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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

An examination of the accounting records of Clowney Company disclosed a high contribution margin ratio and production at a level below maximum capacity. Based on this information, suggest a likely means of improving income from operations. Explain

To determine

Contribution Margin ratio: It is a ratio that measures the contribution margin generated by the company from the sales to make it avialable for paying the fixed cost and generate a profit. It is expressed as percentage of margin available from each dollar sales to pay fixed expenses and to provide profit. It is also called as profit-volume ratio. The formula to calculate the contribution margin ratio is as follows:

ContributionMarginRatio =ContributionMarginSales×100

To explain: the likely means of improving the income from operations.

Explanation

Company C disclosed that it has a high contribution margin ratio and its production level is below its maximum capacity. This indicates that the company has not produced up to its optimal capacity. Thus, it can be said that the company has the potential to improve its income from operations if the sales volume is increased through promotional campaigns...

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