III. CVP AnalysisA. Discussion Questions:1. Explain why a contribution margin per unit becomes profit per unit above the breakevenpoint.2. Suppose a firm with a contribution margin percentage of 30% increased its advertisingexpenses by P10,000 and found that sales increased by P 30,000. Was it a gooddecision to increase advertising expenses? Suppose that the contribution margin ratio isnow 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 ofmen's shoes with identical unit costs and selling prices. A unit is defined as a pair ofshoes. Each store has a store manager who is paid a fixed salary. Individual salespeoplereceive a fixed salary and a sales commission. XYZ is considering opening another storethat is expected to have the revenue and cost relationship shown here:Unit Variable Data (per pair of shoes)Selling priceCost of shoesSales commissionVariable cost per unitAnnual Fixed CostsP 3,000.00 Rent2,300.00 Salaries100.00 AdvertisingP2,400.00 Other fixed costTotal fixed costsP 600,0002,000,000800,000200,000P 3,600,000Required: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 ofP810,000, 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 paida commission of P30 per unit in excess of the break-even point, what would be thestore's operating income if 10,000 units were sold.

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Answered: 1. Explain why a contribution margin…

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

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Consider the following two statements concerning cost-volume-profit analysis. (1) The contribution per unit is the difference between the sales price per unit and the fixed costs per unit. (2) The marginal cost per unit will usually equal the variable cost per unit. Which one of the following combinations ( true/false) relating to the above statements is correct?
The contribution margin equals sales minus all O period O variable O fixed O product expenses.
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