Question

 Req 1 : CM ratio = Contribution margin / Sales = 1080000 / 2160000 50% Req 2 : Break-even point in dollar sales = Fixed expenses / CM ratio = 180000 / 50% 360000
 Req 3 : Increase in net operating income = ( Increase in sales * CM ratio ) - Increase in fixed expense = ( 45000 * 50% ) - 0 22500
 Net operating income increases by 22500
 Req 4A : Degree of operating leverage = Contribution margin / Net operating margin = 1080000 / 900000 1.20
 Req 4B : Degree of operating leverage = % change in net operating income / % change in sales 1.20 = % change in net operating income / 11% % change in net operating income = 1.20 * 11% 13.20%
 Net operating income increase by 13.20%
 Req 5 : Last year's unit sales = Sales / Selling price = 2160000 / 80 27000 After changes : Selling price = Current selling price * ( 1 - % reduction ) = 80 * ( 1 -13% ) 69.60 Fixed expenses = Current fixed expenses + Increase in adverstising expense = 180000 + 64000 244000 Unit sales = Last year's unit sales * ( 1 + % increase ) = 27000 * ( 1 + 25% ) 33750
 a. Sales ( 33750 * 69.60 ) 2349000 (-) Variable expenses ( 33750 * 40 ) 1350000 Contribution margin 999000 (-) Fixed expenses 244000 Net operating income 755000 b. Last year's net operating income 900000 (-) This year's budgeted net operating income 755000 Decrease in net operating income 145000
 6. After change : Unit sales = Last year's unit sales * ( 1 + % increase ) = 27000 * ( 1 + 25% ) 33750 Variable expense per unit = Current variable expense per unit + Increase in sales commission per unit = 40 + 1.90 41.90 Net operating income = Unit sales * ( Selling price - Variable cost per unit ) - Fixed expenses 900000 = 33750 * ( 80 - 41.90 ) - Fixed expense 900000 = 1285875 - Fixed expense Fixed expense = 1285875 - 900000 385875
 The amount by which advertising can be increase is = Fixed expenses after changes - Current fixed expenses = 385375 - 180000 205375

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