0.4) At its present level of operations, a small manufacturing firm ha

QUESTION

0.4) At its present level of operations, a small manufacturing firm has total variable costs equal to 65% of sales and total fixed costs equal to 20% of sales. If sales change by $1.00, operating income will change by
The contribution margin as a percentage of total sales is referred to as contribution margin ratio (CM Ratio) CM Ratio = Contribution Margin / Sales Contribution Margin Ratio = (Contribution Margin / Sales) 100 = (Sales Var costs)/ Sales 100 = (100%-65%)/100% = 35% The CM ratio is extremely useful since it shows how the contribution margin will be affected by a change in

l sales. Here CM ratio is 35%. This means that for each dollar increase in sales, total contribution margin will increase by 35 cents ($1 sales CM ratio of 35%). Net operating income will also increase by 35 cents, assuming that fixed cost do not change.

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