Analysis Of Financial Statements
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Analysis of financial statements
Objectives in analysis of financial statements
Financial statements are analyzed to determine the profitability of the business, its liquidity to meet its obligations, safety of investment in the business, and effectiveness of its management.
Tools and techniques 1. Horizontal Analysis 2. Vertical Analysis
HORIZONTAL ANALYSIS
The changes or behavior patterns of the different items in the financial statements of two or more years are shown and it involves the use of :
A)
Comparative Statements B) Trend ratios and percentages
ET Trading Corp. Comparative Statement of Income
For the years ended December 31,200A and 200B
200B
200A 200,000
40 ,000 Increase
(Decrease) % 20%
Less: Cost of Sales
182,000
140,000
42,000
Gross Profit
58,000
60,000
Amount (2,000)
30%
Less: Operating Expenses: Selling Expenses
17,000
18,000
(1,000)
(6%)
11,800
14,000
(2,200)
(16%)
Operating Income
29,200
28,000
1,200
4.3%
Income tax
(9,344)
(8,960)
384
4.28%
Profit
19,856
19,040
816
4.29%
Sales
240,000
Administrative
(3.33%)
Column 3 / column 2
VERTICAL ANALYSIS The relationship between the different items in
the financial statement for the same year are pointed out with the use of Financial Ratios
PROFITABILITY RATIOS -
ratios that indicate the profitability of a business, involve net income and other statement of income items.
Rate of Return on Sales Significance :
Formula:
Net Income Net Sales
Indicates the amount of net income per peso of sales or the profitability based on sales
Rate of Return on Total Assets Formula
Significance
Net Income Average Total
Indicates
Assets Total assets , beg . + total assets , end / 2
the profitability in the use of the total assets or total capital, both borrowed and invested
Asset Turnover
Formula:
Significance:
Net Sales Average Total Assets
Total assets beg + total assets end / 2
Indicates the rate at which total capital is being used or the efficiency in the use of total resources
Ex. Co. X operates a supermarket while Co. Y operates a department store. The following data are given: Co. X Co. Y Co. X Co. Y Rate of Net Sales 5M 5M Return on 5% 250T/5M Sales Net Income 250T 500T 10% 500T/5M Asset Total Assets: Turnover 5 times 5M/1M* End 1.2M 2.3M 2.5 times 5M/2M** Beg.
*1.2 + 800T/2 **2.3 + 1.7 / 2
800T
1.7M
Rate of Return on Total 250T/1M 25% Assets: 500T/2M
25%
Company X operates at a low margin and therefore has low rate of return on sales (5%). However, it is able to earn the same rate of return on its total assets as Co. Y does by having greater volume of sales in relation to its total resources or by having a higher asset turnover.
Gross Profit Ratio
Gross Profit Net Sales
Indicates the gross margin per peso of sales. Used in determining the adequacy of gross margin to cover operating expenses and provide desired profit
Operating Ratio
Cost of Sales + Operating
Expenses
Sales
Net
Indicates what portion of sales is absorbed by operating costs
Rate of Return on Current Assets
Net Income Average Current Assets
Indicates the profitability in the use of current assets.
Rate of Return on Working Capital*
Net Income Average Working Capital
*Working Capital = Current Assets – Current Liabilities
Indicates the profitability in the use of working capital.
Rate of Return on Owner’s Equity
Net Income Average Owner’s Equity
Indicates profitability in the use of invested capital or the amount of return per peso of owner’s equity
Earnings Per Share
Net Income less Preference Share Dividend Requirement No. of Ordinary Shares Outstanding
Indicates the amount of return on each share of ordinary share
Market Price to Book Value Per Share
Market Price per Share Book Value per Share
Indicates whether the share is undervalued or not
LIQUIDITY RATIOS provide information about a firm’s ability to
meet its short-term financial obligations
the more liquid are the assets of a company, the
greater is its ability to meet its current obligations
CURRENT RATIO (Banker’s Ratio)
Current Assets Current Liabilities
Indicates the ability to pay current obligations
Analysis Current ratio is positive when current assets exceed
current liabilities.
When current liabilities exceed current assets, the
ratio is negative, meaning, the company will not be able to meet its maturing obligations.
