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	$	2,080,000
Variable expenses		1,040,000
Contribution margin		1,040,000
Fixed expenses		180,000
Net operating income	$	860,000

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 $44,000 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 12% reduction in the selling price, combined with a $61,000 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 $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 $860,000 net operating income as last year?

Answer 1

5 answers 1 CM ratio (40/80) 50% 2 Break Even Point in Dollar sales (180000/50%) 360000 If sales increase by 44,000 How much Operating income Will increases Increase in operating income (44,000*0.5) 22000 4A) Degree of Operating leverage (Contribution / Net operating income) 1.21 Tim 4B) Sales increased by 19% how much Opearting income % will increase (Operating Leverage * Increased sales) 22.99% COR 12% reduction in selling price, 61,000 incresed in Advertisement, sales units will increase by 25% Sales units 32500 per unit Sales 22880001 70.4 Variable Expenses 1300000 000140 contribution Margin 988000 30.4 Fixed cost 241000 Net operating Income 7470001 5A) Net operating income 747000 5B) Increase (Decrease) to Net operating income Decrease by 113000 6. Instead of Increase in selling price increased the Sales commission by $1.90 Incremental Analysis Sales units 6500 Sales 520000 80 Variable Expenses 272350 contribution Margin 247650 38.1 Fixed cost 247650 Net operating income Increase in Ficed Cost( 247650-(26000* 1.90) 198250 Amount to be increase in advertisements 198250 41.9