Solution

Ex. 1
(a) Fixed Costs $240,000
Unit contribution margin = ———————————— = ————————
Break-even Sales in units ($800,000 ÷ $10)

$240,000
= ———— = $3.00
80,000

Variable cost per unit = $10 – $3 = $7

Contribution margin ratio = $3 ÷ $10 = 30%

(b) Fixed costs = Break-even Sales × CM Ratio

= $900,000 × 30% = $270,000
Therefore, fixed costs increased $30,000 ($270,000 – $240,000).

EX 2
(a) Selling price = $2,125,000 ÷ 500,000 = $4.25 per unit
Variable cost per unit = $1,500,000  500,000 = $3 per unit
Sales – Variable cost – Fixed cost = 0
$4.25X – $3.00X – $1,000,000 = 0
Break-even point in units = 800,000 units ($1,000,000 ÷ $1.25)
Break-even point in dollars = 800,000 × $4.25 = $3,400,000

(b) New variable cost per unit = (45% × $2,500,000) ÷ 500,000 = $2.25 per unit
$4.25X – $2.25X – ($2,500,000 × 55%) = 0
New break-even point in units = 687,500 units ($1,375,000 ÷ $2)
New break-even point in dollars = 687,500 × $4.25 = $2,921,875

EX 3
(a) Break-even sales in units
$10X = $6X + $1,920,000
$4X = $1,920,000
X = 480,000 units
Break-even point in dollars
X = .4X + $1,920,000
.4X = $1,920,000
X = $4,800,000

(b) Margin of safety in dollars

$6,000,000 – $4,800,000 = $1,200,000
Margin of safety ratio
$1,200,000 ÷ $6,000,000 = 20%
(c) Net Income
Sales $6,000,000
Variable Costs (3,600,000)
Fixed Costs (1,920,000)
Net Income $ 480,000

EX 5
(a) 70%X – $84,000 = $140,000
Required sales = $320,000 ($224,000 ÷ .70)

(b) Sales revenue $320,000

Variable costs ($320,000 ×.30) 96,000
Contribution margin 224,000
Fixed costs 84,000
Net income $140,000

EX 7
(a) Break-even Sales = Variable Costs + Fixed Costs
X = .75X + $240,000
.25X = $240,000
X = $960,000

(b) Contribution Margin per Unit = Unit Selling Price – Unit Variable Cost
CM = $20 – $15 = $5

Contribution Margin per Unit

Contribution Margin Ratio = —————————————
Unit Selling Price

CM Ratio = $5 ÷ $20 = 25%

Fixed Costs
Break-even Sales = ————————————
Contribution Margin Ratio

= $240,000 ÷ 25% = $960,000

(c) Sales $1,200,000

Less: Break-even Sales 960,000
Margin of Safety $ 240,000

Margin of Safety
Margin of Safety Ratio = ———————
Actual Sales

= $240,000 ÷ $1,200,000 = 20%

(d) Required Sales = Variable Costs + Fixed Costs + Targeted Net Income
X = .75X + $240,000 + $120,000

EX 8
1. D Activity base
2. A Break-even point
3. E Dollars
4. C Fixed costs
5. G Loss
6. B Profit
7. I Revenues
8. H Total costs
9. F Variable costs

EX 10
Break-even point in dollars: $450,000 ÷ 30% = $1,500,000
Margin of safety in dollars: $2,000,000 – $1,500,000 = $500,000
Margin of safety ratio: $500,000 ÷ $2,000,000 = 25%

Class activity Exercises

Solution Genavine
(a) Product
X21 R45
Contribution margin per unit $25 $40
Machine hours required ÷ 2.5 ÷ 4.2
Contribution margin per unit of limited resource $10 $9.52

(b) The X21 product should be manufactured because it results in the highest contribution
margin per machine hour: $10 × 1,200 = $12,000

Solution SAM
Contribution margin per unit:
Footballs: [$60,000 – $36,000] ÷ 4,000 = $6
Baseballs: [$25,000 – $7,000] ÷ 2,500 = $7.20

Sam should tell his sales people to sell more baseballs due to the higher contribution margin per
unit.