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. Required: Answer the following independent questions: 1. What is the product's CM ratio? CM ratio % 2. Use the CM ratio to determine the break-even point in dollar sales. Break-even point in sales dollars

Answer 1

Answers

• Requirement 1 to 5 [total 7]
• [1]

A	Sale price	$40
B	Variable cost	$20
C = A - B	Contribution margin per unit	$20
D = C/A	CM Ratio	50%

• [2]

A	Sale price	$40
B	Variable cost	$20
C = A - B	Contribution margin per unit	$20
D = C/A	CM Ratio	50%
E	Fixed cost	180000
F = E/D	Break even point in dollars	$360,000 Answer

• [3]

Net Operating Income INCREASE by $ 29,500 [which is $ 59000 x 50%]

• [4a]
  Degree of Operating Leverage = Contribution margin / Net Operating income
  = $ 560000 / 380000
  = 1.47
• [4b]
  >Increase in sale = 16%
  >Operating Leverage = 1.47
  Net Operating Income increases by = 16 x 1.47 = 23.52%
• [5a]

	Last Year		Proposed
	42000	units	63000	units
	Total	per unit	Total	per unit
Sales	$1,680,000	$40	$2,192,400	$34.80
Variable cost	$840,000	$20	$1,260,000	$20.00
Contribution margin	$840,000	$20	$932,400	$14.80
Fixed Cost	$180,000		$258,000
Net Income	$660,000		$674,400

• 5[b]

YES.