Question

Last month when Holiday Creations, Inc., sold 40,000 units, total sales were $295,000, total variable expenses were $215,350, and fixed expenses were $39,300.

Required:
1.	What is the company’s contribution margin (CM) ratio?

      

2.	Estimate the change in the company’s net operating income if it were to increase its total sales by $2,200.

     

Answer 1

1. Calculate contribution margin ratio :

Contribution margin = 295000-215350 = 79650

Contribution margin ratio = 79650*100/295000 = 27%

2. Estimate the change in the company’s net operating income if it were to increase its total sales by $2,200.

	Present	Proposed
Sales	295000	297200
Contribution margin	79650	80244
Less : Fixed expenses	(39300)	(39300)
Net operating income	40350	40944

Company's net income increase by (40944-40350) = $594