Question

Last month when Holiday Creations, Inc., sold 39,000 units, total sales were $296,000, total variable expenses were $248,640, and fixed expenses were $37,300.

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 $1,800? (Do not round intermediate calculations.)

Answer 1

	Total	Per unit (total / 39,000)
Sales	$296,000	$7.5897
Less: Variable expense	($248,640)	($6.3754)
Contribution margin	$47,360	$1.2143
Fixed expenses	$37,300
Net Operating Income	$10,060

Contribution margin ratio = (Contribution Margin / Sales) *100

Contribution margin ratio = ($47,360 / $296,000) *100 = 16%

Contribution margin ratio = 16%

b) If Total sales increase by $1,800 then Net operating income is

Sales (New) = $296,000 + $1,800 = $297.800

Contribution margin = sales * Contribution margin ratio = $297,800 *16% = $47,648

Contribution Margin = $47,648

Less Fixed cost = $37,300

Net Operating Income = $10,348

Change in Net operating Income = $10,348 - $10,060 = $288

Increase in net operating income due to increase in sales by $1,800 = $288