Question

Feather Friends, Inc., distributes a high-quality wooden birdhouse that sells for $40 per unit. Variable expenses are $20.00 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 $ 1,120,000 560,000 560,000 180,000 $ 380,000 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 $58,000 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 17%. 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 12% reduction in the selling price, combined with a $78,000 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 $2.10 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 $380,000 net operating income as last year? Complete this question by entering your answers in the tabs below. Reg 1 Req 2 Req3 Req 4A Req 4B Req 5A Req 5B Req 6 What is the product's CM ratio? CM ratio % < Req1 Req2 >

Answer 1

answers 1 CM ratio (40/80) 50% 2 Break Even Point in Dollar sales (180000/50%) 360000 If sales increase by $58,000 How much Operating income Will Increases Increase in operating income |(58,000*0.5) 29000 4A) Degree of Operating leverage (Contribution / Net operating income) 1.47 Times 4B Sales increased by 17% how much Opearting income % will increase (Operating Leverage Increased sales) 24.99% 12% reduction in selling price, 78,000 incresed in Advertisement, sales units will increase by 25% Sales units 35000 per unit Sales 1232000 35.2 Variable Expenses 700000 contribution Margin 532000 15.2 Fixed cost 258000 Net operating Income 274000 5A) Net operating income 274000 5B) Net operating income Decreased by Decreased by 106000 Instead of Increase in selling price increased the Sales commission by $2.70 Incremental Analysis Sales units 7000 Sales 280000 Variable Expenses 154700 contribution Margin 125300 17.9 Fixed cost 125300 Net operating income Increase in Fixced Cost( 125300-28000*2.1) 66500 Amount to be increase in advertisements 665001