Cornerstone Exercise 16.

1. a. Var. product cost per unit = Direct materials + Direct labor + Var. overhead
= $5.75 + $1.25 + $0.60 = $7.60
b. Total var. cost per unit = Direct materials + Direct labor + Variable
overhead + Variable selling expense
= $5.75 + $1.25 + $0.60 + $0.80 = $8.40
c. Contribution margin per unit = Price – Variable cost per unit
= $16 − $8.40 = $7.60
d. Contribution margin ratio = (Price – Variable cost per unit)/Price
= ($16 − $8.40)/$16 = 0.475 = 47.50%
e. Total fixed expense = $43,000 + $19,000 = $62,000

2. Super-Tees Company
Contribution-Margin-Based Operating Income Statement
For the Coming Year

Total Per Unit

Sales ($16 × 12,000 T- $192,000 $16.00
shirts).........................................
Total variable expense ($8.40 × 100,800 8.40
12,000).......................
Total contribution margin $ 91,200 $ 7.60
........................................
Total fixed expense 62,000
.......................................................
Operating $ 29,200
income.....................................................

3. a. Var. product cost per unit = Direct materials + Direct labor + Var. overhead
= $5.75 + $1.25 + $0.60 = $7.60
b. Total var. cost per unit = Direct materials + Direct labor + Variable overhead +
Variable selling expense
= $5.75 + $1.25 + $0.60 + $1.75 = $9.35
c. Contribution margin per unit = Price – Variable cost per unit
= $16.00 − $9.35 = $6.65
d. Contribution margin ratio = (Price – Variable cost per unit)/Price
= ($16.00 − $6.65)/$16.00 = 0.4156 = 41.56%
e. Total fixed expense = $43,000 + $19,000 = $62,000
Variable product cost and total fixed expense are unchanged by an increase in the
variable selling expense. Total variable unit cost and contribution margin, however,
will be changed by a change in the variable selling expense.
Cornerstone Exercise 16.2

1. Sales commission per unit = Commission rate × Price

= 0.05 × $320
= $16
Direct materials $ 68
Direct labor 40
Variable overhead 12
Sales commission 16
Variable cost per unit $136
Contribution margin per unit = Price – Variable cost per unit
= $320 – $136
= $184

2. Break-even units = Total fixed costs/(Price – Unit variable cost)

= ($500,000 + $116,400)/($320 – $136)
= $616,400/$184
= 3,350

Sales (3,350 units × $320) ....................................... $1,072,000

Less: Variable expenses (3,350 × $136)................. 455,600
Contribution margin............................................. $ 616,400
Less: Fixed expenses.............................................. 616,400
Operating income................................................. $ 0
Indeed, selling 3,350 units does yield a zero profit.

3. Units for $333,408 = (Total fixed costs + Target profit)/Contribution margin

= ($616,400 + $333,408)/$184
= 5,162

4. The number of units needed to achieve operating income of $322,000 is less

than 5,162. Units = (Total fixed costs + Target profit)/Contribution margin
= ($616,400 + $322,000)/$184
= 5,100

Cornerstone Exercise 16.3

1. Contribution margin per unit = Price – Unit variable cost

= $90.00 – $75.60 = $14.40
Contribution margin ratio = $14.40/$90.00 = 0.16, or 16%
Cornerstone Exercise 16.3 (Concluded)

2. Break-even sales revenue = Total fixed cost/Contribution margin ratio

= $321,000/0.16 = $2,006,250

3. Sales revenue needed = (Total fixed cost + Target profit)/Contribution margin

ratio
= ($321,000 + $100,000)/0.16 = $2,631,250

4. Target profit of $110,000 is larger than $100,000, so the sales revenue needed
would be larger. Sales needed = (Total fixed cost + Target profit)/Contribution
margin ratio
= ($321,000 + $110,000)/0.16 = $2,693,750
Sales revenue needed for a target profit of $110,000 would be $62,500 more ($2,693,750 –
$2,631,250) than the sales revenue needed for a target profit of
$100,000. The amount of increase could also be calculated by dividing the increase in
target profit by the contribution margin ratio ($10,000/0.16 =
$62,500).

Cornerstone Exercise 16.4

1. Before-tax income = After-tax income/(1 – Tax

rate)
= $420,000/(1 – 0.40)
= $420,000/(0.60)
= $700,000

2. Units = (Total fixed cost + Target profit)/(Price – Variable cost per unit)
= ($730,000 + $700,000)/($275 − $185)
= 15,889 (rounded)

3. Olivian Company
Income Statement
For the Coming Year

Total
Sales ($275 × 15,889 $ 4,369,475
units)......................................
Total variable expense ($185 × 2,939,465
15,889)...................
Total contribution margin $ 1,430,010
...................................
Total fixed expense 730,000
..................................................
Operating $ 700,010
income................................................
Less: Income taxes ($700,010 × 280,004
0.40).....................
Net income*.......................................................... $ 420,006

* Net income does not precisely equal $420,000 due to rounded units.
Cornerstone Exercise 16.4 (Concluded)

4. The units would be lower than 15,889 since the lower tax rate means that a smaller
operating income would be needed to yield the same target net income.
Before-tax income = $420,000/(1 – 0.35)
= $420,000/(0.65)
= $646,154 (rounded)
Units = (Total fixed cost + Target profit)/(Price – Variable cost per unit)
= ($730,000 + $646,154)/($275 − $185)
= 15,291 (rounded)