ILLUSTRATION Current Ratio is 1 : 1
Total Current Assets Total Current Liabilities Current Ratio
20,000 20,000 1:1 or 100%
Total Current Assets Total Current Liabilities
20,000 40,000 2:1 or 200%
Current Ratio is Positive 2 : 1
Current Ratio is Negative 1 : 2
Total Current Assets Total Current Liabilities Current Ratio
10,000 20,000 1:2 or 50%
ACID TEST RATIO OR QUICK RATIO Quick Assets*
Current Liabilities
*Cash, Marketable Securities,
Receivables
Indicates the ability to
pay current obligations from the more liquid current assets
Inventories are excluded
because of the uncertainty as to their saleability
Some analyst consider an acid test ratio of 100%
satisfactory
one acid-test ratio cannot be considered satisfactory for
all businesses
ratio for one company is preferably compared what is
typical for the specific trade or industry
Most of the inventory items may be considered more liquid than some of the receivables because of the greater volume of cash sales
Current Assets to Total Assets
Current Assets Total Assets
indicates the liquidity of
total assets
Some types of
businesses will have higher investment in PPE
Ratio of Each Current Asset Item to Total Current Assets
Each Current Asset Item
Total Current Assets
Indicates the liquidity of the total current assets and the distribution thereof
ILLUSTRATION X Co.
Co. Ratio Industry Ratio
Cash
12,000
10%
15%
Trading Securities
36,000
30%
10%
Receivables, net
12,000
10%
10%
Inventories
54,000
45%
60%
Prepaid Expenses
6,000
5%
5%
TOTAL
120,000
Receivable Turnover
Indicates the number of
times average amount of receivables is collected during the period and the efficiency in collection
Net Credit Sales Average Receivables
A high turnover rate
indicates that receivables are collectible within a shorted period
Number of Day’s Sales in Average Receivables or Average Collection Period
360 --------Receivable Turnover
Indicates the average age of receivables or the number of days to collect average receivables
Illustration: Net Credit Sales
200,000
Receivable Turnover:
Accounts Receivable, Jan 1
35,000
Accounts Receivable, Dec 31
45,000
Net Credit Sales Average Receivables
200,000 40,000
Average Receivables = 35,000 + 45,000/2
No. of days’ sales in receivables
= 40,000
360/ 5 times = 72days
5 times
The analyst should compare the receivable turnover rate with the turnover rate of accounts payable to determine the gap between the collection period and the length of time before payables are paid so that proceeds from sales can be used in the payment of the latter.
Merchandise Inventory or Finished Goods Turnover
Cost of Goods Sold Average Inventory
• Indicates the number of times average inventory was sold during the period and the over or (under) investment in inventory
Interpretation: • A high turnover rate may indicate that inventory levels are too low
• On the other hand, low turnover rates may indicate that inventory levels are too high so that capital is unnecessarily tied up in inventories and the company incurs more storage costs
Work in Process Turnover
Cost of Goods Manufactured Average Work in Process Inventory
• •
• Indicates the number of times average inventory was manufactured during the period and the length of the manufacturing process
Raw materials turnover • •
Raw Materials Used Average Raw Materials Inventory
Indicates the number of times average inventory was used and the sufficiency of raw materials in stock
Number of Days’ Supply in Inventory
360 --------------------
Inventory Turnover
• • Indicates the number of days required to sell or consume average inventory
Accounts Payable Turnover • Payables Turnover:
•
Net Credit Purchases
Average Accounts Payable
No , of Days ’ Purchases in Average Payables
360 -------------------Payables Turnover
• Indicates the number of times the amount of average payables is paid during the period.
Illustration: Payables Turnover: = 350,000 / 35,000 = 10 x
350,000 Purchases on account Accounts, net of 30,000 returns Payable , and Jan 1 40,000 Accounts Payable, allowances Dec 31
No. of Days’ Purchases in Average Payables = 360 / 10x = 36 days
* If suppliers grant credit for 14 days , the payables , on the average , are overdue by 22 days ( 36 - 14 ).
Financial Leverage Ratio
- provides an indication of the long-term solvency of the firm
Measures the extent to which the firm is using long term-debt
Measures stability or long-term solvency
Debt to Equity Ratio
Total Liabilities Owner’s Equity
Measures the proportion of borrowed capital to invested capital
ILLUSTRATION
Debt/Equity Ratio:
Total Liabilities Owner’s Equity
200,000 300,000
= 66 2/3 %
Equity To Debt Ratio
Owner’s Equity Total Liabilities
Indicates the margin of safety to creditors
PROPRIETARY OR Equity Ratio
Owner’s Equity Total Assets
Indicates what portion of total assets is provided by owners or shareholders
ILLUSTRATION
Equity Ratio:
Owner’s Equity Total Assets
300,000 500,000
=
60%
A
high equity ratio gives a business entity the flexibility it needs in times of poor economic condition.
