Solution To Assignment 6

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Strategic Business Analysis

Assignment 6

Case 1. Cost-based pricing. Dennis Company's cost structure for a certain item at a level of20,000 units per month is as
follows:
Manufacturing costs:
Direct materials P 1.00
Direct labor 1.20
Variable indirect cost 0.80
Fixed indirect cost 0.50
Selling and others:
Variable 1.50
Fixed 0.90

Required: Determine the selling price per unit if the markup ratio is
1. 50% based on conversion costs.
2. 40% based on full production costs.
3. 45% based on variable production costs.
4. 30% based on total (full) costs.
5. 35% based on total variable costs.
6. 60% based on prime costs.

Solution:
1. 50% based on conversion costs. Conversion costs = Cost based 1.2 + 0.80 + .50 = 2.50 + Mark up is equal to
2.50 x 50 % = 1.25 therefore total Selling price is P3.75 or 2.5 x 150% = P3.75
2. 40% based on full production costs. Full production costs = 1 + 1.2 + 0.80 + .50 = 3.5 x 140% = P4.90
3. 45% based on variable production costs. DM P1 + DL 1.20 and VOH. 0.80 = P3 x 145% = P4.35
4. 30% based on total (full) costs. DM P1 + DL 1.20 + VOH. 0.80 + FOH 0.50 + 1.50 + 0.90 = 5.90 x 130% = P7.67
5. 35% based on total variable costs. DM P1 + DL 1.20 + VOH. 0.80 + VE 1.50 = 4.50 x 135% = P6.075
6. 60% based on prime costs. DM P1 + DL 1.20 = 2.2 x 1.6 = 3.52

Case 2. Mark-up ratio, target sales price. Negros Corporation is considering the production of a new product that needs
P2.5 million investment. The company wants a 12% ROI on all products and uses the contribution margin approach to
pricing. The costs shown below are traceable to the new product.
Variable factory costs per unit P 30
Fixed factory overhead 600,000
Variable expenses per unit 6
Fixed expenses 150,000

The company expects to sell 50,000 units a year.

Required:
1. Mark-up ratio. 21/36 = 58.33%
2. Target unit sales price. Answer P57/unit
3. Assuming the expected sales 30,000 units instead of 50,000 units, what is the mark up ratio? P35/P36 =
97.22%
Solution:
Profit = ROI x investment = .12 x P2.5 M = P300,000 so profit per unit = P300,000/50,000= P6 per unit
1 and 2. Mark-up ratio. Contribution margin is equal to Profit P300,000 plus Fixed costs P600,000 + P150,000 =
P1,050,000/50,000 = P21 Contribution Margin per unit

Sales 57 Target Sales Price


Less VC (30+6) 36
Contribution margin P1,050,000 / 50,000 = P21
Less FC 750,000
Profit 300,000

3. Sales 71 Target Sales Price


Less VC (30+6) 36
Contribution margin P1,050,000 / 30,000 = P35
Less FC 750,000
Profit 300,000

Case 3. Sales and costs variances with incomplete data. The contribution margin of Boy Corporation for 20PY and 20CY
are given below:
20PY 20CY
Sales P 8,000,000 P12,000,000.
Less: Variable costs 6,000,000 8,000,000
Contribution margin P2,000,000 P4,000.000

The number of units sold increased by 5%.

Required: Compute the following for the year 20CY:


1. Sales price variance and sales price variance ratio. Sales Price variance is P3,600,000 favorable and the Sales
Price variance ratio is 3,600,000/8,400,000 = 42.86%
2. Sales quantity variance. Sales quantity variance rate is 5% given so the Sales quantity variance is P8,000,000 x
5% = P400,000 favorable
3. Variable cost price variance and variable cost price variance ratio. Variable cost price variance is P1,700,000 U
and the variable cost price variance ratio is 1,700,000/6,300,000 = 26.98%
4. Variable cost quantity variance. P6,000,000 x 105% = 6,300,000 CTY @ UCPLY so variable cost quantity
variance is P6,300,000 – 6,000,000= P300,000 U

Solution:
Sales Price variance
Sales this year P12,000,000
Sales this year at unit sales price last year 8,400,000 3,600,000 F

Sales Quantity variance


Sales this year at unit sales price last year 8,400,000
Sales last year 8,000,000 400,000 F

Variable Cost price variance


Cost this year 8,000,000
Cost this year at unit prices last year 6,300,000 1,700,000 U

Variable Cost Quantity variance


Cost this year at unit prices last year 6,300,000
Cost last year 6,000,000 300,000 U

Contribution margin variance P2,000,000 F

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