Question

Last month when Holiday Creations, Inc., sold 38,000 units, total sales were $313,000, total variable expenses were $256,660, and fixed expenses were $38,900.

Required:

1. What is the company’s contribution margin (CM) ratio?

2. What is the estimated change in the company’s net operating income if it can increase total sales by $3,000? (Do not round intermediate calculations.)

Answer 1

1. Contribution margin (CM) ratio = Contribution margin / Total Sales

Contribution margin = Total Sales - Total variable expenses

= $313,000 - $256,660

= $ 56,340

    Contribution margin (CM) ratio = $ 56,340 / $313,000

= 18%

2. Actual Profit = Contribution margin - Fixed expenses

= $ 56,340 - $38,900

= $ 17,440

If total sales increased by $3,000, then the desired profit is:

= (Sales x  Contribution margin ratio) - Fixed expenses   

= [(313,000 + 3,000) x 18%] - 38,900

= (316,000 x 18%) -38,900

= $17,980

Hence, company’s net operating income will increase by $ 540 ($17,980 - $ 17,440) if it can increase total sales by $3,000.