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 $160,000 per year. Its operating results for last year were as follows: $ 1,120,000 560,000 560,000 160,000 Sales Variable expenses Contribution margin Fixed expenses Net operating income 400,000 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 $48,000 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 13%. 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 14% 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 willi 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 sales by 25%. How much could the president increase this year's advertising expense and still earn the same $400,000 net operating income as last year? Complete this question by entering your answers in the tabs below. Reg 2 Req 4A Reg 1 Reg 3 Reg 4B Reg SA Reg 5B Reg 6 What is the product's CM ratio? CM ratio

Answer 1

1	Sales	$40
	Less: Variable Cost	$20
	Contribution margin	$20
	Contribution margin ratio =	Contribution margin/sales
	=	20/40
	=	50.00%
2	Break-Even Point in Sales =	Total Fixed Costs / Contribution Margin Ratio
	=	$160,000/0.50
	=	$320,000
3	Sales	$1,168,000
	Less: Variable Cost	$584,000
	Contribution margin	$584,000
	Less: Fixed expense	$160,000
	Net Operating Income	$424,000
4 a.	Degree of operating leverage =	Contribution/Net Operating Income
	($560,000/$400,000)	1.4
4 b.	If sales increase by 13% , the net operatingIncome should increase by 1.4 x 13% = 18.2%