Question

Check Feather Friends, Inc., distributes a high-quality wooden birdhouse that sells for $120 per unit Variable expenses are $60.00 per unit, and fixed expenses total $160,000 per year. Its operating results for last year were as follows: Sales Variable expenses Contribution margin Fixed expenses Net operating income $ 3,240,000 1,620,000 1,620,000 160,000 $ 1,460,000

Answer 1

1) Product CM Ratio = (Contribution Per Unit / Sales Price Per Unit ) X 100

Contribution Per Unit = Selling Price Per Unit - Variable Cost Per Unit

So, the Contribution of the Product Per Unit = (120 - 60) = $ 60/ unit

Thus, CM Ratio = ($60/ $120) X 100 = 50%

2) Break-Even Point in Dollar Sales = Total Fixed Cost / Contribution Margin

Thus, the Break- Even Sales = $ 160000 / 0.50 = $ 320000

3) Number of units sold in the previous year = $ 3240000 / $ 120 per unit = 27000 units

Increase in this year of sales is 57000 units.

Thus, this years sales in units = ( 27000 + 57000) = 84000 units.

We Know that Operating Profit = ( Total Contribution - Total Fixed Cost)

So, Total Contribution for this year = ( 74000 X $60 / unit) = $ 4440000

So, The Net Operating income in this year = (4440000 - 160000) = $ 4280000

So, the increase in Operating income this year = (4280000 - 1460000) = $ 2820000

4)

Operating Leverage = Total Contribution / Net Operating Profit

So the Operating Leverage of the last Year = (27000 X 60) / 1460000 = 1.11