Bolding Inc.'s contribution margin ratio is 61% and its fixed monthly expenses are $42,000. Assuming that the fixed monthly expenses do not change, what is the best estimate of the company's net operating income in a month when sales are $126,000?
A)$76,860
B)$7,140
C)$34,860
D)$84,000

Question

Quizplus · Accepted Answer

Contribution margin = Sales - Variable expenses
Using the contribution margin ratio, we can find the contribution margin per unit by dividing the ratio by 100:
Contribution margin ratio = 61% = 0.61
Contribution margin per unit = 0.61 x Sales = 0.61 x $126,000 = $76,860
Net operating income = Contribution margin - Fixed expenses
Net operating income = $76,860 - $42,000 = $34,860
Therefore, the best estimate of the company's net operating income in a month when sales are $126,000 is $34,860 (option C).