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 $ 1,040,000 520,000 520,000 180,000 $ 340,000

5. The sales manager is convinced that a 14% reduction in the selling price, combined with a $65,000 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 $1.70 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 $340,000 net operating income as last year?

Answer 1

20 14% reduction in selling price, 65,000 incresed in Advertisement, sales units will increase by 25% Sales units 32500 per unit Sales 1118000 34.4 Variable Expenses 650000 contribution Margin 468000 14.4 Fixed cost 245000 Net operating Income 223000 5A) Net operating income 223000 5B) Increase (Decrease) to Net operating income (340000-203000) Decrease by 117000 Instead of Increase in selling price increased the Sales commission by $1.70 Incremental Analysis Sales units 6500 Sales 260000 40 Variable Expenses 141050 21.7 contribution Margin 118950 18.3 Fixed cost 118950 Net operating income 0 Increase in Fixced Cost(118950-26000*1.70)) 74750 Amount to be increase in advertisements 74750

Answer 2

Req 5-a	Contribution Income   statement
		Last Year		Proposed
		26,000	Units	32,500	Units
		Total	Per Unit	Total	Per Unit
	Sales	1,040,000	40.00	1,118,000	34.40
	Less: Variable expense	520,000	20.00	650,000	20.00
	Contribution margin	520,000	20.00	468,000	14.40
	Fixed expenses	180,000		245,000
	Net Income	340,000		223,000
Req 5-b	Net Operating Income Decrease by	(117,000)
Req 6	The amount by which advertising can be increased	74,750
	Working Note :
	Contribution margin per unit (Last year)	20.00
	Less: increase in sales comm	(1.70)
	Prposed contribution margin	18.30
	Multiplied by proposed sales after increase	32,500
	Proposed total contribution margin	594,750
	Less: Fixed expenses	(180,000)
	Less: Target Income	(340,000)
	The amount by which advertising can be increased	74,750