Last month when Holiday Creations, Inc., sold 35,000 units, total sales were $291,000, total variable expenses...

Last month when Holiday Creations, Inc., sold 35,000 units, total sales were $291,000, total variable expenses were $247,350, and fixed expenses were $38,800.

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

Solutions

Expert Solution

1 ) Contribution margin ratio

Contribution margin ratio indicates relation contribution to sales so first find out total contribution.

Total Sales revenue	$ 291,000
Less: Variable cost	$247,350
Contribution margin	$ 43,650

Contribution margin ratio :

Contribution margin	$ 43,650
Divided by : Total Sales	$ 291,000
Contribution margin ratio	0.15 or 15%

= Contribution margin / Total Sales * 100

= $ 43,650 / $ 291,000 * 100

= 15 %

2) What is changes in net operating income ?

First find out present net operating income.

Explanation	Present sales	New sales
Total Sales	$ 291,000	$ 292,700
Less : Variable cost	$247,350	$ 248,795
Contribution margin	$ 43,650	$ 43,905
Less: Fixed cost	$ 38,800	$ 38,800
Net operating Income	$ 4,850	$ 5,105

So changes in net operating income is $ 255 ( $ 5,105 -$ ,4850)

In second method

After break even point contribution is equal to profit.

So Contribution = changes in sales * contribution margin ratio

= $ 1,700 *15 %

= $ 255 changes in net operating income

ekkarill92 answered 1 year ago

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