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1. Explain why a contribution margin per unit becomes profit per unit above the breakeven point.

1. Explain why a contribution margin per unit becomes profit per unit above the breakeven point.

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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III. CVP Analysis A. Discussion Questions: 1. Explain why a contribution margin per unit becomes profit per unit above the breakeven point. 2. Suppose a firm with a contribution margin percentage of 30% increased its advertising expenses by P10,000 and found that sales increased by P 30,000. Was it a good decision to increase advertising expenses? Suppose that the contribution margin ratio is now 40%. Would it be a good decision to increase advertising expense? B. The XYZ Shoe Company operates a chain of shoe stores that sell 10 different styles of men's shoes with identical unit costs and selling prices. A unit is defined as a pair of shoes. Each store has a store manager who is paid a fixed salary. Individual salespeople receive a fixed salary and a sales commission. XYZ is considering opening another store that is expected to have the revenue and cost relationship shown here: Unit Variable Data (per pair of shoes) Selling price Cost of shoes Sales commission Variable cost per unit Annual Fixed Costs P 3,000.00 Rent 2,300.00 Salaries 100.00 Advertising P2,400.00 Other fixed cost Total fixed costs P 600,000 2,000,000 800,000 200,000 P 3,600,000 Required: 1. What is the annual breakeven point in (a) units sold and (b) revenues? 2. If 5,000 units are sold, what will be the store's operating income (loss)? 3. If sales commissions are discontinued and fixed salaries are raised by a total of P810,000, what would be the annual breakeven point in (a) units sold and (b) revenues? 4. Refer to the original data. If in addition to his fixed salary, the store manager is paid a commission of P30 per unit in excess of the break-even point, what would be the store's operating income if 10,000 units were sold.
Transcribed Image Text:III. CVP Analysis A. Discussion Questions: 1. Explain why a contribution margin per unit becomes profit per unit above the breakeven point. 2. Suppose a firm with a contribution margin percentage of 30% increased its advertising expenses by P10,000 and found that sales increased by P 30,000. Was it a good decision to increase advertising expenses? Suppose that the contribution margin ratio is now 40%. Would it be a good decision to increase advertising expense? B. The XYZ Shoe Company operates a chain of shoe stores that sell 10 different styles of men's shoes with identical unit costs and selling prices. A unit is defined as a pair of shoes. Each store has a store manager who is paid a fixed salary. Individual salespeople receive a fixed salary and a sales commission. XYZ is considering opening another store that is expected to have the revenue and cost relationship shown here: Unit Variable Data (per pair of shoes) Selling price Cost of shoes Sales commission Variable cost per unit Annual Fixed Costs P 3,000.00 Rent 2,300.00 Salaries 100.00 Advertising P2,400.00 Other fixed cost Total fixed costs P 600,000 2,000,000 800,000 200,000 P 3,600,000 Required: 1. What is the annual breakeven point in (a) units sold and (b) revenues? 2. If 5,000 units are sold, what will be the store's operating income (loss)? 3. If sales commissions are discontinued and fixed salaries are raised by a total of P810,000, what would be the annual breakeven point in (a) units sold and (b) revenues? 4. Refer to the original data. If in addition to his fixed salary, the store manager is paid a commission of P30 per unit in excess of the break-even point, what would be the store's operating income if 10,000 units were sold.
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