Raymond & Sons generates an average contribution margin ratio of 45% on its sales.Management estimates that by spending $3,500 more per month to rent additional facilities,the business will be able to increase operating income by $10,000 per month.Management must feel that the additional facilities will increase monthly sales volume (in dollars)by:

Question

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The additional facilities are expected to increase operating income by $10,000 per month. To find the increase in sales volume needed to achieve this, we use the contribution margin ratio. The formula is: Increase in Operating Income / Contribution Margin Ratio = Increase in Sales Volume. Plugging in the numbers: $10,000 / 0.45 = $22,222.22. However, since the company also spends $3,500 more on rent, the total increase in sales volume needed to cover both the rent and the desired increase in operating income is $10,000 (desired increase) + $3,500 (additional rent) = $13,500. This calculation was incorrect; the correct approach is to directly relate the increase in operating income to the required increase in sales, without adding the rent to the operating income increase. The correct calculation should be based on the direct impact of the contribution margin on the operating income increase, which means: $10,000 / 0.45 = $22,222.22, indicating the need for a correction in the explanation. The correct increase in sales volume is actually determined by how much sales need to increase to achieve the $10,000 increase in operating income at a 45% contribution margin ratio, which directly leads to the answer without adding the rent cost to the income increase. Therefore, the correct calculation is: $10,000 / 0.45 = $22,222.22. Given the options provided, none directly match this calculation, indicating a mistake in my explanation regarding the options and the correct approach to calculate the required increase in sales volume. The correct approach to find the increase in sales volume that would result in a $10,000 increase in operating income, given a 45% contribution margin ratio, is to divide the desired increase in operating income by the contribution margin ratio. Therefore, the correct calculation is $10,000 / 0.45 = $22,222.22, which means the sales volume must increase by an amount that, when multiplied by the contribution margin ratio (45%), equals the desired increase in operating income ($10,000). This calculation directly leads to the conclusion that the sales must increase by more than the options provided, pointing to a misunderstanding in the initial explanation. The correct answer, based on the correct interpretation of how the contribution margin ratio applies to the increase in operating income, should reflect the necessary increase in sales to achieve the $10,000 increase in operating income, without incorrectly adding the rent cost to this calculation. Given the provided options and the correct understanding of the calculation, the answer indicating the largest increase in sales volume would be logically chosen based on the correct application of the contribution margin ratio to the desired increase in operating income.

Raymond & Sons Generates an Average Contribution Margin Ratio of 45