Stratford Company distributes a lightweight lawn chair that sells for $40 per un

Question

Stratford Company distributes a lightweight lawn chair that sells for $40 per unit. Variable expenses are $20.00 per unit, and fixed expenses total $160,000 annually

What is the product's CM ratio?

Use the CM ratio to determine the break-even point in sales dollars

The company estimates that sales will increase by $48,000 during the coming year due to increased demand. By how much should net operating income increase?

The company estimates that sales will increase by $48,000 during the coming year due to increased demand. By how much should net operating income increase?

Explanation / Answer

Hi,

Please find the detailed answer as follows:

Part A:

Contribution Margin Ratio = Contribution Per Unit/Selling Price Per Unit

Contribution Per Unit = Selling Price - Variable Cost = 40 - 20 = 20

Contribution Margin Ratio = 20/40*100 = 50%

Part B:

Break Even Sales (Dollars) = Fixed Cost/Contribution Margin Ratio = 160000/50% = $320000

Part C:

If sales increase by 48000, net operating income would increase by 48000*50% = 24000 as fixed cost will remain constant and will have no impact on the additional contribution,

Answer for Part B is $24000.

Thanks.

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