A rise in the equity ratio indicates an improvement in the long-term financial position of the company because of the greater protection for creditors and the reduced debt amortization and financing charges.
A
relatively low proprietary (or equity) ratio may indicate that the company has greater financial burden in the form of the periodic amortization and interest charges.
Debt Ratio or Total Liabilities to Total Assets
Total Liabilities Total Assets
Indicates what portion of total assets is provided by creditors or the extent of trading in equity
To what extent may trading on equity be resorted to with safety?
There is no definite limit to trading on equity for it depends on a variety of factors such as characteristics of the industry, availability of working capital, liquidity of assets, earning capacity of the company.
Plant , property and Equipment To Total Owner ’ s equity
Total PPE Total Owner’s Equity
Indicates the portion of owner’s equity invested in Plant, Property and Equipment
PPE to Owner’s Equity
PPE 350,000 ----------------------- =1.16 2/3 Owner’s Equity 300,000 or 117 %
The owners financed 300,000 of the PPE with the 50,000 difference financed by creditors.
PPE to Long Term Liabilities
Indicates
PPE* ------------------
Total Long Term Liabilities
*based on book values
the cover provided by book value of PPE to long-term debt.
Illustration
PPE 350,000loan -------------------------- = 3.5or Long-Term Debt 100,000 350%
- There is a lien of 100,000 on the PPE of 350,000 and the difference of 250,000 may be considered as a possible source of funds through long-term borrowings when the need for the same arises.
PPE Turnover
Indicates the efficiency in the use of property
Net Sales Average PPE(net)
A low turnover rate may indicate an over investment in PPE or management’s ineffectiveness in the use thereof.
Rate should be compared with the industry
COST – VOLUME - PROFIT ANALYSIS
refers to the determination of the effects of changes in volume on revenue, costs, and profit
It provides management with a desired tool in the performance of its planning function for estimates of revenue, cost and profit.
DEFINITION OF TERMS
Breakeven Point
Point at which sales is just enough to cover total cost
Point at which there is no profit nor loss
Total sales are just enough to avoid a loss
Contribution Margin
Refers to the contribution of a unit of product to the absorption of fixed costs and to profit
Contribution Margin = Selling Price – Variable Cost
Variable Costs - vary in direct proportion to changes in
production or sales volume
Examples:
Direct Labor Direct Materials Salesmen’s Commission Depreciation based on units of production
FIXED COSTS Refers to cost items not affected by changes
in volume of production
Examples: Rent of space Depreciation under the straight line method Fixed salaries of employees
Mixed or Semi-Variable Costs vary in amount but not in direct
proportion to changes in volume of production
Example: Light and Power Expense
Direct Materials Cost Refers to cost of materials that form an
integral part of the finished product and can easily be included in calculating the cost of the finished product.
Example:
lumber in making furniture
DIRECT LABOR COST Refers to cost of labor expended directly on
goods being processed and can easily be included in calculating the cost of the finished product.
Example:
Wages of sewers in manufacturing.
garments
MANUFACTURING OVERHEAD COST Refers to all manufacturing costs incurred in
production and not classified as either direct labor or direct materials.
Example:
Fuel and Oil Repairs and Maintenance
ILLUSTRATION Co. X produces a single
BEP Sales Volume:
product and provides the Fixed Cost / Contribution Margin ff. data:
Unit Selling Price 30
Unit Variable Costs 18
= 60,000 / 12 = 5,000units
Total Fixed Costs= 60,000
BEP Sales :
Contribution Margin / Unit : Selling Price – Variable Cost 30 - 18 = 12
Fixed Cost / Contribution Margin %
= 60 , 000 / 40 % = P150 , 000
12 / 30
SALES WITH DESIRED PROFIT
Profit Peso Sales
Fixed Cost + Desired = ------------------------------Contribution Margin
%
Fixed Cost + Desired Profit Sales Volume= ----------------------------- Contribution Margin per Unit
ILLUSTRATION Peso Sales : 60,000 + 24,000 product and provides the ff. data: 40% = P210,000 Unit Selling Price 30
Co. X produces a single
Unit Variable Costs 18
Total Fixed Costs= P60,000 Desired Profit = P24,000
Contribution Margin / Unit : Selling Price – Variable Cost 30 - 18 = 12
Sales Volume : 60,000 + 24,000
=
7,000 units
12
Objectives in analysis of financial statements
Financial statements are analyzed to determine the profitability of the business, its liquidity to meet its obligations, safety of investment in the business, and effectiveness of its management.
