1. What is the company\'s Contribution margin ratio? 2. What is the company\'s b
ID: 2425542 • Letter: 1
Question
1. What is the company's Contribution margin ratio?
2. What is the company's break-even in units?
3. If sales increase by 100 units, by how much should net operating income increase?
4. How many units would the company have to sell to attain a target profit of $125,000?
The following is Arkadia Corporation's contribution format income statement for last month Sales $1,200,000 Variable expenses Contribution margin Fixed expenses Net operating income 800,000 400,000 300,000 $100,000 The company has no beginning or ending inventories and produced and sold 20,000 units during the month.Explanation / Answer
Arkadia Corporation (All amounts in $) 1. Contribution Margin Ratio is Sales less Variable Costs as divided by the total Sales Since, Contribution Margin is $ 400,000 and Sales are $ 1,200,000, the Contribution Margin Ratio is $ 400,000 / $ 1,200,000 = 33.33% 2. Let us assume the breakeven point in sales as X units Breakeven is a level where Sales = Costs Sales price per unit $ 60 Variable Costs per unit $ 40 Thus, 60X = 40X + 300,000 Hence, 20X = 300,000 or X = 15,000 units 3. If the sales increase by 100 units, the contribution margin would increase by 100 X ($ 60 - $ 40) = 100 X $ 20 = $ 2,000. This would be the increase in the Net Operating Income (since Fixed Costs remain constant), 4. Let us assume the number of units sold in order to achieve a target profit of $ 125,000 as X 60X - 40X - 300,000 = 125,000 Hence, 20X = 425,000 or X = 21,250 units
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