Exercise 5-4 Computing and Using the CM Ratio [LO3] Last month when Harrison Cre
ID: 2423715 • Letter: E
Question
Exercise 5-4 Computing and Using the CM Ratio [LO3] Last month when Harrison Creations, Inc., sold 42,000 units, total sales were $301,000, total variable expenses were $246,820, and fixed expenses were $35,500.
Required:
1. What is the company’s contribution margin (CM) ratio? (Omit the "%" sign in your response.)
Contribution margin ratio %
2. Estimate the change in the company’s net operating income if it were to increase its total sales by $1,400. (Omit the "$" sign in your response.)
Estimated change in net operating income $
Explanation / Answer
1. The company’s contribution margin (CM) ratio is:
Total sales $301000
Total variable expenses 246820
= Total contribution margin $ 54180
÷ Total sales $301,000
= CM ratio = 54180/ 301000 =18%
2. The change in net operating income from an
increase in total sales of $1,400 can be estimated
by using the CM ratio as follows:
Change in total sales $1,400
× CM ratio 18%
= Estimated change in net operating income = 1400*18% =252