Question

Last month when Holiday Creations, Inc., sold 39,000 units, total sales were $314,000, total variable expenses were $229,220, and fixed expenses were $36,400. 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 $2,400? (Do not round intermediate calculations.) 1. Contribution margin ratio 2. Estimated change in net operating income %

Answer 1

SOLUTION-

1) contribution margin ratio= (contribution margin/ sales)*100

contribution margin= sales- variable cost= 3,14,000-2,29,220= 84,780

contribution margin ratio=(84,780/314000)*100= 27%

2) net operating income= contribution margin - fixed expenses

i) when sales were 3,14,000

net operating income= 84780( calculated above)-36400= 48,380 (a)

ii)when sales were increased by 2,400 (i.e total sales after increase is 3,14,000+2,400=3,16,400)

contribution margin ratio remains same irrespective number of units sold. in this case sale is increased which indicates that company has sold more units.

now, contribution margin=contribution margin ratio*sales=27%*3,16,400=85428

net operating income=85,428-36400= 49,028 (b)

change in net operating income=(b)-(a)= 49,028-48,380=648

change in net operating income( in %)

= (change in net operating income/ net operating income before change in sales)*100

=(648/ 48,380)*100=1.34%