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	$	1,080,000
Variable expenses		540,000
Contribution margin		540,000
Fixed expenses		180,000
Net operating income	$	360,000

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 $360,000 net operating income as last year?

Answer 1

Instead of Increase in selling price increased the Sales commission by $2.20 Incremental Analysis Sales units 6750 Sales = 1,080,000*0.25 270000 Variable Expenses 149850 contribution Margin 120150 Fixed cost 120150 Net operating income 0 Increase in Fixced Cost( 120150-(27000*2.20) 60750 Amount to be increase in advertisements 40 22.2 17.8 60750

Answer 2

Req 6	The amount by which advertising can be   increased	60,750
	Working Note:
	Contribution margin per unit (Last year)	20.00
	Less: increase in sales comm	(2.20)
	Prposed contribution margin	17.80
	Multiplied by proposed sales after increase	33,750
	Proposed total contribution margin	600,750
	Less: Fixed expenses	(180,000)
	Less: Target Income	(360,000)
	The amount by which advertising can be increased	60,750