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 | $ | 1,040,000 |
| Variable expenses | 520,000 | |
| Contribution margin | 520,000 | |
| Fixed expenses | 180,000 | |
| Net operating income | $ | 340,000 |
The sales manager is convinced that a 11% reduction in the selling price, combined with a $74,000 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?
Solution a:
New selling price per unit = $40 * 89% = $35.60
New Fixed costs = $180,000 + $74,000 = $254,000
New sales volume = ($1,040,000 / $40)*125% = 32500 units
| Computation of net operating income - Feather friend Inc. | |
| Particulars | Amount |
| Sales (32500 * $35.6) | 1157000 |
| Variable expenses (32500*$20) | 650000 |
| Contribution margin | 507000 |
| Fixed expenses | 254000 |
| Net operating income | 253000 |
Solution b:
net operating income decrease by = $253000 - 340000 = ($87,000)
Feather Friends, Inc., distributes a high-quality wooden birdhouse that sells for $40 per unit. Variable expenses...