MANAGEMENT ACCOUNTING (VOLUME I) - Solutions Manual
CHAPTER 7
GROSS PROFIT VARIATION ANALYSIS AND
EARNINGS PER SHARE DETERMINATION
I.
Problems
Problem I
The Dawn Mining Company
Gross Profit Variation Analysis
For 2006
Increase 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)
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
Increase in Gross Profit
P 51,000
(256,500)
P 307,500
Problem II
1. Selling Price Factor
Sales in 2006
Less: Sales in 2006 at 2005 prices
(P210,000 ÷ 105%)
Favorable
2. Cost Factor
Cost of Sales in 2006
Less: Cost of Sales in 2006 at 2005 costs
Favorable
P(12,000)
3. Quantity Factor
Increase in Sales
7-1
P210,000
200,000
P 10,000
P164,000
176,000
Chapter 7 Gross Profit Variation Analysis and Earnings Per Share Determination
Sales in 2006 at 2005 prices
P200,000
Less: Sales in 2005
Favorable
P 50,000
Less: 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
Unfavorable
P 44,000
Net favorable quantity factor
Increase in Gross Profit
150,000
132,000
6,000*
P 28,000
* This may also be obtained using the following presentation:
Quantity Factor:
Sales in 2006 at 2005 prices
Less: Sales in 2005
Increase in Sales
Multiplied by: Ave. Gross Profit rate in 2005
Net favorable variance
P200,000
150,000
P 50,000
12%
P
6,000
Problem III
Requirement A:
Tony Corporation
Statement Accounting for Gross Profit Variation
For 2006
Increase (Decrease) in Sales accounted for as follows:
Price Factor
Sales this year
Less: Sales this year at last year’s prices
269,500
Favorable (Unfavorable)
Quantity Factor
Sales this year at last year’s
prices (P210,210 ÷ 78%)
Less: Sales last year
Favorable (Unfavorable)
Net Increase (decrease) in sales
P210,210
P(59,290)
P269,500
192,500
P 77,000
P 17,710
Increase (decrease) in Cost of Sales accounted for as follows:
7-2
Gross Profit Variation Analysis and Earnings Per Share Determination Chapter 7
Cost Factor
Cost of Sales this year
Less: Cost of Sales this year at last
year’s costs
(Favorable) Unfavorable
P 165,400
161,700
P 3,700
Quantity Factor
Cost of Sales this year at last year’s
costs (115,500 x 140%)
Less: Cost of Sales last year
(Favorable) Unfavorable
P 161,700
115,500
P 46,200
Net increase (decrease) in Cost of Sales
Net increase (decrease) in Gross Profit
P 49,900
P (32,190)
Gross Profit, this year
Gross Profit, last year
Increase (Decrease) in Gross Profit
P 44,810
77,000
P(32,190)
Requirement B:
(1) Change in Quantity
(2) Change in Unit Costs
P 77,000
P192,500
=
=
P 3,700
P161,700
=
=
40% increase
2.38% increase
Problem IV
Quantity Factor
1.
2.
Decrease in Sales due to decrease in the number
of customers [(1,000) x 18 MCF x P2.50)]
P(45,000)
Increase in Sales due to increase in consumption
rate per customer (26,000 x 2 MCF x P2.50)
Net Increase
130,000
P 85,000
Price Factor
3.
