Week 5, LO 3 Demo - the impact on net operating income of...

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Week 5 Week 5 Skill Building Demonstration Problem 3 Use the contribution margin ratio (CM ratio) to compute changes in contribution margin and net operating income resulting from changes in sales volume. Learning Objective 3 The contribution margin ratio can be used in cost-volume-profit calculations. CM ratio shows how the contribution margin will be affected by a change in total sales. The CM Ratio is calculated by: To illustrate, let’s use the example from Roddick’s Enterprise: As we can see above,
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Unformatted text preview: the impact on net operating income of any given dollar change in total sales can be computed by simply Definitions applying the CM ratio to the dollar change. For example, if Roddick Enterprises plans a $600 increase in sales during the coming month, the contribution margin will increase by $400 ($600 increase in sales CM ratio of 66.7%). As we noted above, net operating income will also increase by $400. Assuming fixed cost remains unchanged....
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Week 5, LO 3 Demo - the impact on net operating income of...

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