Solutions for Chapter 12

E12.13.
a. Use the model, enter the known data, and solve for the unknown.
Revenue
Variable Expense
Contribution Margin

Per Unit
*
$ ?
7.00
$ ? *

Volume

=
=

Total
$

%
100%
70%
30%

Variable expenses = 70% of selling price. Selling price = $7.00 / 70% = $10.00
b.
Revenue
Variable Expense
Contribution Margin
Fixed Expense
Operating Income

Per Unit
*
$10.00
7.00
$ 3.00 *

Volume

Total

$
?
(21,000)
$ 9,000

%
100%
70%
30%

Total contribution margin = ($21,000 + $9,000) = $30,000. Total contribution margin

divided by the contribution margin per unit of $3.00 gives 10,000 units of the new
product that would have to be sold to increase operating income by $9,000.
E12.14.
a.
Revenue
Variable Expense
Contribution Margin

Per Unit
*
$ ?
8.25
$ ? *

Volume

Total

$ ?

%
100%
66%
34%

Variable expense ratio = 100% - 34% = 66%

Selling price = Variable expenses / Variable expense ratio = $8.25 / 66% = $12.50
b. Note: The requirement is to determine the number of units of the new product
that must be sold to break even on the new product.
Revenue
Variable Expense
Contribution Margin
Fixed Expense
Operating Income

Per Unit
*
$12.50
8.25
$ 4.25 *

Volume

Total

$ 30,600
(30,600)
$
0

%
100%
66%
34%

Break-even in units = Fixed expenses / Contribution margin per unit = $30,600 / $4.25
= 7,200 units

E12.14.

(continued)
New Product

c. Revenue
Variable Expense
Contribution Margin
Fixed Expense
Operating Income (loss)

Existing Products

$13.75 * 20,000 = $275,000

8.25
$ 5.50 * 20,000 = $ 110,000
(30,600)
$ 79,400

Total

$275,000

$550,000

$ 93,500 = 34%
(100,000)
$ (6,500)

203,500
(130,600)
$ 72,900

Average contribution margin ratio = Total contribution margin / Total sales

= $203,500 / $550,000 = 37%
d.

E12.15.
a.

The specific data for existing products, not known in this example, would have to be
adjusted for the reduction due to volume "stolen" by the new product. This could result
in a reduction of total revenue, contribution margin and operating income. The average
contribution margin ratio would also change.
Per Unit
*
$2.50
0.80
$1.70 *

Volume

Revenue
Variable Expense
Contribution Margin
750
Fixed Expense
Operating income from increased volume
Variable expenses of 950 cones given away, @ $0.80
Net increase in operating income
b.

Total

$ 1,275
(350)
$ 925
(760)
$ 165

%
100%
32%
68%

Yes. Not only does the promotion itself result in increased operating income, but also
it is likely that customers will purchase some other products (e.g., food and/or
beverages) on which additional contribution margin will be earned.

P12.19.
a. Revenues (20,000 units * $10 per unit)
Variable expenses:
Cost of goods sold (20,000 units * $ 5.20 per unit)
Selling expenses (20,000 unit * $0.30 per unit)
Administrative expenses (20,000 units * $0.50 per unit)
Total variable expenses
Contribution margin
Fixed expenses:
Cost of goods sold
Selling expenses
Administrative expenses
Total fixed expenses

$200,000
$104,000
6,000
10,000
120,000
$ 80,000
$36,000
9,200
18,800
64,000

Operating income

$ 16,000

b. Contribution margin per unit = Total CM / Volume = $80,000 / 20,000 units = $4.00
Alternative approach:
CM per unit = Selling price per unit - Variable expense per unit
= $10.00 - $6.00 = $4.00 per unit
Contribution margin ratio = CM / Revenues = $80,000 / $200,000 = 40%
Alternative approach:
CM ratio = CM per unit / Selling price per unit = $4.00 / $10.00 = 40%
P12.19. (continued)
c. 1. Volume of 14,000 units:
Revenue
Variable Expense
Contribution Margin
Fixed Expense
Operating Income

Per Unit
*
$10.00
6.00
$ 4.00 *

Volume

Total

28,000 = $112,000
(64,000)
$ 48,000

%
100%
60%
40%

Alternative approach: 8,000 more units sold @ $4.00 CM per unit = $32,000 increase
in contribution margin and operating income. Present operating income is $16,000, so
new operating income will be $48,000.
2. Volume of 6,000 units:
Revenue
Variable Expense
Contribution Margin
Fixed Expense (no change)
Operating Loss

Per Unit
*
$10.00
6.00
$ 4.00 *

Volume

12,000 =

Total
$ 48,000
(64,000)
$(16,000)

%
100%
60%
40%

Alternative approach: Operating income decreases by $32,000 (8,000 units * $4.00

contribution margin per unit) from present operating income of $16,000, causing an
operating loss of $16,000.
d. 1. Use the contribution margin ratio of 40%. Revenue increase of $60,000 causes a
$24,000 increase (40% * $60,000) in contribution margin and operating income.
Operating income = $16,000 + $24,000 = $40,000
2. Revenue decrease of $52,000 causes a $20,800 decrease (40% * $52,000) in
contribution margin and operating income. Operating income changes to a loss
= $16,000 - $20,800 = $(4,800)

P12.22.
a. Sales
Variable expenses (70% * $80,000)
Contribution margin (30% * $80,000)
Fixed expenses
Operating income

$80,000
(56,000)
$24,000
(18,000)
$ 6,000

Note: Operating income remains the same, so Fixed expenses = ($24,000

Contribution margin - $6,000 Operating income).
b. Increase in sales (8% * $80,000)
Contribution margin ratio .
Increase in contribution margin.
Previous operating income
Adjusted operating income

$6,400
30%
$1,920
6,000
$7,920

Operating income = $6,000 + $1,920 = $7,920. The increase in contribution margin is

also the increase in operating income, because fixed expenses do not change.
c. At break-even, contribution margin = fixed expenses = $18,000
Contribution margin = (30% contribution margin ratio * ??? sales) = $18,000
Sales = ($18,000 fixed expenses / 30% CM ratio) = $60,000 at break-even.