Question

10 Problem 6-23 CVP Applications; Contribution Margin Ratio: Degree of Operating Leverage (L06-1, LO6- 3, LO64, LO65, LO6-8]. Feather Friends, Inc. distributes a high-quality wooden birdhouse that sells for $20 per unit Variable expenses are $ 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 et operating income 160.000 200.00 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 575,000 and fixed expenses do not change how much wil 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 20%. Using the degree of operating leverage from last year, what percentage increase in net operating income will the company realze this year? 5. The sales manager is convinced that a 10% reduction in the selling price, combined with a $30,000 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 S1 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 $60,000 net operating income as last year? Answer is not complete Complete this question by entering your answers in the tabs below. Regi Reg 2 Reg 3 Raga Reg AB Beg SA The sales manager is convinced that a 10% reduction in the selling price, combined with a $30,000 increase in advertising would increase this year's unit sales by 25%. If the sales manager's ideas are implemented, how much will net operating income increase or decrease over last year? (Negative amounts should be input with a minus sign.) decrease to be prating in 20 000 < Reg SA Re >

Answer 1

1.CM ratio=contribution/sale=240000/400000*100=60%

2.break even point in dollar sales=fixed cost/cm ratio=180000/60%=$300000

3.

if sales increase by 75000,then
sales	475000
variable costs(40%)	190000
contribution	285000
fixed costs	180000
net operating income	105000
increase in net oprating income(105000-60000)	45000

4.a.degree of operating leverage=contribution margin/operating income=240000/60000=4 times

b.

if sale increased by 20%,then
sales(400000+20%)	480000
variable costs(40%)	192000
contribution	288000
fixed costs	180000
net oprating income	108000
increase in net income(108000-60000)	48000
% increase in net oprating income(48000/60000)	80%

5.if selling price reduced by 10%,new selling price=20-10%=18

unit sale in this year if plan implemented=400000/20+25%=25000 units,then

a.

if sale increased by 20%,then
sales(25000 units*18)	450000
variable costs(40%)	180000
contribution	270000
fixed costs	180000
net oprating income	90000

b.

if sale increased by 20%,then
sales(25000 units*18)	450000
variable costs(40%)	180000
contribution	270000
fixed costs(30000+180000)	210000
net oprating income	60000

as from the table,there is no change in net operating income in both situation.

6.let total advertisement expenses is X,then

if sale increased by 25%,then
sales(400000+25%)	500000
variable costs(8+1)*25000 units	225000
contribution	275000
fixed costs(180000+x)	180000+x
net oprating income	60000

from the table,60000=275000-(180000+x),ie x=$35000,hence total advertising expense=35000