Question

Contribution Margin Ratio a. Young Company budgets sales of $112,900,000, fixed costs of $25,000,000, and variable costs of $66,611,000. What is the contribution margin ratio for Young Company? % b. If the contribution margin ratio for Martinez Company is 40%, sales were $34,800,000, and fixed costs were $1,500,000, what was the operating income? $

Answer 1

Solution:

(a) The formula for calculating the contribution margin ratio is

= ( Total sales – Total Variable costs ) / Total sales

As per the information given in the question we have

Sales = $ 112,900,000 ; Variable cost = $ 66,611,000

Applying the above information in the contribution margin ratio we have

= ( $ 112,900,000 - $ 66,611,000 ) / $ 112,900,000

= $ 46,289,000 / $ 112,900,000

= 0.41

= 41 %

Thus the contribution margin ratio for Young company = 0.41 = 41 %

(b) The operating income can be calculated as follows :

= ( Total Sales * Contribution Margin ratio ) - Fixed Costs

As per the information given in the question we have

Contribution margin Ratio = 40 % = 0.40 ; Total sales = $ 34,800,000   ; Fixed costs = $ 1,500,000

Applying the available information in the formula for operating income we have :

= ( $ 34,800,000 * 0.40 ) - $ 1,500,000

= $ 13,920,000 - $ 1,500,000

= $ 12,420,000

Thus the operating Income of Martinez Company = $ 12,420,000