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Feather Friends, Inc., distributes a high-quality wooden birdhouse that sells for $80 per unit. Variable expenses are $40.00

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Answer #1
Req 1 :
CM ratio = Contribution margin / Sales = 1080000 / 2160000 50%
Req 2 :
Break-even point in dollar sales = Fixed expenses / CM ratio = 180000 / 50% 360000
Req 3 :
Increase in net operating income = ( Increase in sales * CM ratio ) - Increase in fixed expense = ( 45000 * 50% ) - 0 22500
Net operating income increases by 22500
Req 4A :
Degree of operating leverage = Contribution margin / Net operating margin = 1080000 / 900000 1.20
Req 4B :
Degree of operating leverage = % change in net operating income / % change in sales
1.20 = % change in net operating income / 11%
% change in net operating income = 1.20 * 11% 13.20%
Net operating income increase by 13.20%
Req 5 :
Last year's unit sales = Sales / Selling price = 2160000 / 80 27000
After changes :
Selling price = Current selling price * ( 1 - % reduction ) = 80 * ( 1 -13% ) 69.60
Fixed expenses = Current fixed expenses + Increase in adverstising expense = 180000 + 64000 244000
Unit sales = Last year's unit sales * ( 1 + % increase ) = 27000 * ( 1 + 25% ) 33750
a.
Sales ( 33750 * 69.60 ) 2349000
(-) Variable expenses ( 33750 * 40 ) 1350000
Contribution margin 999000
(-) Fixed expenses 244000
Net operating income 755000
b.
Last year's net operating income 900000
(-) This year's budgeted net operating income 755000
Decrease in net operating income 145000
6.
After change :
Unit sales = Last year's unit sales * ( 1 + % increase ) = 27000 * ( 1 + 25% ) 33750
Variable expense per unit = Current variable expense per unit + Increase in sales commission per unit = 40 + 1.90 41.90
Net operating income = Unit sales * ( Selling price - Variable cost per unit ) - Fixed expenses
900000 = 33750 * ( 80 - 41.90 ) - Fixed expense
900000 = 1285875 - Fixed expense
Fixed expense = 1285875 - 900000 385875
The amount by which advertising can be increase is = Fixed expenses after changes - Current fixed expenses = 385375 - 180000 205375
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