Computing and Using the CM Ratio

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.

1. 40%

2. $400

Explanation:

1. The computation of the contribution margin ratio is shown below:

Contribution margin ratio = (Sales - variable expenses) : (sales)

= ($200,000 - $120,000) : ($200,000)

= ($80,000) : ($200,000)

= 40%

2. And, if the total sales is increased by $1,000, so the change in the net income would be

= Increased amount of total sales * contribution margin ratio

= $1,000 * 40%

= $400