Question

# Feather Friends, Inc., distributes a high-quality wooden birdhouse that sells for \$80 per unit. Variable expenses...

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 \$180,000 per year. Its operating results for last year were as follows:

 Sales \$ 2,160,000 Variable expenses 1,080,000 Contribution margin 1,080,000 Fixed expenses 180,000 Net operating income \$ 900,000

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 \$55,000 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 20%. 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 \$61,000 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 \$2.20 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 \$900,000 net operating income as last year?

Dear Student,

as per the HOMEWORKLIB POLICY, only the first four questions should be answered. Kindly take note of it.

Part 1

 Contribution margin 50%
 Sales price 80 100% Less: Variable expenses 40 50% Contribution margin 40 50%

Part 2

Break-even point in total sales dollars = Fixed expenses/CM ratio = 180000/50% = \$360000

Part 3

Net operating income should increase by \$27500 (\$55,000 increased sales × 50% CM ratio).

Part 4 A

 Sales 2160000 Less variable expenses 1080000 Contribution margin 1080000 Less fixed expenses 180000 Net operating income 900000

Degree of operating leverage = Contribution margin / net operating income = 1080000/900000 = 1.20

Part 4 B

1.20 (degree of operating leverage) * 10% (expected increase in sales)= 12% increase in NOI.

In dollars, this increase would be 12% * \$900000 (current NOI) = \$10800 additional income.

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