CHAPTER 6

MANAGEMENT ACCOUNTING - Solutions Manual

Chapter 7 Gross Profit Variation Analysis and Earnings Per Share DeterminationGross Profit Variation Analysis and Earnings Per Share Determination Chapter 7

CHAPTER 7GROSS PROFIT VARIATION ANALYSIS AND EARNINGS PER SHARE DETERMINATION

I.Problems

Problem I The Dawn Mining Company

Gross Profit Variation Analysis

For 2006Increase in Sales:

Quantity Factor [(24,000) x P8]

P(192,000)

Price Factor (105,000 x P3)

315,000

Quantity/Price Factor [(24,000) x P3]

(72,000)P 51,000

Less: Increase (decrease) in Cost of Sales:

Quantity Factor [(24,000) x P9]

P(216,000)

Cost Factor [105,000 x (P.50)]

(52,500)

Quantity/Cost Factor [(24,000) x (P.50)] 12,000(256,500)

Increase in Gross Profit

P 307,500

Problem II1. Selling Price Factor

Sales in 2006

P210,000

Less: Sales in 2006 at 2005 prices

(P210,000 ( 105%)

200,000Favorable

P 10,0002. Cost Factor

Cost of Sales in 2006

P164,000

Less: Cost of Sales in 2006 at 2005 costs

176,000Favorable

P(12,000)

3. Quantity Factor

Increase in Sales

Sales in 2006 at 2005 prices

P200,000

Less: Sales in 2005

150,000Favorable

P 50,000Less: Increase in Cost of Sales

Cost of Sales in 2006 at 2005 costs

(P132,000 x 133-1/3%)

P176,000

Less: Cost of Sales in 2005

132,000Unfavorable

P 44,000Net favorable quantity factor

6,000*

Increase in Gross Profit

P 28,000* This may also be obtained using the following presentation:

Quantity Factor:

Sales in 2006 at 2005 prices

P200,000

Less: Sales in 2005

150,000Increase in Sales

P 50,000

Multiplied by: Ave. Gross Profit rate in 2005

12%Net favorable variance

P 6,000

Problem IIIRequirement A:Tony Corporation

Statement Accounting for Gross Profit Variation

For 2006Increase (Decrease) in Sales accounted for as follows:

Price Factor

Sales this year

P210,210

Less: Sales this year at last years prices

269,500Favorable (Unfavorable)

P(59,290)

Quantity Factor

Sales this year at last years

prices (P210,210 ( 78%)

P269,500

Less: Sales last year

192,500Favorable (Unfavorable)

P 77,000

Net Increase (decrease) in sales

P 17,710

Increase (decrease) in Cost of Sales accounted for as follows:

Cost Factor

Cost of Sales this year

P 165,400

Less: Cost of Sales this year at last

years costs

161,700(Favorable) Unfavorable

P 3,700Quantity Factor

Cost of Sales this year at last years

costs (115,500 x 140%)

P 161,700

Less: Cost of Sales last year

115,500(Favorable) Unfavorable

P 46,200Net increase (decrease) in Cost of Sales

P 49,900Net increase (decrease) in Gross Profit

P (32,190)Gross Profit, this year

P 44,810

Gross Profit, last year

77,000Increase (Decrease) in Gross Profit

P(32,190)

Requirement B:

(1)Change in Quantity= P 77,000 = 40% increase

P192,500

(2) Change in Unit Costs = P 3,700 = 2.38% increase

P161,700

Problem IVQuantity Factor

1.Decrease in Sales due to decrease in the number

of customers [(1,000) x 18 MCF x P2.50)]

P(45,000)

2.Increase in Sales due to increase in consumption

rate per customer (26,000 x 2 MCF x P2.50)

130,000Net Increase

P 85,000Price Factor

3.Decrease in Sales due to the decrease in rate per

MCF [P(.05) x 520,000]

(26,000)

Increase in operating revenues

P 59,000Supporting Computations:Average Consumption:

(a)2006 = 520,000 ( 26,000 = 20 MCF/customer

2005 = 486,000 ( 27,000 = 18 MCF/customer

Increase in Consumption

per customer 2 MCF/customer

(b)27,000 - 26,000 = 1,000 decrease in number of customers

(c)Price 2006

P2.45

2005

2.50

Decrease in rate or

price per MCF sold

P(.05)

Problem VXYZ Corporation

Gross Profit Variation Analysis

For 2006Price Factor

Sales in 2006

P 1,750

Less: Sales in 2006 at 2005 prices

A (25 x P10)

