question archive Last month when Holiday Creations, Inc
Last month when Holiday Creations, Inc
Subject:AccountingPrice:2.87 Bought7
Last month when Holiday Creations, Inc., sold 50,000 units, total sales were $200,000, total variable expenses were $120,000, and fixed expenses were $65,000.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 $1,000?
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 $1,000?
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Answer:
(1) 0.4 or 40%
(2) $400
Explanation:
1)
Unit selling price = Total sales ÷ Number of units
= $200,000 ÷ 50,000
= $4
Unit variable expense = Total variable expenses ÷ number of units
= $120,000 ÷ 50,000
= $2.4
Contribution margin per unit = Selling price per unit - Variable cost per unit
= $4 - $2.4
= $1.6
Now, computing the contribution margin ratio as :
Contribution margin ratio = Unit Contribution margin ÷ Unit selling price
= $1.6 / $4
= 0.4 or 40%
(2) Change in net operating income:
= Increase in total sales × Contribution margin ratio
= $1,000 × 0.4
= $400
Therefore, the net operating income increases by $400.
