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: Sales Variable expenses Contribution margin Fixed expenses Net operating income $ 3,240,000 1,620,000 1,620,000 180,000 $1,440,000 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. Assume this year's unit sales and total sales increase by 55,000 units and $6,600,000, respectively. If the 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? 4-5. Assume the president expects this year's unit sales to increase by 11%. 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 13% 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 $1.90 per unit. He thinks that this move, combined with some increase in advertising, would increase this year's unit sales by 25%. How much could the president increase this year's advertising expense and still earn the same $1,440,000 net operating income as last year? Complete this question by entering your answers in the tabs below. Reg 1 Reg 2 Reg 3 Reg 4A Reg 43 Req 5A Reg 58 Reg 6 What is the product's CM ratio? CM ratio %6

Answer 1

Solution 1:
Sales Price	120
Less: Variable cost per unit	60
Contribution Margin per unit	60
Contribution Margin ratio	50.00%
Solution 2:
Fixed costs	180000
/Contribution Margin ratio	50%
Break-even point in sales dollars	360000
Solution 3:
Increase in sales	6600000
*Contribution Margin ratio	50%
Net operating income Increase by	3300000
Solution 4-a:
Total Contribution margin	1620000
/ Net operating income	1440000
Degree of operating leverage	1.13
Solution 4-b:
% Increase in sales	11%
*Degree of operating leverage	1.13
Net operating income Increase by	12.43%
Solution 5-a:
Feather friend Inc.
Contribution Income statement
	Last Year	Proposed
	27000	units	33750	units
Particulars	Total	Per unit	Total	Per unit
Sales	3240000	120	3523500	104.40
Variable expenses	1620000	60	2025000	60
Contribution margin	1620000	60	1498500	44.4
Fixed expenses	180000		242000
Net operating income	1440000		1256500
Solution 5-b:
Decrease in net operating income	$183,500
Solution 6:
Existing contribution margin per unit	60
Less: Increase in sales commission	1.90
New contribution margin per unit	58.10
New sales units	33750
*New contribution margin per unit	58.10
Total Contribution margin	1960875
Less: Target operating income	1440000
Minimum Fixed cost	520875
Less: existing fixed cost	180000
Amount by which advertising can be increased =	340875