Exercise 6-4 Computing and Using the CM Ratio [LO6-3]

Last month when Holiday Creations, Inc., sold 50,000 units, total sales were $200,000, total variable expenses were $120,000, and fixed expenses were $65,000.

Required:

1. What is the companys contribution margin (CM) ratio?

2. What is the estimated change in the companys net operating income if it can increase total sales by $1,000?

Exercise 6-5 Changes in Variable Costs, Fixed Costs, Selling Price, and Volume [LO6-4]

[The following information applies to the questions displayed below.]

Data for Hermann Corporation are shown below:

	Per Unit			Percent of Sales
Selling price	$	90		100	%
Variable expenses		63		70
Contribution margin	$	27		30	%

Fixed expenses are $30,000 per month and the company is selling 2,000 units per month.

Exercise 6-5 Part 1

Required:

1-a. How much will net operating income increase (decrease) per month if the monthly advertising budget increases by $5,000 and monthly sales increase by $9,000?

1-b. Should the advertising budget be increased?