The problem states that sales increased 20%. So multiply the current sales by 20% and add that amount to the current sales. Then use this new sales number to calculate margin.
Remember that when sales increases, the net operating income increases as well... if you multiply the contribution margin ratio by the amount of the sales increase you will get the amount of the net operating income increase. The CM ratio is 399,200/998,000.
The contribution format income statement for Huerra Company for last year is given below:
Total Unit
Sales $998,000 $49.90
Variable expenses 598,800 29.94
Contribution margin 399,200 19.96
Fixed expenses 321,200 16.06
Net operating income 78,000 3.90
Income taxes @ 40 % 31,200
1.56
Net operating income $46,800 $2.34
The company had average operating assets of $509,000 during the year.As a result of a more intense effort by salespeople, sales are increased by 20%; operating assets remain unchanged.