Answer
In almost all type of CVP questions which involve changes in one or more variables i.e., sale price, variable costs etc., remember that the correct calculation of "Revised Contribution Margin" is the key to solve the problem. Focus on how the contribution margin will behave when its components change. An easy approach is to take the "existing" figure and adjust for the changes required in the question as follows;
Work Step by Step
Note-1
Existing contribution margin (CM) = 7.5
Revised CM = 7.5 * 1.10 (10% increase) = 8.25
Note-2
Revised sales price 32.50
Variable costs - direct 21
Variable costs - sales commissions 32.5 * 5% = 1.625
Revised contribution margin (32.5 - 21 - 1.625) = 9.8750
Note-3
Fixed costs
Manufacturing (1,200,000 * [100% - 60%[ saving on outsourcing) = 480,000
marketing 300,000
Revised total fixed costs = 780,000
Note-4
Sales price 30
variable costs (revised) = 23 (21 + 2 increased)
variable costs (commissions) = 30 * 0.05 = 1.5
Revised contribution margin = 30 - 21 - 1.5 = 7.5