Decrease in Sales due to the decrease in rate per
MCF [P(.05) x 520,000]
7-3
(26,000)
Chapter 7 Gross Profit Variation Analysis and Earnings Per Share Determination
Increase in operating revenues
P 59,000
Supporting 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
2005
Decrease in rate or
price per MCF sold
P2.45
2.50
P(.05)
Problem V
XYZ Corporation
Gross Profit Variation Analysis
For 2006
Price Factor
Sales in 2006
Less: Sales in 2006 at 2005 prices
A (25 x P10)
B (75 x P20)
Increase (decrease) in gross profit
P 1,750
P 250
1,500
Cost Factor:
Cost of sales in 2006
Less: Cost of sales in 2006 at 2005 costs:
A (25 X P5)
P 125
B (75 x P10)
750
Increase (decrease) in gross profit
Quantity Factor:
Increase (decrease) in total quantity
Multiplied by: Average gross profit
per unit in 2005 (P750 ÷ 100)
7-4
1,750
P P
P
P
875
875
-
7.50
Gross Profit Variation Analysis and Earnings Per Share Determination Chapter 7
Increase (decrease) in gross profit
P
Sales Mix Factor:
Average gross profit per unit in 2006 at
2005 prices
Less: Average gross profit per unit in 2005
Increase (decrease)
-
P8.75 *
7.50
P1.25
Multiplied by: Total quantity in 2006
Increase (decrease) in gross profit
Increase in Gross Profit
100
P125.00
P125.00
* Sales in 2006 at 2005 prices
Less: Cost of sales in 2006 at 2005 prices
Gross profit in 2006 at 2005 prices
P1,750
875
P 875
Average Gross Profit on 2006 at 2005 prices:
P875
100 (volume in 2006)
=
P8.75
Problem VI (Computation of Weighted Average Number of Ordinary
Shares)
Date
1/1/2006
2/15/2006
4/1/2006
6/1/2006
9/1/2006
12/1/2006
Total
Number of Shares
Adjustment
for 25%
stock
As
Unadjusted dividend
Adjusted
16,000
4,000
20,000
3,200
800
4,000
(3,000)
(750)
(3,750)
1,400
350
1,750
6,400
1,600
8,000
6,000
(6,000)
30,000
30,000
Multiplier
12/12
10.5/12
9/12
7/12
4/12
-
Problem VII (Computation of Basic EPS and Diluted EPS)
1. Basic EPS
=
=
P 90,000
100,000
P0.90
7-5
Weighted
Shares
20,000
3,500
(2,812)
1,020
2,667
24,375
Chapter 7 Gross Profit Variation Analysis and Earnings Per Share Determination
2. Diluted EPS
=
P90,000 + (10% x P500,000 x 65%)
P500,000
100,000 +
P1,000
x 100
P90,000 + P32,500
150,000
=
P0.82 (rounded off)
=
Problem VIII
Requirements (1) and (2)
Explanation
Earnings
Basic earnings and shares
P122,000a
Stock option share increment
Tentative DEPS 1 amounts
P122,000
10% bond interest expense savings e 13,300d
Increment in shares
Tentative DEPS 2 amounts
P135,300
7.5% preference dividend savings e
28,500 d
Increment in shares
P163,800
5.8% bonds
21,924
Diluted earnings and shares
P185,724
a
Shares
÷
÷
33,333b = P3.66 Basic
293c
33,626 = P3.63 DEPS 1
÷
4,400 d
38,026 = P3.56 DEPS 2
÷
÷
= Per Share
9,310d
47,336 = P3.46 DEPS 3
6,264
53,600 = P3.465 Diluted
P122,000 = P150,500 (net income) - P28,500 (preference dividends)
Weighted average shares:
b
Weighted average shares
c
÷
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
33,333
Increment due to stock options:
Issued
Reacquired
4,000
4,000 x ( P33 + P5 )
P41
= (3,707)
Increment in shares
d
293
Impact on diluted earnings per share and ranking:
7-6
Gross Profit Variation Analysis and Earnings Per Share Determination Chapter 7
Ranking
P13,300
4,400
P3.02
5
=
P21,924
6,264
P3.50
3
=
P28,500
9,310
P3.06
2
[(0.10 x P200,000) – P1,000] x 0.7
=
200 x 22
10% bonds:
(0.058 x P540,000) x 0.7
540 x 11.6
5.8% bonds:
(0.075 x P380,000)
3,800 x 2.45
7.5% preference:
e
Impact
Dilutive effect on diluted earnings per share:
10% bonds:
P3.02 impact < P3.63 (DEPS 1), therefore dilutive
7.5% preference: P3.06 impact < P3.56 (DEPS 2), therefore dilutive
5.8% bonds:
P3.50 impact > P3.46 (DEPS 3), 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 Questions
1.
2.
3.
4.
B
B
C
D
5.
6.
7.
8.
A
B
B
B
9.
A
10. A
11. D *
12. C
13.
14.
15.
16.
A
D
C
A
17.
18.
19.
20.
A
B
C
D
21. C
22. A
23. B
* Supporting computation for no. 11:
P3,500,000 + (P800,000 x 65%)
400,000 + 25,000 + 225,000
P4,020,000
or P6.18
650,000
Diluted EPS for 12/31/2006 =
=
7-7