Question

EXERCISE 5–4Computing and Using the CM Ratio [LO5–3] Guided Example 5-4 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: 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 $1,000.

Answer 1

40% and $400

Step-by-step explanation:

For computing the change in net operating income, first we have to determine the contribution margin ratio which is shown below:

Contribution margin per unit = Selling price per unit - Variable expense per unit

= $4 -$2.4

=$1.6

And, Contribution margin ratio = (Contribution margin per unit) ÷ (selling price per unit) × 100

So, the Profit volume ratio = (1.6) ÷ (4) × 100 = 40%

Since the sale is increased by $1,000, so the change would be

= $1,000 × 40%

= $400