Schister Systems uses the following data in its Cost-Volume-Profit analyses:

Total Sales $395,000
Variable expenses 197,500
Contribution margin 197,500
Fixed expenses 119,000
Net operating income $78,500

What is the total contribution margin if sales volume increases by 20%?

contribution margin = $237,000

Explanation:

If sales volume increases by 20%, the sales revenue will increase by 20%. Therefore, the new sales revenue is = $395,000 + ($395,000 × 20%) = $395,000 + 79,000 = $474,000

If sales revenue increases, the variable expenses will also increase by 20%. The new variable expense is = $197,500 + ($197,500 × 20%) = $197,500 + 39,500 = $237,000

We know, sales revenue - variable expenses = contribution margin.

If sales volume increases by 20%,

The new contribution margin = $474,000 - $237,000 = $237,000

$237,000

Explanation:

The contribution margin is the difference between the sales and the variable cost. Both are determined  by the level of activities and the unit price and variable cost respectively.

If the sales volume increases by 20%, the same effect will happen to the variable cost while the fixed cost may remain constant at this change in the level of activities.

Therefore since

Contribution margin

= Total Sales - Total variable cost

An increase of 20% in sales volume would give a contribution margin

= 1.2($395,000 - $197,500)

= 1.2 × $197,500

= $237,000

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