Question

In: Accounting

Last month when Holiday Creations, Inc., sold 37,000 units, total sales were $301,000, total variable expenses...

Last month when Holiday Creations, Inc., sold 37,000 units, total sales were $301,000, total variable expenses were $219,730, and fixed expenses were $36,400.

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 $1,700? (Do not round intermediate calculations.)

Expert Solution

1. Calculation of contribution margin ratio:

Contribution margin ratio = ( Contribution margin / Sales ) * 100

= ( $ 81,270 / $ 301,000 ) * 100

= 27%

Contribution margin ratio is 27%

Working note:

Contribution margin = Sales - Variable cost

= $ 301,000 - $ 219,730

= $ 81,270

2. Increase (decrease) in net operating income:

Increase (decrease) in net operating income = Increase in sales * Contribution margin ratio

= $ 1,700 * 27%

= $ 459

Thus, If sales increases by $ 1700 it will result in increase in net operating income by $ 459

Note:

Sales beyond breakeven point earns profit as contribution margin because at break even point all fixed cost is recovered. Thus, After break even point sales earns profit as contribution margin.

In this case, how would we know that company has crossed its break even point ?

answer: There are two ways, We can either compute the break even point and will check with current sales or we can simply check whether at present company has earning profit or not. If company is having net operating income that simple means company has crossed break even point as at break even point is recovery of fixed cost through contribution margin.

break even point = fixed cost / contribution margin ratio

= $ 36,400 / 27%

= $ 134,814.8

Thus, at $ 134,814.8 sales there is break even currently company having sales of $ 301,000 thus, Company has crossed break even point.

Profit = Contribution margin - fixed cost

= $ 81,270 - $ 36,400

= $ 44,870

Thus, we can see company is earning profit that means break even point is crossed.

ekkarill92 answered 2 years ago

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