Question

Last month when Holiday Creations, Inc., sold 45,000 units, total sales were $307,000, total variable expenses were $254.810, and fixed expenses were $38,600. 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 $2,000? (Do not round intermediate calculations.) % 1. Contribution margin ratio 2. Estimated change in net operating Income

Answer 1

1)

Unit selling price = Total sales ÷ Number of units

= $3,07,000 ÷ 45,000 units

Selling price = 6.82

* Unit variable expense =

Total variable expenses ÷ number of units

Unit variable expense = $2,54,810 ÷ 45,000 units

unit variable expense = 5.66

* Contribution margin per unit =

Selling price per unit - Variable cost per unit

Contribution margin per unit = 6.82 - 5.66

Contribution margin per unit = 1.16

Now, computing the contribution margin ratio as :

* Contribution margin ratio =

Unit Contribution margin ÷ Unit selling price

Contribution margin ratio = 1.16 ÷ 6.82

The Contribution margin ratio = 0.17 (or) 17℅

2) Change in net operating income =

Increase in total sales × Contribution margin ratio

Change in net operating income = $2,000 × 0.17

Change in net operating income = $340

Therefore, the net operating income increases by $340

1) contribution margin rato = 0.17 (or) 17℅

2) net operating income increases by $340