Tools and techniques 1. Horizontal Analysis 2. Vertical Analysis
HORIZONTAL ANALYSIS
The changes or behavior patterns of the different items in the financial statements of two or more years are shown and it involves the use of :
A)
Comparative Statements B) Trend ratios and percentages
ET Trading Corp. Comparative Statement of Income
For the years ended December 31,200A and 200B
200B
200A 200,000
40 ,000 Increase
(Decrease) % 20%
Less: Cost of Sales
182,000
140,000
42,000
Gross Profit
58,000
60,000
Amount (2,000)
30%
Less: Operating Expenses: Selling Expenses
17,000
18,000
(1,000)
(6%)
11,800
14,000
(2,200)
(16%)
Operating Income
29,200
28,000
1,200
4.3%
Income tax
(9,344)
(8,960)
384
4.28%
Profit
19,856
19,040
816
4.29%
Sales
240,000
Administrative
(3.33%)
Column 3 / column 2
VERTICAL ANALYSIS The relationship between the different items in
the financial statement for the same year are pointed out with the use of Financial Ratios
PROFITABILITY RATIOS -
ratios that indicate the profitability of a business, involve net income and other statement of income items.
Rate of Return on Sales Significance :
Formula:
Net Income Net Sales
Indicates the amount of net income per peso of sales or the profitability based on sales
Rate of Return on Total Assets Formula
Significance
Net Income Average Total
Indicates
Assets Total assets , beg . + total assets , end / 2
the profitability in the use of the total assets or total capital, both borrowed and invested
Asset Turnover
Formula:
Significance:
Net Sales Average Total Assets
Total assets beg + total assets end / 2
Indicates the rate at which total capital is being used or the efficiency in the use of total resources
Ex. Co. X operates a supermarket while Co. Y operates a department store. The following data are given: Co. X Co. Y Co. X Co. Y Rate of Net Sales 5M 5M Return on 5% 250T/5M Sales Net Income 250T 500T 10% 500T/5M Asset Total Assets: Turnover 5 times 5M/1M* End 1.2M 2.3M 2.5 times 5M/2M** Beg.
*1.2 + 800T/2 **2.3 + 1.7 / 2
800T
1.7M
Rate of Return on Total 250T/1M 25% Assets: 500T/2M
25%
Company X operates at a low margin and therefore has low rate of return on sales (5%). However, it is able to earn the same rate of return on its total assets as Co. Y does by having greater volume of sales in relation to its total resources or by having a higher asset turnover.
Gross Profit Ratio
Gross Profit Net Sales
Indicates the gross margin per peso of sales. Used in determining the adequacy of gross margin to cover operating expenses and provide desired profit
Operating Ratio
Cost of Sales + Operating
Expenses
Sales
Net
Indicates what portion of sales is absorbed by operating costs
Rate of Return on Current Assets
Net Income Average Current Assets
Indicates the profitability in the use of current assets.
Rate of Return on Working Capital*
Net Income Average Working Capital
*Working Capital = Current Assets – Current Liabilities
Indicates the profitability in the use of working capital.
Rate of Return on Owner’s Equity
Net Income Average Owner’s Equity
Indicates profitability in the use of invested capital or the amount of return per peso of owner’s equity
Earnings Per Share
Net Income less Preference Share Dividend Requirement No. of Ordinary Shares Outstanding
Indicates the amount of return on each share of ordinary share
Market Price to Book Value Per Share
Market Price per Share Book Value per Share
Indicates whether the share is undervalued or not
LIQUIDITY RATIOS provide information about a firm’s ability to
meet its short-term financial obligations
the more liquid are the assets of a company, the
greater is its ability to meet its current obligations
CURRENT RATIO (Banker’s Ratio)
Current Assets Current Liabilities
Indicates the ability to pay current obligations
Analysis Current ratio is positive when current assets exceed
current liabilities.
When current liabilities exceed current assets, the
ratio is negative, meaning, the company will not be able to meet its maturing obligations.
