Question

XYZ Inc. sell Product Y at P5 per unit. The variable costs of making and selling each unit is P3 while the total fixed cost is P2,000. The company wants to earn a profit of P3,000. The company is subject to 40% tax rate.

1. What should be the level of sales in units and pesos to earn the desired profit if it is after tax?
2. What is the Margin of Safety for the target sales computed in requirement 3 in units, pesos, and percentage?

Answer 1

Solution:

Selling Price	5
Less: Variable Cost	3
Contribution Margin per unit	2
Fixed Cost	2000
Profit After Tax	3000
Profit Before Tax (3000*100/60)	5000
Desired Profit	5000

Desired Sales	=(Fixed Cost + Desired Profit) / CM per unit
	=(2000+5000)/2
	=7000/2
	3500 units

Formula - Margin of Safety

Margin of Safety

=Expected Sales - BEP Sales

BEP Sales	=Fixed Cost/ CM per unit
	=(2000)/2
	1000

Margin of Safety
Expected Sales	3500
BEP Sales	1000
Margin of Safety (Units) -: 3500-1000	2500
Margin of Safety (Peso) = 2500*5	12500
Margin of Safety % = 2500/3500	71.43%

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