Question

Last month when Holiday Creations, Inc., sold 44,000 units, total sales were $302,000, total variable expenses were $232,540, and fixed expenses were $35,800. 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 $1,200? (Do not round intermediate calculations.)

Answer 1

Answer:

(1) contribution margin ratio = 0.23 or 23%

(2)The operating Income will increase $276

Explanation:

302,000 sales

232,540 variable cost

69,460 contribution margin

35,800 fxed cost

33,660 net income

(1) contribution margin ratio

$\frac{Contribution Margin}{Sales Revenue} = Contribution Margin Ratio$

69,460/302,000 = 0.23 = 23%

This means, for every dolalr of sale, the company has $0.23 of contribution margin, AKA money to cover fixed cost and make a gain.

(2) income if sales increase

↑Sales x CMR = ↑Operating Income

↑1,200 x 00.23 = ↑276