ILLUSTRATION Current Ratio is 1 : 1
Total Current Assets Total Current Liabilities Current Ratio
20,000 20,000 1:1 or 100%
Total Current Assets Total Current Liabilities
20,000 40,000 2:1 or 200%
Current Ratio is Positive 2 : 1
Current Ratio is Negative 1 : 2
Total Current Assets Total Current Liabilities Current Ratio
10,000 20,000 1:2 or 50%
ACID TEST RATIO OR QUICK RATIO Quick Assets*
Current Liabilities
*Cash, Marketable Securities,
Receivables
Indicates the ability to
pay current obligations from the more liquid current assets
Inventories are excluded
because of the uncertainty as to their saleability
Some analyst consider an acid test ratio of 100%
satisfactory
one acid-test ratio cannot be considered satisfactory for
all businesses
ratio for one company is preferably compared what is
typical for the specific trade or industry
Most of the inventory items may be considered more liquid than some of the receivables because of the greater volume of cash sales
Current Assets to Total Assets
Current Assets Total Assets
indicates the liquidity of
total assets
Some types of
businesses will have higher investment in PPE
Ratio of Each Current Asset Item to Total Current Assets
Each Current Asset Item
Total Current Assets
Indicates the liquidity of the total current assets and the distribution thereof
ILLUSTRATION X Co.
Co. Ratio Industry Ratio
Cash
12,000
10%
15%
Trading Securities
36,000
30%
10%
Receivables, net
12,000
10%
10%
Inventories
54,000
45%
60%
Prepaid Expenses
6,000
5%
5%
TOTAL
120,000
Receivable Turnover
Indicates the number of
times average amount of receivables is collected during the period and the efficiency in collection
Net Credit Sales Average Receivables
A high turnover rate
indicates that receivables are collectible within a shorted period
Number of Day’s Sales in Average Receivables or Average Collection Period
360 --------Receivable Turnover
Indicates the average age of receivables or the number of days to collect average receivables
Illustration: Net Credit Sales
200,000
Receivable Turnover:
Accounts Receivable, Jan 1
35,000
Accounts Receivable, Dec 31
45,000
Net Credit Sales Average Receivables
200,000 40,000
Average Receivables = 35,000 + 45,000/2
No. of days’ sales in receivables
= 40,000
360/ 5 times = 72days
5 times
The analyst should compare the receivable turnover rate with the turnover rate of accounts payable to determine the gap between the collection period and the length of time before payables are paid so that proceeds from sales can be used in the payment of the latter.
Merchandise Inventory or Finished Goods Turnover
Cost of Goods Sold Average Inventory
• Indicates the number of times average inventory was sold during the period and the over or (under) investment in inventory
Interpretation: • A high turnover rate may indicate that inventory levels are too low
• On the other hand, low turnover rates may indicate that inventory levels are too high so that capital is unnecessarily tied up in inventories and the company incurs more storage costs
Work in Process Turnover
Cost of Goods Manufactured Average Work in Process Inventory
• •
• Indicates the number of times average inventory was manufactured during the period and the length of the manufacturing process
Raw materials turnover • •
Raw Materials Used Average Raw Materials Inventory
Indicates the number of times average inventory was used and the sufficiency of raw materials in stock
Number of Days’ Supply in Inventory
360 --------------------
Inventory Turnover
• • Indicates the number of days required to sell or consume average inventory
Accounts Payable Turnover • Payables Turnover:
•
Net Credit Purchases
Average Accounts Payable
No , of Days ’ Purchases in Average Payables
360 -------------------Payables Turnover
• Indicates the number of times the amount of average payables is paid during the period.
Illustration: Payables Turnover: = 350,000 / 35,000 = 10 x
350,000 Purchases on account Accounts, net of 30,000 returns Payable , and Jan 1 40,000 Accounts Payable, allowances Dec 31
No. of Days’ Purchases in Average Payables = 360 / 10x = 36 days
* If suppliers grant credit for 14 days , the payables , on the average , are overdue by 22 days ( 36 - 14 ).
Financial Leverage Ratio
- provides an indication of the long-term solvency of the firm
Measures the extent to which the firm is using long term-debt
Measures stability or long-term solvency
Debt to Equity Ratio
Total Liabilities Owner’s Equity
Measures the proportion of borrowed capital to invested capital
ILLUSTRATION
Debt/Equity Ratio:
Total Liabilities Owner’s Equity
200,000 300,000
= 66 2/3 %
Equity To Debt Ratio
Owner’s Equity Total Liabilities
Indicates the margin of safety to creditors
PROPRIETARY OR Equity Ratio
Owner’s Equity Total Assets
Indicates what portion of total assets is provided by owners or shareholders
ILLUSTRATION
Equity Ratio:
Owner’s Equity Total Assets
300,000 500,000
=
60%
A
high equity ratio gives a business entity the flexibility it needs in times of poor economic condition.
