Last month when Holiday Creations, Inc., sold 42,000 units, total sales were $313,000, total variable expenses were $250,400, and fixed expenses were $39,800. 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 $2,100?

Last month when Holiday Creations, Inc., sold 42,000 units, total sales were $313,000, total variable expenses were $250,400, and fixed expenses were $39,800.

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 $2,100? 

Explanation

1. The company’s contribution margin (CM) ratio is:

Total sales	$	313,000
Total variable expenses		250,400
Total contribution margin (a)	$	62,600
Total contribution margin (a)	$	62,600
Total sales (b)	$	313,000
CM ratio (a) ÷ (b)		20	%

2. The change in net operating income from an increase in total sales of $2,100 can be estimated by using the CM ratio as follows: