Last year, Brown Manufacturing had a contribution margin ratio of 40%. This year, fixed expenses are...
Last year, Brown Manufacturing had a contribution margin ratio of 40%. This year, fixed expenses are expected to remain at $50 000 and sales are expected to increase by $90 000. What should the contribution margin ratio be this year if the company wishes to increase net income by $31 500?
|
a. |
78.75% |
|
b. |
40.00% |
|
c. |
35.00% |
|
d. |
55.56% |
Homework Answers
Last year contribution margin ratio is equal to 40%.
Since, the fixed expense are expected to remain at $ 50,000. And and this 50,000 is already taken into account while calculating the operating income. So if there is any increase in the sale , it has to deduct only the variable cost related with such sales.
Since all the fixed cost have already deducted. We do not need to deduct any further fixed cost.
Therefore, any amount in excess of variable cost will directly contribute towards contribution or the contribution margin.
Accordingly,
Sale increased by $ 90,000.
And we need to increase the income by $31,500.
Thus, these 31,500 dollar will be the the contribution itself.
So, new contribution margin ratio=(contribution/sales)*100
=(31,500/90,000)*100
=0.35*100
=35%. Ans.
Hence, Answer- (C). 35%.
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