Question

In: Accounting

XYZ Inc. sell Product Y at P5 per unit. The variable costs ofmaking and selling...

XYZ Inc. sell Product Y at P5 per unit. The variable costs of making and selling each unit is P3 while the total fixed cost is P2,000. The company wants to earn a profit of P3,000. The company is subject to 40% tax rate.

  1. What is the break-even point in units and pesos?

  2. What should be the level of sales in units and pesos to earn the desired profit if it is before tax?

  3. What should be the level of sales in units and pesos to earn the desired profit if it is after tax?

  4. What is the Margin of Safety for the target sales computed in requirement 3 in units, pesos, and percentage?

Solutions

Expert Solution

Data
Selling price per unit $        5.00
Variable cost per unit $        3.00
Contribution Margin per unit $        2.00
Contribution Margin % 40% ($ 2 / $ 5)
Fixed cost $ 2,000.00
Break even point
In units = Fixed cost / Contribution Margin per unit
= $ 2000 / $ 2
= 1000 units
In pesos = Fixed cost / Contribution Margin %
= $ 2000 / 40%
= $ 5,000.00
Level of sales to earn $ 5000 profit before tax
In units = (Fixed Cost + Desired profit) / Cont. Margin p.u
= ($ 2000 + $ 5000) / $ 2
= 3500 units
In pesos = 3500 units x $ 5
= $ 17,500.00
Level of sales to earn $ 5000 profit after tax
Tax rate is 40%
Therefore, profit before tax shall be $ 8,333.33 ($ 5000 / 60%)
In units = (Fixed Cost + Desired profit) / Cont. Margin p.u
= ($ 2000 + $ 8333.33) / $ 2
= 5167 units
In pesos = 5167 units x $ 5
= $ 25,833.33
Margin of safety
In units = Actual sales - Break even sales
= 5167 units - 1000 units
= 4167 units 20833.33
In pesos = $ 25833.33 - $ 5000
= $ 20,833.33
In % = (Actual Sales - Break Even sales) / Actual sales
= ($ 25833.33 - $ 5000) / $ 25833.33
= 80.65%

ekkarill92 answered 2 years ago
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