Question

Questions: 1. What is the meaning of contribution margin ration? How is this ratio useful in planning business operations? 2. In all respects, Company A and Company B are identical except that Company A's costs are mostly variable whereas Company B's costs are mostly fixed. When sales increase, which company will tend to realize the greatest increase in profits? Explain. 3. What is the meaning of operating leverage? 4. What is the meaning of break-even point? Problem: Oslo Company prepared the following contribution format income statement based on a sales volume of 1,000 units (the relevant range of production is 500 units to 1,500 units): I Sales $ 20,00 0 Variable expenses 12.00 0 Contribution margin 8,000 Fixed expenses 6.000 Net operating income $ 2,000 Required: 1. What is the contribution margin per unit? 2. What is the contribution margin ratio? 3. What is the variable expense ratio? 4. If sales increase to 1,001 units, what would be the increase in net operating income? 5. If sales decline to 900 units, what would be the net operating income? 6. If the selling price increases by $2 per unit and the sales volume decreases by 100 units, what would be the net operating income? 7. If the variable cost per unit increases by $1, spending on advertising increases by $1,500, and unit sales increase by 250 units, what would be the net operating income? 8. What is the break-even point in unit sales? 9. What is the break-even point in dollar sales?

Answer 1

Question 1 :

Contribution is defined as the amount recovered towards the fixed cost and profit

Contributiion Margin Ratio is also called P/V ratio (Profit Volume Ratio )

Contribution Margin Ratio = Contribution / Sales *100 , where contribution = Sales - Variable cost

The ratio shows the relationship between Fixed costs,Profit & sales

The use of the ratio are

*Used in determination of profitability of products

*Easy to user

*Able to predict the future contigencies

*Can be used in small scale as well as large scale business