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13 May, 11:57

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?

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Answers (1)
  1. 13 May, 12:06
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    (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.
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