MANAGEMENT ACCOUNTING - 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]
Price Factor (105,000 x P3)
Quantity/Price Factor [(24,000) x P3]
Less: Increase (decrease) in Cost of Sales:
Quantity Factor [(24,000) x P9]
Cost Factor [105,000 x (P.50)]
Quantity/Cost Factor [(24,000) x (P.50)]
Increase in Gross Profit

P(192,000)
315,000
(72,000)
P(216,000)
(52,500)
12,000

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

Less: Sales in 2005
Favorable
Less: Increase in Cost of Sales
Cost of Sales in 2006 at 2005 costs
(P132,000 x 133-1/3%)
Less: Cost of Sales in 2005
Unfavorable
Net favorable quantity factor
Increase in Gross Profit

P200,000
150,000
P 50,000
P176,000
132,000
P 44,000
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 years prices
Favorable (Unfavorable)
Quantity Factor
Sales this year at last years
prices (P210,210 78%)
Less: Sales last year
Favorable (Unfavorable)
Net Increase (decrease) in sales

P210,210
269,500
P(59,290)

P269,500
192,500
P 77,000
P 17,710

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

Cost Factor
7-2

Gross Profit Variation Analysis and Earnings Per Share Determination Chapter 7

Cost of Sales this year

Less: Cost of Sales this year at last
years costs
(Favorable) Unfavorable

P 165,400
P

161,700
3,700

Quantity Factor
Cost of Sales this year at last years
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]
Increase in operating revenues
P 59,000
7-3

(26,000)

Chapter 7 Gross Profit Variation Analysis and Earnings Per Share Determination

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
P

1,750
-

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

875

875
-

Quantity Factor:
Increase (decrease) in total quantity
Multiplied by: Average gross profit
per unit in 2005 (P750 100)

Increase (decrease) in gross profit

7-4

7.50
-

Gross Profit Variation Analysis and Earnings Per Share Determination Chapter 7

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 DEPS1 amounts
P122,000
10% bond interest expense savings e
13,300d
Increment in shares
Tentative DEPS2 amounts
P135,300
7.5% preference dividend savings e
28,500d
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 DEPS1

4,400d
38,026 = P3.56 DEPS2

= Per Share

9,310d
47,336 = P3.46 DEPS3
6,264
53,600 = P3.465 Diluted

P122,000 = P150,500 (net income) - P28,500 (preference dividends)

Weighted average shares:

Weighted 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
33,333

Increment due to stock options:

Issued
Reacquired

4,000
4,000 x ( P33 + P5 )
P41

= (3,707)

Increment in shares

293

Impact on diluted earnings per share and ranking:

7-6

Gross Profit Variation Analysis and Earnings Per Share Determination Chapter 7
Impact
Ranking
[(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

P13,300
4,400

P3.02

P21,924
6,264

P3.50

P28,500
9,310

P3.06

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 (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 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