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29 December, 01:23

Othman Inc. has a $800,000 investment opportunity with the following characteristics:

Sales $2,240,000

Contribution margin ratio 50% of sales

Fixed expenses $1,008,000

The margin for this investment opportunity is closest to:

A. 45.0%

B. 5.0%

C. 55.0%

D. 50.0%

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Answers (1)
  1. 29 December, 03:16
    0
    The correct answer is option (b).

    Explanation:

    According to the scenario, the given data are as follows:

    Sales = $2,240,000

    Contribution margin ratio = 50%

    Fixed expenses = $1,008,000

    So, First we calculate the contribution margin by using following formula:

    Contribution margin = Contribution margin ratio * Sales

    = 50% * $2,240,000

    = $1,120,000

    So, we can calculate the margin for this investment by using following formula:

    Margin = Net operating income : Sales

    Where, Net operating income = Contribution margin - Fixed expenses

    = $1,120,000 - $1,008,000

    = $112,000

    Now by putting the value in the formula, we get

    Margin = $112,000 : $2,240,000

    = 0.05

    = 5%

    Hence, the margin for this investment opportunity is 5%.
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