A B C Last month when Holiday Creations Inc sold 40000 units

A.

B.

C.

Last month when Holiday Creations, Inc., sold 40,000 units, total sales were $295,000, total variable expenses were $215,350, and fixed expenses were $39,300. Required: 1. What is the company\'s contribution margin (CM) ratio? Contribution margin ratio e the change in the company s net operating income if were to ncrease its total sales by $2,200 Estimated change in net operating income

Solution

Question (A) 1) What is the Company Contribution margin ratio Contribution Margin ratio = (Sales - Variable Expenses) / Sales Contribution margin ratio =($295,000 -$215,350) /$295,000 =0.27 =27% 2) Change in Net Operating Income if it Increse in Total Sales by $2200 Change in Net Operating Income =Sales Incresed * Contribution Margin ratio =$2200*27% =$594 Question (B) 1)Break even point units sales under Equation method Equation method:   Px =Vx +Fixed Expenses + Profit x = Number of Units P = price per unit =$25 V = variable expenses per unit =$21.5 Fixed Expenses =$5950 Profit at break even point is zero $25x = $21.5x +$5950 $25x -21.5x =$5950 $3.5x =$5950 x =$5950/$3.50 =1700 Units 2) Contribution margin ratio and Break even point sales in dollars under equation method Contribution margin ratio = (sales - varaible expenses ) /sales =$25-$21.50 /$25 =0.14=14% Equation : Total Sales = variable expenses as a persent age of sales + Fixed expenses + profit Profit = Zero at break even point Total Sales =X variable expenses as a persent age of sales =21.50/25 =0.86 Total variable expenses =0.86 *X =0.86X X = 0.86X +$5950+$0 0.14X =$5950 X =$5950/0.14 =$42500 Break even sales =$42500 3) Break even Point unit sales under Formula method Break even point in Units = Fixed Cost /(Sales Per unit - variable expenses Per unit) =$5950/($25-$21.50 =$5950/$3.50 =1700 Units 4) Contribution margin ratio and Break even point sales in dollars under Formula method Contribution margin ratio = (sales - varaible expenses ) /sales =$25-$21.50 /$25 =0.14=14% Break even Sales in Dollars = Fixed Cost / Contribution margin ratio =$5950/0.14 =$42,500 Question no: (C ) 1) Compute the Company margin of safety Break even point (Units) = Fixed cost /(Sale price per unit - Variable cost per Units) =$8700/($27-$17) =870 Units Break even point in Sales dollars = break even point in Units * Sales Price Per unit =870*$27 =$23,490 Margin of Safety = Budgeted Sales - Break even Sales =(1020*$27) -$23,490 =$27,540 -$23,490 =$4050 2) Compute the Margin of safety as per sentage of its sales margin of safety (%) =( Budgeted sales - break even sales) / Budgeted Sales      *100   ={(1020*$27) - $23,490} /(1020*$27)      *100 =$4050/$27,540   *100 =14.71%