Question

Roland Inc. is planning to expand their business by entering in the construction industry as a panel formwork supplier. The potential number of forthcoming projects, you forecasted that within two years, your fixed cost for producing formworks is $ 292,000. The variable unit cost for making one panel is $ 18. The sale price for each panel will be $ 50. The company’s income statement from last month is as follows: Sales Revenue Total $600,000 Per Unit $50 Variable expenses 216,000 18 Contribution margin 384,000 $32 Fixed expenses 292,000 Net operating income $ 92,000 Required a) What is Roland's contribution margin ratio? Its unit contribution margin? b) If Roland's sales were to increase by $100,000 with no change in fixed expenses, by how much would net operating income increase? c) Roland's managers have determined that variable costs per unit will increase by 16% beginning next month. To offset this increase in costs, they are considering a 10% increase in the sales price. Market research indicates that the price increase will result in a 2% decrease in the number of panels Roland Inc sells. What will be Roland's expected net operating income if the price increase is implemented

Answer 1

a.Roland's contribution margin ratio=(sales-variable costs )/sales--- either per unit or total

ie. Contribution/sales

ie.32/50   or 384000/600000

64.00%

Unit contribution margin= (Selling price-Variable cost)per unit, ie. 50-18= $ 32

b) If Roland's sales were to increase by $100,000 with no change in fixed expenses,

Net operating income will increase by

Increased sales revenue* Contn. Margin ratio

(100000*64%)=

64000

Verification of b.
Sales revenue(600000+100000)	700000
Variable expenses (14000 units* $ 18)	252000
Contribution margin	448000
Fixed expenses	292000
Net operating income	156000
Previous NOI	92000
Increase	64000

c. Income statement
12000*(1-2%) panels	Per unit	11760 panels
Sales revenue(50*1.1)	55	646800
Variable cost(18*1.16)	20.88	245548.8
Contribution margin	34.12	401251.2
Fixed expenses		292000
Expected Net operating income		109251.2