Question

Feather Friends, Inc., distributes a high-quality wooden birdhouse that sells for $120 per unit. Variable expenses are $60.00 per unit, and fixed expenses total $180,000 per year. Its operating results for last year were as follows: Sales Variable expenses Contribution margin Fixed expenses Net operating income $ 3, 240,000 1,620,000 1,620,000 180,000 $ 1,440,000 Required: Answer each question independently based on the original data: 1. What is the product's CM ratio? 2. Use the CM ratio to determine the break-even point in dollar sales. 3. If this year's sales increase by $40,000 and fixed expenses do not change, how much will net operating income increase? 4-a. What is the degree of operating leverage based on last year's sales? 4-b. Assume the president expects this year's sales to increase by 12%. Using the degree of operating leverage from last year, what percentage increase in net operating income will the company realize this year? 5. The sales manager is convinced that a 15% reduction in the selling price, combined with a $78,000 increase in advertising, would increase this year's unit sales by 25%. a. If the sales manager is right, what would be this year's net operating income if his ideas are implemented? b. If the sales manager's ideas are implemented, how much will net operating income increase or decrease over last year? 6. The president does not want to change the selling price. Instead, he wants to increase the sales commission by $1.90 per unit. He thinks that this move, combined with some increase in advertising, would increase this year's sales by 25%. How much could the president increase this year's advertising expense and still earn the same $1,440,000 net operating income as last year? Complete this question by entering your answers in the tabs below. Req 1 Req 2 Req3 Req 4A Req 4B Req 5A Req 5B Req 6 The sales manager is convinced that a 15% reduction in the selling price, combined with a $78,000 increase in advertising, would increase this year's unit sales by 25%. If the sales manager is right, what would be this year's net operating income if his ideas are implemented? (Do not round intermediate calculations.) Net operating income (loss) ( Req 4B Req 5B >

Answer 1

1)	CM ratio
	contribution margin/sales
	1,620,000/3,240,000
	0.5
	50%
2)	Break even sales in dollars
	fixed cost/contribution margin ratio
	180,000/50%
	360000
3)	Net operating income will increase by
	40,000*50%
	20000
4-a)	Degree of operating leverage
	contribution margin/net income
	1,620,000/1,440,000
	1.125
	or 1.13
4b)	percentage increase in net income
	12*1.125%
	13.5
	13.50%	answer
5)-a)	unit sale =3,240,000/120
		27000
	now unit sales =27000*125%
		33750
	selling price new = 120*85%=			102
	sales        (33750*102)				3442500
	Variable expense (33750*60)				2025000
	Contribution margin				1417500
	fixed expense (180,000+78000)				258000
	Net operating income				1159500
b)	net income will decrease by			1,440,000-1,159,500
	net operating income(loss)			280500
				(it’s a loss if required show in negative )
				per unit
6)	sales			120
	Variable expense			61.9
	Contribution margin			58.1
	increase in sales 25%
	(33750*58.1) - (180,000+x) = 1,440,000
	1960875-180,000-x =		1,440,000
	x                                 =		340,875	asnwer