Question

Last month when Holiday Creations, Inc., sold 50,000 units, total sales were $200,000, total variable expenses were $120,000, and fixed expenses were $65,000.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 $1,000.

Answer 1

Answer and Explanation:

The computation is shown below:

1) The contribution margin ratio is

Contribution margin ratio = Unit Contribution margin ÷ Unit selling price

where,

Unit selling price is

= Total sales ÷ Number of units

= $200,000 ÷50,000

= $4

And,

Unit variable expense = Total variable expenses ÷ number of units

= $120,000 ÷ 50,000

= $2.4

Now

Contribution margin per unit = Selling price per unit - Variable cost per unit

= $4 - $2.4

= $1.6

So, the contribution margin ratio is

Contribution margin ratio = $1.6 ÷ $4

= 0.4 or 40%

2)

The net operating income is

In the case when the total sales increased by $1,000

Sales $201,000

Less: variable expenses $120,600

Contribution margin $80,400

Less: Fixed costs $65,000

Net operating income $15,400

Prior increase in the sales, the net operating income is

Sales $200,000

Less: variable expenses $120,000

Contribution margin $80,000

Less: $65,000

Net operating income $15,000

So it increase by $400 i.e.

= $15,400 - $15000

= $400