Othman Inc. has a $800,000 investment opportunity with the following characteristics:
Sales $2,240,000
Contribution margin ratio 50% of sales
Fixed expenses $1,008,000
The margin for this investment opportunity is closest to:
A. 45.0%
B. 5.0%
C. 55.0%
D. 50.0%

The correct answer is option (b).

Explanation:

According to the scenario, the given data are as follows:

Sales = $2,240,000

Contribution margin ratio = 50%

Fixed expenses = $1,008,000

So, First we calculate the contribution margin by using following formula:

Contribution margin = Contribution margin ratio × Sales

= 50% × $2,240,000

= $1,120,000

So, we can calculate the margin for this investment by using following formula:

Margin = Net operating income ÷ Sales

Where, Net operating income = Contribution margin - Fixed expenses

= $1,120,000 - $1,008,000

= $112,000

Now by putting the value in the formula, we get

Margin = $112,000 ÷ $2,240,000

= 0.05

= 5%

Hence, the margin for this investment opportunity is 5%.

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