Question & Answer: Last month when Holiday Creations, Inc., sold 36,000 units, total sales were $316,000, total variable expenses were $2…..

Last month when Holiday Creations, Inc., sold 36,000 units, total sales were $316,000, total variable expenses were $252,800, and fixed expenses were $38,500. Required: 1. What is the companys contribution margin (CM) ratio? Contribution margin ratio 2. Estimate the change in the companys net operating income if it were to increase its total sales by $2,400 Estimated change in net operating income

Last month when Holiday Creations, Inc., sold 36,000 units, total sales were $316,000, total variable expenses were $252, 800, and fixed expenses were $38, 500. Required: What is the company’s contribution margin (CM) ratio? Estimate the change in the company’s net operating income if it were to increase its total sales by $2, 400.

Expert Answer

 

1. Contribution margin = Sales – Variable expenses = $316,000-$252,800 = $63,200

Contribution margin ratio = Contribution margin/Sales = $63,200/$316,000 = 0.20 = 20%

2.

Change in net operating income = Change in sales*Contribution margin ratio

Increase in net operating income = $2,400*20% = $480

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