Question

Last month when Holiday Creations, Inc., sold 37,000 units, total sales were $283,000, total variable expenses were $215,080, and fixed expenses were $39,600. 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 $2,500? (Do not round intermediate calculations.)

Answer 1

a. 24%

b. $600

Step-by-step explanation:

The computation is shown below:

a. The contribution margin ratio is

= (Sales - variable cost) ÷ (Contribution margin) × 100

= ($283,000 - $215,080) ÷ (283,000) × 100

= ($67,920) ÷ (283,000) × 100

= 24%

b. Now the estimate change in the net operating income is

= Increase in total sales × contribution margin ratio

= $2,500 × 24%

= $600

The fixed cost remain unchanged