P 250

B (75 x P20)

1,500

1,750Increase (decrease) in gross profit P -

Cost Factor:

Cost of sales in 2006

P 875

Less: Cost of sales in 2006 at 2005 costs:

A (25 X P5)

P 125

B (75 x P10)

750 875Increase (decrease) in gross profit P -

Quantity Factor:

Increase (decrease) in total quantity

Multiplied by: Average gross profit

per unit in 2005 (P750 ( 100)

P 7.50

Increase (decrease) in gross profit P -

Sales Mix Factor:

Average gross profit per unit in 2006 at

2005 prices

P8.75*

Less: Average gross profit per unit in 2005

7.50Increase (decrease)

P1.25

Multiplied by: Total quantity in 2006

100

Increase (decrease) in gross profit

P125.00Increase in Gross Profit

P125.00*Sales in 2006 at 2005 prices

P1,750

Less: Cost of sales in 2006 at 2005 prices 875Gross profit in 2006 at 2005 prices

P 875Average Gross Profit on 2006 at 2005 prices:

P875

= P8.75

100 (volume in 2006)

Problem VI (Computation of Weighted Average Number of Ordinary Shares)Number of Shares

DateUnadjustedAdjustment for 25% stock dividendAs

AdjustedMultiplierWeighted Shares

1/1/200616,0004,00020,00012/1220,000

2/15/20063,2008004,00010.5/123,500

4/1/2006(3,000)(750)(3,750)9/12(2,812)

6/1/20061,4003501,7507/121,020

9/1/20066,4001,6008,0004/122,667

12/1/2006 6,000(6,000) - - -

Total30,000 - 30,00024,375

Problem VII (Computation of Basic EPS and Diluted EPS)

1.Basic EPS

=

= P0.90

2.Diluted EPS=

=

= P0.82 (rounded off)

Problem VIII

Requirements (1) and (2)

Explanation

Earnings(

Shares=Per Share

Basic earnings and shares

P122,000a(

33,333b=P3.66 Basic

Stock option share increment

293cTentative DEPS1 amounts

P122,000(

33,626=P3.63 DEPS110% bond interest expense savingse 13,300dIncrement in shares

4,400dTentative DEPS2 amounts

P135,300(

38,026=P3.56 DEPS27.5% preference dividend savingse 28,500dIncrement in shares

9,310d

P163,800(

47,336=P3.46 DEPS35.8% bonds

21,924

6,264Diluted earnings and shares

P185,724(

53,600=P3.465 Diluted

aP122,000 = P150,500 (net income) - P28,500 (preference dividends)

bWeighted average shares:

25,000 x 1.20 = 30,000 x 7/12 = 17,500

32,000 x 1.20 = 38,400 x 4/12 = 12,800

38,400 - 2,000 = 36,400 x 1/12 = 3,033 Weighted average shares

33,333cIncrement due to stock options:

Issued

4,000

Reacquired

Increment in shares

293dImpact on diluted earnings per share and ranking:

Impact Ranking

10% bonds:

P3.025

5.8% bonds:

P3.503

7.5% preference:

P3.062

eDilutive effect on diluted earnings per share:

10% bonds: P3.02 impact < P3.63 (DEPS1), therefore dilutive

7.5% preference: P3.06 impact < P3.56 (DEPS2), therefore dilutive

5.8% bonds: P3.50 impact > P3.46 (DEPS3), therefore exclude from EPS

Requirement 3

Fuego Company would report basic earnings per share of P3.66 and diluted earnings per share of P3.46 on its 2005 income statement.

II.Multiple Choice Questions1. B5. A9. A13. A17. A21. C

2. B6. B10. A14. D18. B22. A

3. C7. B11. D *15. C19. C23. B

4. D8. B12. C16. A20. D

* Supporting computation for no. 11:

Diluted EPS for 12/31/2006 =

=

or P6.18P4,020,000

650,000

P3,500,000 + (P800,000 x 65%)

400,000 + 25,000 + 225,000

P 90,000

100,000

P90,000 + (10% x P500,000 x 65%)

P500,000

P1,000

100,000 + x 100

P90,000 + P32,500

150,000

4,000 x ( P33 + P5 )

P41

= (3,707)

[(0.10 x P200,000) P1,000] x 0.7

200 x 22

=

P13,300

4,400

(0.058 x P540,000) x 0.7

540 x 11.6

=

P21,924

6,264

(0.075 x P380,000)

3,800 x 2.45

=

P28,500

9,310

7-17-87-7