PRODUCT A B

1. Contribution margin ratio 40% 30%

Selling price 5 2.5
Monthly sales average 30,000 40,000
Fixed cost $ 72,000

a) Total fixed cost $ 72,000

Divided by: Contribution margin ratio 36%
Break-even in dollar sales $ 200,000

Contribution margin/unit $9
Divided by: Selling price/unit $ 25
Contribution margin ratio 36%

A B
Selling price $5 $ 2.5
Multiplied by: Contribution margin ratio 40% 30%
$2 $ .75
Multiplied by: Unit sold ratio 3 4
Total contribution margin/unit $6 $3 = $9

Selling price $5 $ 2.5

Multiplied by: Unit sold ratio 3 4
Total selling price/unit $ 15 $ 10 = $ 25

b) Total fixed cost $ 36,000

Divided by: Contribution margin ratio 40%
Break-even in dollar sales for product A $ 90,000

Total fixed cost $ 36,000

Divided by: Contribution margin ratio 30%
Break-even in dollar sales for product B $ 120,000

c) Fixed cost $ 72,000

Add: Advertising 9,700
Total fixed cost $ 81,700
Divided by: Contribution margin ratio 37.1429%
New break-even in dollar sales $ 219,962

Contribution margin/unit $ 13
Divided by: Selling price/unit $ 35
Contribution margin ratio 37.1429%

A B
Selling price $5 $ 2.5
Multiplied by: Contribution margin ratio 40% 30%
$2 $ .75
Multiplied by: Unit sold ratio 5 4
Total contribution margin/unit $ 10 $ 3 = $ 13

Selling price $5 $ 2.5

Multiplied by: Unit sold ratio 5 4
 Total selling price/unit $ 25 $ 10 = $ 35

Yes, the proposal to spend the additional $9,700 a month should be accepted. Even
the sales of product B falls to 32,000 units a month, the increase of 40,000 units a month
for product A and the additional advertising contribute to the increase of operating
income. For the old product mix, the OI is only $ 18,000 (CM of $90,000 less FC of
72000) while for the new product mix, the OI is $22,300 (CM of $ 104,000 less FC of
$81,700).

2.
Product A Product B Product C
Selling price $10 $20 $40
Variable costs 7 12 16
Contribution margin $3 $8 $ 24
Contribution margin ratio 30% 40% 60%

CMR = (30%×20%) + (40%×60%) + (60%×20%) = 42%

a) Total fixed cost $ 840,000

Divided by: Contribution margin ratio 42%
Break-even in dollar sales $ 2,000,000

b) Break-even in dollar sales $ 2,000,000

Multiplied by: Percentage in dollar sales 20%
Portion sales of unit A 400,000
Divided by: Selling price $ 10
Sales in units A at break-even 40,000 units

Break-even in dollar sales $ 2,000,000

Multiplied by: Percentage in dollar sales 60%
Portion sales of unit A 1, 200,000
Divided by: Selling price $ 20
Sales in units A at break-even 60,000 units

Break-even in dollar sales $ 2,000,000

Multiplied by: Percentage in dollar sales 20%
Portion sales of unit A 400,000
Divided by: Selling price $ 40
Sales in units A at break-even 10,000 units

3.

Product A Product B
Selling price $1,200 $240
Variable costs 480 160
Contribution margin $720 $80
Weighted contribution margin (3A+5B) $2,160 $400 $ 2,560
Fixed cost 1,800,000

a) Total fixed cost $ 1,800,000

Divided by: Weighted contribution margin $ 2,560
Break-even in units 703.125 or 704
 Break-even in units 704
Multiplied by: Contribution margin ratio 3
Break-even in units for product A 2,112 units

Break-even in units 704

Multiplied by: Contribution margin ratio 5
Break-even in units for product B 3,520 units

b) Total fixed cost $ 1,800,000

Add: Income before income taxes 800,000
2,600,000
Divided by: Weighted contribution margin $ 2,560
Break-even in units 1015. 65 or 1016

Break-even in units 1016

Multiplied by: Contribution margin ratio 3
Sales volume for product A 3,048 units

Break-even in units 1016

Multiplied by: Contribution margin ratio 5
Sales volume for product B 5,080 units

c) Total fixed cost $ 1,800,000

Add: Income after income taxes (800k/70%) 1,142,857
2,942,857
Divided by: Weighted contribution margin $ 2,560
Break-even in units 1,149.55 or 1,150

Break-even in units 1,150

Multiplied by: Contribution margin ratio 3
Sales volume for product A 3,450 units

Break-even in units 1150

Multiplied by: Contribution margin ratio 5
Sales volume for product B 5,750 units

d) Selling price of product A (3 × $1,200) $ 3,600

Selling price of product B (5 × $240) 1,200
Total selling price $ 4,800
 Let x = sales revenue before tax income

x = $1,800,000 + $.12x
$2,560/$4,800
$2,560/$4,800x = $1,800,000 + $.12x
$2,560/$4,800x - $.12x = $1,800,000
31/75x = $1,800,000
31/75 31/75
x = $ 4,354,838.71 or $ 4,354,839

Sales revenue in before tax income $ 4,354,839

Multiplied by: Portion of product A 75%
3,266,129.25
Divided by: Selling price of product A $ 1,200
Sales volume for product A 2,722 units

Sales revenue in before tax income $ 4,354,839

Multiplied by: Portion of product B 25%
1,088,709.75
Divided by: Selling price of product B $ 240
Sales volume for product B 4,537 units

e) Let x = sales revenue after tax income

x = $1,800,000 + $.12x/70%
$2,560/$4,800
$2,560/$4,800x = $1,800,000 + 6/35x
$2,560/$4,800x – 6/35x = $1,800,000
38/105x = $1,800,000
38/105 38/105
x = $ 4,973,684.211 or $ 4,973,684

Sales revenue in before tax income $ 4,973,684

Multiplied by: Portion of product A 75%
3,730,263
Divided by: Selling price of product A $ 1,200
Sales volume for product A 3,109 units

Sales revenue in before tax income $ 4,973,684

Multiplied by: Portion of product B 25%
1,243,421
Divided by: Selling price of product B $ 240
Sales volume for product B 5,181 units