Question

Carla Vista Orthotics Company distributes a specialized ankle support that sells for $55. The company’s variable costs are $41.25 per unit; fixed costs total $380,000 each year.

A) Calculate contribution margin ratio?

B) If sales increase by $39,000 per year, by how much should operating income increase?

C) Last year, Carla Vista sold 38,000 ankle supports. The company’s marketing manager is convinced that a 12% reduction in the sales price, combined with a $51,000 increase in advertising, will result in a 40% increase in sales volume over last year.

*Projected income?

Should Carla Vista implement the price reduction?

Carla Vista __ implement the price reduction because the estimated operating income is __ than the current operating income.

Answer 1

A.)	Contribution Margin ratio	25.00%	=(55-41.25)/55
B.)	Operating Income will increase by	$ 9,750	=39000*25%
C.)	Last Year	Amount $
	Sales (38,000 x 55 )	2,090,000
	Less: Variable Cost ( 38,000 x 41.25 )	1,567,500
	Contribution Margin	522,500
	Less: Fixed Costs	380,000
	Operating Income	142,500
	Projected Income	Amount $
	Sales (38,000 x 140% ) x ( 55 x 88% )	2,574,880
	Less: Variable Cost ( 38,000 x 140% x 41.25 )	2,194,500
	Contribution Margin	3,80,380
	Less: Fixed Costs	380,000
	Less: Additional advertising expense	51,000
	Operating Income(loss)	-50,620

Carla Vista Should Not implement the price reduction because the estimated operating income is Less than the current operating income.