Last month when Holiday Creations, Inc., sold 45,000 units, total sales were $281,000, total variable expenses were $205,130, and fixed expenses were $36,800.
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 $2,200? (Do not round intermediate calculations.)
1. Contribution margin ratio = 27%
2. Estimated change in the company’s net operating income = $594 (Increase)
Explanation
1. Contribution margin ratio = (Sales - Variable expenses) / Sales
= ($281,000 - $205,130) / $281,000
= 27%
2. Calculation of estimated change in the company’s net operating income if it can increase total sales by $2,200:
Actual income = Sales - Variable expenses - Fixed expenses
= $281,000 - $205,130 - $36,800
= $ 39,070
Estimated income = (Sales x Contribution margin ratio) - Fixed expenses
= [($281,000 + $2,200) x 27%] - $36,800
= $ 76,464 - $36,800
= $ 39,664
Estimated Changes in net operating income = $ 39,664 - $ 39,070
= $594 (Increase)
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