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. What is the estimated change in the company’s net operating income if it can increase total sales by $1,000?

Answer 1

Answer:

(1) 0.4 or 40%

(2) $400

Explanation:

1)

Unit selling price = Total sales ÷  Number of units

                            = $200,000 ÷  50,000

                            = $4

Unit variable expense = Total variable expenses ÷ number of units

                                    = $120,000 ÷ 50,000

                                    = $2.4

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

                                               = $4 - $2.4

                                               = $1.6

Now, computing the contribution margin ratio as :

 Contribution margin ratio = Unit Contribution margin ÷ Unit selling price

                                          = $1.6 / $4

                                          = 0.4 or 40%

(2) Change in net operating income:

= Increase in total sales ×   Contribution margin ratio

= $1,000 × 0.4

= $400

Therefore, the net operating income increases by $400.