Question

Feather Friends, Inc., distributes a high-quality wooden birdhouse that sells for $80 per unit. Variable expenses are $40.00 per unit, and fixed expenses total $200,000 per year. Its operating results for last year were as follows: Sales Variable expenses Contribution margin Fixed expenses Net operating income $2,160,000 1,080,000 1,080,000 200,000 $ 880,000 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 $56,000 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 10%. 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 11% reduction in the selling price, combined with a $66,000 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 $1.60 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 $880,000 net operating income as last year?

Answer 1

4B) answers 1 CM ratio ( 40/80) 50% 2 Break Even Point in Dollar sales (200000/50% 400000 If sales increase by $56,000 How much Operating income Will Increases Increase in operating income |(56,000*0.5) 28000 4A) Degree of Operating leverage (Contribution / Net operating income) 1080000/880000 1.23 Sales increased by 16% how much Opearting income 10% will increase (Operating Leverage * Increased sales) 1.23*10% 12.30% 5 11% reduction in selling price,66000 incresed in Advertisement, sales units will increase by 25% Sales units 33750 per unit Sales 2403000 Variable Expenses 1350000 contribution Margin 1053000 31.2 Fixed cost 266000 Net operating Income 787000 5A) This years Net operating income 787000 |5B) how much net oeprating income increase or Decrease (880000-787000) Decrease by 93000 Instead of Increase in selling price increased the Sales commission by $1.60 6750 540000 280800 259200 259200 80 41.6 Sales units Sales Variable Expenses contribution Margin Fixed cost Net operating income Increase in Fixed Cost( 259200-27000*1.60) Amount to be increase in advertisements 38.4 2160001 216000