = 214,500 / 32.5 = 6,600 units

d.The quantity of units above break-even to achieve target net income before taxes

current net income before taxes = Php100,750

Number of units sold to get this income(already calculated) = 9,700 units

Break - even point(units) = 6,600 units

So, quantity of units above break-even to reach this income = Number of units sold - break even units

= 9,700 - 6,600 = 3,100 units(this is also called margin of safety in units).