Question

Last month when Holiday Creations, Inc., sold 42,000 units, total sales were $297,000, total variable expenses were $222,750, and fixed expenses were $36,900.Required:
1. What is the companyâs contribution margin (CM) ratio?
2. Estimate the change in the companyâs net operating income if it were to increase its total sales by $1,800.

Answer 1

Answer:

Results are below.

Explanation:

Giving the following information:

Sales in units= 42,000

Total sales= $297,000

Total variable expenses= $222,750

Total fixed expenses= $36,900

To calculate the contribution margin ratio, we need to use the following formula:

contribution margin ratio= (sales - total variable cost) / sales

contribution margin ratio= (297,000 - 222,750) / 297,000

contribution margin ratio= 0.25

Now, the effect on the income of an increase in sales:

Effect on income= contribution margin ratio*increase in sales

Effect on income= 0.25*1,800

Effect on income= $450 increase