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.

Answer and Explanation:

The computation is shown below:

1) The contribution margin ratio is

Contribution margin ratio = Unit Contribution margin ÷ Unit selling price

where,

Unit selling price is

= Total sales ÷  Number of units

= $200,000 ÷50,000

= $4

And,  

Unit variable expense = Total variable expenses ÷ number of units

= $120,000 ÷ 50,000

= $2.4

Now  

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

= $4 - $2.4

= $1.6

So,  the contribution margin ratio is

Contribution margin ratio = $1.6 ÷ $4

= 0.4 or 40%  

2)

The net operating income is

In the case when the total sales increased by $1,000

Sales                                  $201,000

Less: variable expenses    $120,600

Contribution margin           $80,400

Less: Fixed costs                   $65,000

Net operating income         $15,400

Prior increase in the sales, the net operating income is

Sales                                   $200,000

Less: variable expenses   $120,000

Contribution margin              $80,000

Less:                                     $65,000

Net operating income           $15,000

So it increase by $400 i.e.

= $15,400 - $15000

= $400

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