Question

Last month when Holiday Creations, Inc., sold 36,000 units, total sales were $309,000, total variable expenses were $219,390, and fixed expenses were $35,100. 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 $2,700? (Do not round intermediate calculations.)

1.	Contribution margin ratio		%
2.	Estimated change in net operating income

Answer 1

1. Contribution margin ratio = 29%

2. Estimated change in net operating income = $783

Explanation:

It is given that,

Sales = $309,000

Variable expenses = $219,390

Contribution margin = Sales - Variable expenses = $309,000 - $219,390 = $89,610

Contribution margin ratio = Contribution margin ÷ Sales = $89,610 ÷ $309,000 = 0.29 = 29%

Estimated change in net operating income if total sales increases by $2,700 = Increase in total sales × Contribution margin ratio = $2,700 × 29% = $783