Question

A company sold a total of 1,000 units for total sales revenue of $70,000. The company incurred total variable expenses of $38,500 and total fixed expenses of $ 23,310. Based on this, the company reported a total contribution margin of $31,500 and net operating income of $ 8,190. Use this information to answer the following questions. Assume that all units are within the relevant range.

1.Calculate the per-unit contribution margin

2.Calculate the contribution margin ratio.

3. Calculate the increase in net operating income if sales increase to 1,001 units

4.Calculate the net operating income if the selling price increases by $2 per unit and the sales volume decreases by 100 units.

Answer 1

Answer:

1.Calculation of contribution margin per unit is as follows:

contribution margin per unit = Total Contribution margin / Number of units sold

= $ 31,500 / 1,000

= $ 31.50

Alternative,

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

= $ 70 - $ 38.50

= $ 31.50

Working note:

Selling price per unit = Sales / number of units sold

= $ 70,000 / 1,000

= $ 70

Variable cost per unit = Variable cost / number of units sold

= $ 38,500 / 1,000

= $ 38.50

2. Calculation of contribution margin ratio is as follows:

Contribution margin ratio = ( Contribution margin per unit / Selling price per unit ) * 100

= ( $ 31.50 / $ 70 ) * 100

= 45%

Alternative,

Contribution margin ratio = ( Total Contribution margin /Total sales ) * 100

= ( $ 31,500 / $ 70,000 ) * 100

= 45%

3. Calculation of increase in net operating income if sales increase to 1,001 units is as follows:

Beyond breakeven units of sales, every unit of sale earns profit as equal to contribution margin as at breakeven point all fixed cost has been recovered.

At breakeven point there is no profit and no loss. Breakeven point is recovery of fixed cost

So, At 1,000 units we have profit 8,190 that represents we have crossed break even point therefore profit is reflecting. Thus, As we have crossed break-even point, every unit of sales earns profit as contribution margin per unit.

Current sales level is 1,000 units & sales increases to 1,001 units . ( 1 unit of sale increases)

Therefore, Increase in operating income by $ 31.50 i.e contribution margin per unit.

Note: For clarification purpose:

Breakeven point of sale = Fixed cost / Contribution margin per unit

= $ 23,310 / $ 31.50

= 740 units

Beyond 740 units, every unit of sale earns profit as equal to contribution margin per unit

4.Calculation of net operating income if the selling price increases by $2 per unit and the sales volume decreases by 100 units is as follows:

Net operating income = Contribution margin - Fixed cost

= $ 30,150 - $ 23,310

= $ 6,840

Thus, if the selling price increases by $2 per unit and the sales volume decreases by 100 units contribution income will be $ 6,840

Working note:

Contribution margin = Sales - variabke cost

= $ 64,800 - $ 34,650

= $ 30,150

Calculation of sales:

Sales = Sales units * selling price per unit

= 900 * $ 72

= $ 64,800

Sales units = Current sale - Decreased by 100 units

= 1,000 - 100

= 900 units

selling price per unit = Current selling price per unit + Increases by $ 2 per unit

= ( $ 70,000 / 1,000 ) + $ 2

= $ 70 + $ 2

= $ 72

Calculation of variable cost:

Variable cost = Number of units sold * Variable cost per unit

= 900 units * $ 38.50

= $ 34,650