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 $160,000 per year. Its operating results for last year were as follows: Sales Variable expenses Contribution margin Fixed expenses Net operating income $ 3,000,000 1,500,000 1,500,000 160,000 $ 1,340,000 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 $59,000 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 11% reduction in the selling price, combined with a $62,000 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 $2.40 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 $1,340,000 net operating income as last year?

Please help me solving the Question Number 5(a), 5(b) and 6.

Answer 1

5)	last year sale units
	3,000,000/120
	25000
	unit sales this year 25000*125%=				31250
	Selling price per unit (this year )=120*89%=				106.8
	total fixed expnese = 160,000+62,000=				222000
	Sales (31250*106.8)				3337500
	less Variable cost (31250*60)=				1875000
	Contribution margin				1462500
	less Fixed expenses				222000
	Net operating income				1240500
b)	decrease in net operating income				1,340,000-1,240,500
					99500
	% decrease		99,500/1,340,000
			7.43%
6)	sales = (31250*120)=				3750000
	less variable cost (31250*62.40)				1950000
	Contribution margin				1800000
	contribution = fixed expense +advertising expense + net operating income
	1,800,000      = 160,000 +x +1,340,000
	x                      = $300,000
	the amount by which advertising can be increased is					$300,000