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. What is the estimated change in the company's net operating income if it can increase total sales by $1,000?

(1) 0.4 or 40%

(2) $400

Explanation:

1)

Unit selling price = Total sales : Number of units

= $200,000 : 50,000

= $4

Unit variable expense = Total variable expenses : number of units

= $120,000 : 50,000

= $2.4

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

= $4 - $2.4

= $1.6

Now, computing the contribution margin ratio as:

Contribution margin ratio = Unit Contribution margin : Unit selling price

= $1.6 / $4

= 0.4 or 40%

(2) Change in net operating income:

= Increase in total sales * Contribution margin ratio

= $1,000 * 0.4

= $400

Therefore, the net operating income increases by $400.