Question

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	$	2,000,000
Variable expenses		1,000,000
Contribution margin		1,000,000
Fixed expenses		180,000
Net operating income	$	820,000

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 $53,000 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 19%. 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 $63,000 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 $820,000 net operating income as last year?

Answer 1

Sales Variable Expenses contribution Margin Fixed cost Net operating Income 25000 Per unit 2000000 1000000 1000000 180000 820000 40 401 50% 360000 answers 1 CM ratio ( 40/80) 2 Break Even Point in Dollar sales |(180000/50%) If sales increase by $53,000 How much Operating income Will increases Increase in operating income (53,000*0.5) 4A) Degree of Operating leverage | Contribution / Net operating income) 4B Sales increased by 19% how much Opearting income % will increase (Operating Leverage * Increased sales ) 26500 1.22 Times 23.18%

13% reduction in selling price, 63,000 incresed in Advertisement, sales units will increase by 25% Sales units 31250 per unit Sales 2175000 69.6 Variable Expenses 1250000 40 contribution Margin 925000 29.6 Fixed cost 243000 Net operating Income 682000 5A) This years Net operating income 682000 5B) how much net oeprating income increase or Decrease Decrease by 138000 6. Instead of Increase in selling price increased the Sales commission by $2.40 13900 80 Sales units Sales Variable Expenses contribution Margin Fixed cost Net operating income Increase in Ficed Cost( 235000-(25000*2.40) Amount to be increase in advertisements 6250 500000 265000 235000 235000 42.4 37.6 175000 175000