A rise in the equity ratio indicates an improvement in the long-term financial position of the company because of the greater protection for creditors and the reduced debt amortization and financing charges.
A
relatively low proprietary (or equity) ratio may indicate that the company has greater financial burden in the form of the periodic amortization and interest charges.
Debt Ratio or Total Liabilities to Total Assets
Total Liabilities Total Assets
Indicates what portion of total assets is provided by creditors or the extent of trading in equity
To what extent may trading on equity be resorted to with safety?
There is no definite limit to trading on equity for it depends on a variety of factors such as characteristics of the industry, availability of working capital, liquidity of assets, earning capacity of the company.
Plant , property and Equipment To Total Owner ’ s equity
Total PPE Total Owner’s Equity
Indicates the portion of owner’s equity invested in Plant, Property and Equipment
PPE to Owner’s Equity
PPE 350,000 ----------------------- =1.16 2/3 Owner’s Equity 300,000 or 117 %
The owners financed 300,000 of the PPE with the 50,000 difference financed by creditors.
PPE to Long Term Liabilities
Indicates
PPE* ------------------
Total Long Term Liabilities
*based on book values
the cover provided by book value of PPE to long-term debt.
Illustration
PPE 350,000loan -------------------------- = 3.5or Long-Term Debt 100,000 350%
- There is a lien of 100,000 on the PPE of 350,000 and the difference of 250,000 may be considered as a possible source of funds through long-term borrowings when the need for the same arises.
PPE Turnover
Indicates the efficiency in the use of property
Net Sales Average PPE(net)
A low turnover rate may indicate an over investment in PPE or management’s ineffectiveness in the use thereof.
Rate should be compared with the industry
COST – VOLUME - PROFIT ANALYSIS
refers to the determination of the effects of changes in volume on revenue, costs, and profit
It provides management with a desired tool in the performance of its planning function for estimates of revenue, cost and profit.
DEFINITION OF TERMS
Breakeven Point
Point at which sales is just enough to cover total cost
Point at which there is no profit nor loss
Total sales are just enough to avoid a loss
Contribution Margin
Refers to the contribution of a unit of product to the absorption of fixed costs and to profit
Contribution Margin = Selling Price – Variable Cost
Variable Costs - vary in direct proportion to changes in
production or sales volume
Examples:
Direct Labor Direct Materials Salesmen’s Commission Depreciation based on units of production
FIXED COSTS Refers to cost items not affected by changes
in volume of production
Examples: Rent of space Depreciation under the straight line method Fixed salaries of employees
Mixed or Semi-Variable Costs vary in amount but not in direct
proportion to changes in volume of production
Example: Light and Power Expense
Direct Materials Cost Refers to cost of materials that form an
integral part of the finished product and can easily be included in calculating the cost of the finished product.
Example:
lumber in making furniture
DIRECT LABOR COST Refers to cost of labor expended directly on
goods being processed and can easily be included in calculating the cost of the finished product.
Example:
Wages of sewers in manufacturing.
garments
MANUFACTURING OVERHEAD COST Refers to all manufacturing costs incurred in
production and not classified as either direct labor or direct materials.
Example:
Fuel and Oil Repairs and Maintenance
ILLUSTRATION Co. X produces a single
BEP Sales Volume:
product and provides the Fixed Cost / Contribution Margin ff. data:
Unit Selling Price 30
Unit Variable Costs 18
= 60,000 / 12 = 5,000units
Total Fixed Costs= 60,000
BEP Sales :
Contribution Margin / Unit : Selling Price – Variable Cost 30 - 18 = 12
Fixed Cost / Contribution Margin %
= 60 , 000 / 40 % = P150 , 000
12 / 30
SALES WITH DESIRED PROFIT
Profit Peso Sales
Fixed Cost + Desired = ------------------------------Contribution Margin
%
Fixed Cost + Desired Profit Sales Volume= ----------------------------- Contribution Margin per Unit
ILLUSTRATION Peso Sales : 60,000 + 24,000 product and provides the ff. data: 40% = P210,000 Unit Selling Price 30
Co. X produces a single
Unit Variable Costs 18
Total Fixed Costs= P60,000 Desired Profit = P24,000
Contribution Margin / Unit : Selling Price – Variable Cost 30 - 18 = 12
Sales Volume : 60,000 + 24,000
=
7,000 units
12
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