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: Variable expenses Contribution margin Fixed expenses Net operating income $ 3, 120, eee 1, 55e, Bee 1,550,000 10,eee $ 1,398,eee 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 soles. 3. If this year's sales increase by $55,000 and fixed expenses do not change, how much will net operating income increase? 4-8. What is the degree of operating leverage based on last year's sales? 4-6. Assume the president expects this year's sales to increase by 13%. 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 14% reduction in the selling price, combined with a $67,000 increase in advertising, would increase this year's unit soles by 25% . 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 $1.50 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 $1,380.000 net operating income as last year? Answer is not complete. Complete this question by entering your answers in the tabs below. Reg 1 Red 2 Reg 3 Rey 4A Req 40 Rey 5A Reg 5B Reg 6 The sales manager is convinced that a 1496 reduction in the selling price, combined with a $67,000 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 rourid intermediate calculations.) Not aparating income (Reg 4B Reg SB >

Answer 1

1)	CM ratio
	contribution margin/sales
	1,560,000/3,120,000
	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
	55,000*50%
	27500
4-a)	Degree of operating leverage
	contribution margin/net income
	1,560,000/1,380,000
	1.130435
	or 1.13
4b)	percentage increase in net income
	13*1.30435
	14.69565
	or 14.70%
5)-a)	unit sale = 3,120,000/120
		26000
	now unit sales =26000*125%
		32500
	selling price new = 120*86%=$103.2
	sales        (32500*103.2)				3354000
	Variable expense (32500*60)				1950000
	Contribution margin				1404000
	fixed expense (180,000+67000)				247000
	Net operating income				1157000
b)	Decrease in net income =			223000
				per unit
6)	sales			120
	Variable expense			61.5
	Contribution margin			58.5
	increase in sales 25%
	(32500*58.5) - (180,000+x) = 1,380,000
	1901250 - 180,000-x =1,380,000
	x                                 =		341,250	asnwer