A. This unit contribution margin in year 2 will be $8, not $9.

B. This is the profit in year 1. It is predicted that the sales level would be increased by 10% in year 2.

C. In the original Year 2 budget, net income will be reduced to $300,000 from $450,000 in Year 1, a $150,000 decrease. The question says that fixed costs will not change for Year 2, and in the original Year 2 budget, that sales revenue will not change. Therefore, if net income is to decrease by $150,000, the decrease must come from an increase of $150,000 in variable costs. Actual variable costs in Year 1 totaled $3,150,000. If they increase by $150,000, they will increase to a total of $3,300,000. So the original Year 2 budget is as follows:

 Sales (150,000 units @ $30)                  $4,500,000

 Variable costs                                   3,300,000

 Contribution margin                            $1,200,000

 Fixed costs:  

   Manufacturing overhead                    $   600,000

   Selling & marketing exp.                        300,000

 Net income                                    $   300,000

Now, we adjust the revenue to the revised level of 110% of $4,500,000. However, when we do that, we must also increase the variable costs, because this revenue increase will come from increased unit sales, not from price increases. So we must also increase variable costs to 110% of $3,300,000. Now, we have an income statement that looks like this:

 Sales ($4,500,000 × 1.10)                    $4,950,000

 Variable costs ($3,300,000 × 1.10)             3,630,000

 Contribution margin                            $1,320,000

 Fixed costs: 

   Maufacturing overhead                      $   600,000

   Selling & marketing expense                    300,000

 Net income                                    $   420,000

D. This answer is incorrect since it also including a 10% increase in fixed costs as well.