Last month when Holiday Creations, Inc., sold 35,000 units, total sales were $300,000, total variable expenses were $234,000, and fixed expenses were $38,700. 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 $2,500?

See below

Explanation:

1. Contribution margin ratio

= (Sales - Variable cost) / Sales

Sales = $300,000

Variable cost = $234,000

Contribution margin = ($300,000 - $234,000) / $300,000

= 0.22

= 22%

Hence, contribution margin ratio is 22%

2. Change in the net operating income if it can increase total sales by $2,500

Contribution margin of $2,300 = $2,300 × 22%

= $506

Operating income for $300,000 sales is

= Sales - total variable expenses - fixed expenses

= $300,000 - $234,000 - $38,700

= $27,300

If sales is $302,500 the net operating income would be

= $27,300 + $506

= $27,806

• It therefore means that the net operating income will increase by $506

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