Question

In: Accounting

Last month when Holiday Creations, Inc., sold 43,000 units, total sales were $172,000, total variable expenses...

Last month when Holiday Creations, Inc., sold 43,000 units, total sales were $172,000, total variable expenses were $130,720, and fixed expenses were $37,200.

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 sales volume by 450 units and total sales by $1,800? (Do not round intermediate calculations.)

Solutions

Expert Solution

(1) Formula for contribution margin ratio is:

Contribution margin ratio = Sales - Variable expenses / Sales

putting the values in the above formula, we get,

Contribution margin ratio = ($172000 - $130720) / $172000

Contribution margin ratio = 0.24 or 24%

(2) First we will calculate last month's net operating income as per below:

Net operating income = Contribution margin - Fixed expenses

or

Net operating income = Sales - Variable expenses - Fixed expenses

Net operating income  = $172000 - $130720 - $37200

Net operating income = $4080

Now, we will calculate the net operating income when sales increase by 450 units or by $1800:

New sales = $172000 + $1800 = $173800

Contribution margin = Sales * Contribution margin ratio

Contribution margin = $173800 * 24% = $41712

Now,

Net operating income = Contribution margin - Fixed expenses

Net operating income = $41712 - $37200 = $4512

Change in net operating income = $4512 - $4080 = $432

ekkarill92 answered 2 years ago
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