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16 December, 16:45

Computing and Using the CM Ratio

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. Estimate the change in the company's net operating income if it were to increase its total sales by $1,000.

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Answers (1)
  1. 16 December, 17:46
    0
    1. 40%

    2. $400

    Explanation:

    1. The computation of the contribution margin ratio is shown below:

    Contribution margin ratio = (Sales - variable expenses) : (sales)

    = ($200,000 - $120,000) : ($200,000)

    = ($80,000) : ($200,000)

    = 40%

    2. And, if the total sales is increased by $1,000, so the change in the net income would be

    = Increased amount of total sales * contribution margin ratio

    = $1,000 * 40%

    = $400
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