Question

Sattler Corporation has provided the following contribution format income statement. All questions concern situations that are within the relevant range.

Sales (8,000 units)= $480,000
Variable expenses= 336,000
Contribution margin= 144,000
Fixed expenses= 142,200
Net operating income= $1,800
Required:
a. What is the contribution margin per unit?
b. What is the variable expense ratio?
c. If sales decline to 7,900 units, what would be the estimated net operating income?
d. If the variable cost per unit increases by $5, spending on advertising increases by $2,000, and unit sales increase by 3,400 units, what would be the estimated net operating income?

Answer 1

The contribution margin per unit is $18,000. The variable expense ratio is 70%. If sales decline to 7,900 units, the estimated net operating income would be $2,400. If the variable cost per unit increases by $5, spending on advertising increases by $2,000, and unit sales increase by 3,400 units, the estimated net operating income would be $32,200.

Step-by-step explanation:

a. The contribution margin per unit can be calculated by dividing the total contribution margin by the number of units sold. In this case, the contribution margin per unit is $18,000 ($144,000 / 8,000 units).

b. The variable expense ratio can be calculated by dividing the total variable expenses by the total sales revenue. The variable expense ratio is 70% ($336,000 / $480,000).

c. To estimate the net operating income if sales decline to 7,900 units, you can use the formula: Net Operating Income = (Unit Contribution Margin × Number of Units Sold) - Fixed Expenses. Substituting the given values, the estimated net operating income would be $2,400 (($18,000 / 8,000 units) × 7,900 units) - $142,200).

d. To estimate the net operating income with the given changes, you can use the formula: Net Operating Income = (Unit Contribution Margin × Number of Units Sold) - Fixed Expenses. Substituting the given values, the estimated net operating income would be $32,200 ((((($18,000 + $5) / 8,000 units) × (8,000 + 3,400 units)) - $2,000) - $142,200).