Problem
A. What is meant by a product's contribution margin ratio? How is this ratio useful in planning business operations?
B. Often the most direct route to a business decision is an incremental analysis. What is meant by an incremental analysis?
C. What is meant by the term operating leverage?
D. What is meant by the term break-even point?
E. In response to a request from your immediate supervisor, you have prepared a CVP graph portraying the cost and revenue characteristics of your company's product and operations. Explain how the lines on the graph and the break-even point would change if (a) the selling price per unit decreased, (b) fixed cost increased throughout the entire range of activity portrayed on the graph, and (c) variable cost per unit increased.
F. What is meant by the margin of safety?
G. What is meant by the term sales mix? What assumption is usually made concerning sales mix in CVP analysis?
H. Explain how a shift in the sales mix could result in both a higher break-even point and a lower net income.
I. What factors would cause a difference in the use of financial leverage for a utility company and an automobile company?
J. Explain how the break-even point and operating leverage are affected by the choice of manufacturing facilities (labor intensive versus capital intensive.
K. What role does depreciation. play in break-even analysis based on accounting flows? Based on cash flows? Which perspective is longer term in nature?
L. What does risk taking have to do with the use of operating and financial leverage?
M. Discuss the limitations of financial leverage.
N. How does the interest rate on new debt influence the use of financial leverage?
O. Explain how combined leverage brings together operating income and earnings per share.
P. Explain why operating leverage decreases as a company increases sales and shifts away from the break-even point.
Q. When you are considering two different financing plans, does being at the level where earnings per share are equal between the two plans always mean you are indifferent as to which plan is selected?
Question I: Computing and Using the CM Ratio
Last month when Fiesta, Inc., sold 50,000 units, total sales were P200,000, total variable expenses were P120,000, and fixed expenses were P65,000.
Task
i. What is the company's contribution margin (CM) ratio?
ii. Estimate the change in the company's net operating income if it were to increase its total sales by P1,000.
Question II: Compute the Break-even Point
Mario Company distributes a single product, a woven basket whose selling price is PIS and whose variable expense is PI2 per unit. The company's monthly fixed expense is P4,200.
Task
i. Solve for the company's break-even point in unit sales using the equation method.