3. LANZONES Company\'s product sells for Php16 and has a variable cost per unit

Question

3. LANZONES Company's product sells for Php16 and has a variable cost per unit of Php12. Fixed costs are Php 120,000 a. Compute the break-even point in units and pesos b. Lanzones has a target profit of Php36,000 and expects to sell 30,000 units. Compute the selling price Lanzones must charge to earn the target profit. Lanzones wants to keep its selling price at Php 16 per unit and earn a 10% return on sales. Compute for the units that must be sold to meet this target. c. d. Compute the total peso sales Lanzones must have to earn a Php30,000 profit. e. Consider the computed peso sales in requirement d, determine the margin of safety f. g. Consider the degree of operating leverage in f, determine the income (or loss) that percentage at that level. Consider the peso sales in requirement d, determine the degree of operating leverage at that level should result from a 14% increase in sales that should result from a 10% decrease in sales. h. Consider the degree of operating leverage in f, determine the operating income (or loss)

Explanation / Answer

Given information:

Selling Price = Php 16;

Variable cost = Php 12;

Fixed Costs = Php 120,000

Analysis:

Contribution = Php 16 - Php 12 = Php 4.

CM Ratio = Php 4 / Php 16 x 100 = 25%

a. Break even point in units and pesos:

Break even point (units) = Fixed Cost/ Contribution per unit = Php 120,000 / Php 4 = 30,000 units.

Break even point (pesos) = Fixed Cost / CM Ratio = Php 120,000 / 25% = Php 480,000

b. Target profit is Php 36,000; expected sales - 30,000 units; selling price = ?

Target Profit = Php 36,000

Fixed Cost            = Php 120,000

Target Contribution = Php 156,000

Expected sales units = 30,000 units.

Therefore, Target contribution per unit = Php 156,000 / 30,000units = Php 5.20

We already have the variable cost per unit as Php 12.

Target Selling Price = Variable Cost + Contribution

Target Selling Price = Php 12 + Php 5.20

Target Selling Price = Php 17.20

c. Selling price at Php 16; Return of 10% on sales. No. of units = ?

Let the no. of units be 'x'

Required Profit = Php 16 x 10% x (x units)

Required Profit = Php 1.6 x

Fixed cost = Php 120,000

Sales units = (Fixed Cost + Target Profit)/ Contribution per unit

x = (Php 120,000 + Php 1.6 x) / Php 4

Php 4 x = Php 120,000 + Php 1.6 x

Php 2.4 x = Php 120,000

x = 50,000 units.

Therefore, the company must sell 50,000 units to acheive this target profit.

d. Target profit is Php 30,000; Total peso sales = ?

Sales in pesos = (Fixed Cost + Target Profit)/ CM Ratio

= (Php 120,000 + Php 30,000)/ 25%

= Php 150,000 / 25%

= Php 600,000

Therefore, Total peso sales Lanzones must have to earn a Php 30,000 profit is Php 600,000.

Hope this is helpful!!

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