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 $160,000 per year. Its operating results for last year were as follows: Sales Variable expenses Contribution margin Fixed expenses Net operating income $ 1,000,000 500,000 500,000 160,000 $ 340,000 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 $59,000 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 12%. 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 11% reduction in the selling price, combined with a $70,000 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 $2.40 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? Complete this question by entering your answers in the tabs below. Req 1 Reg 2 Reg 3 Req 4A Re 45 Reg SA Reg 58 Reg 6 What is the product's CM ratio?

Answer 1

contribution CM ratio $20x100 - 50% per uni uni $40 Sales per contribution margin p. u= sales priupu-vcp.u i $20 - $40 $20 Break even sales (in dollars) fined costs / CM ratio $1,60,000 / 504 $320000 3) Increase in Net operating income if sales increase by $59000 contributiom margin ratto x Increase in sales sot. X $59000 $ 29500 ul as Degree of operating everage & contribution margin Net operating incom $500000 1.47 $340000 b) to increase in operating income to increase in sales xoperating levurage 127 X 1.47 17.64%

5) a) Calculation of g this year's operating income Units sold = Total sales revenue $1,000000 90 250000 SP per unit $35.6 p.u sp per unt. 891 of $40 p.u- Advertising cost - $70000 inerease which means fined $230000 Units salen 125% 31,250 cost ? 7 of 25000 Calculation of NOI Sales ( 31,250 x 35.6 pu) vouable experie sud000 X 3/200) $ 1/12500 $ 6250 oo 28000 $ 487500 contribution margin If the idea is implemented Net operating income will increase by $487500 $34oooo $147500

6 SP = $40 p.u UC $20 put $2.40 pe NOI = $340000 Fired expenses $160000 tx adu. eup. Sales 1 251 : sales $12,50,000 $120,000 Contribution pu. $40 - ($20+$2.40) $40 - $22.4. $17.6 p.u. Unitsa $31250 $12,50,000 $40 contribution margin. $17-6" $31250 $ Soooo z NO I CM - fined cup $ 000 (160000 + x ). $34oow L $ 500 . Additional enpon $50,000 can be spent on NOI. adu to have same