Question

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 $1,800? (Do not round intermediate calculations.)

Last month when Holiday Creations, Inc., sold 36,000 units, total sales were $311,000, total variable expenses were $223,920, 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 $1,800? (Do not round Intermediate calculations.) 1. Contribution margin ratio 2. Estimated change in net operating income

1-a. The marketing manager argues that a $9,000 increase in the monthly advertising budget would increase monthly sales by $20,000. Calculate the increase or decrease in net operating income.

1-b. Should the advertising budget be increased?

2-a. Refer to the original data. Management is considering using higher-quality components that would increase the variable expense by $5 per unit. The marketing manager believes that the higher-quality product would increase sales by 20% per month. Calculate the change in total contribution margin.

2-b. Should the higher-quality components be used?

1. Calculate the company’s break-even point in unit sales.

2. Calculate the company’s break-even point in dollar sales. (Do not round intermediate calculations.)

3. If the company's fixed expenses increase by $600, what would become the new break-even point in unit sales? In dollar sales? (Do not round intermediate calculations.)

1. Calculate the unit sales needed to attain a target profit of $4,750. (Do not round intermediate calculations.)

2. Calculate the dollar sales needed to attain a target profit of $9,000. (Round your intermediate calculations to the nearest whole number.)

1. What is the company’s margin of safety? (Do not round intermediate calculations.)

2. What is the company’s margin of safety as a percentage of its sales? (Round your percentage answer to 2 decimal places (i.e. .1234 should be entered as 12.34).)

Answer 1

1),cm ratio

CONTRIBUTION MARGIN ratio = CONTRIBUTION/sales×100

CONTRIBUTION MARGIN= sales- variable cost

=$311000 - $223920

= $87080

cm ratio = $87080/$311000×100 = 28%

2) change in operating income if sales increase by$1800

Increase in operating income = increase in sales× CONTRIBUTION MARGIN ratio

= $1800×28%=$504

​​​​1a) $9000 increase in monthly budget which lead to increase MONTHLY sales by $20000 then change in net operating income will be

Increase/decrease in net operating income =(increase in sales×contrubution ratio)- increase in fixed cost

$20000×36%- $9000

= $7200 - $9000 = $1800

1b) no , advertising budget don't increase

2a)

increase sales units by 20%

Then 2700+20%= 3240units

New variable cost per unit =$80+$5=$85

NEW CONTRIBUTION MARGIN PER UNIT= $125-$85 =$40

Old CONTRIBUTION MARGIN =2700units ×36=$97200

New CONTRIBUTION MARGIN =3240×$40=$129600

Change in CONTRIBUTION = $97200 - $129600= $32400

2b) yes high quality components to used which leads to increase in NET OPERATING INCOME

1) break even point in units =fixed cost/CONTRIBUTION MARGIN PER UNIT

CONTRIBUTION MARGIN PER UNIT=selling price - variable cost per unit

=$10-$8=$2

=$4000/2= 2000units

2)break even point in dollars =2000units ×selling price per unit

=2000×$10=$20000

3)if fixed expenses increase by$600 then New break even point in units and dollars

New BREAK EVEN POINT IN UNITS =$4600/$2=2300units

New break even point in dollars=2300unit×$10=$23000

1)to achieve Target profit compute UNIT sales

unit sales =Target profit+fixed cost/CONTRIBUTION MARGIN PER UNIT

CONTRIBUTION MARGIN PER UNIT=selling price - variable expenses per unit

. =$134-$67=$67

=$4750+$32100/$67

= 550units

2)ta achieve Target profit, compute sales in dollars

sales in dollars =Target profit+fixed COST/CONTRIBUTION MARGIN ratio

CONTRIBUTION MARGIN ratio =$67/$134=50%

=$9000+$32100/50@%=$82200

1) compute margin of safety

margin of safety =profit/CONTRIBUTION MARGIN PER UNIT

  

Particular	amount ($)
Sales(1020×$25)	25500
(-) variable expenses(1020×$16)	(16320)
CONTRIBUTION	9180
(-) fixed cost	(7830)
Net operating income	1350

margin of safety in dollars= $1350/$9= 150units

150×$25=$3750

​​​​margin of safety profit ratio = margin of safety/sales×100

=$3750/$25500×100=14.70%

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