Question

Feather Friends, Inc., distributes a high-quality wooden birdhouse that sells for $80 per unit. Variable expenses are $40.00 per unit, and fixed expenses total $180,000 per year. Its operating results for last year were as follows:

Sales	$	1,920,000
Variable expenses		960,000
Contribution margin		960,000
Fixed expenses		180,000
Net operating income	$	780,000

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 $46,000 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 19%. 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 $66,000 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 $1.80 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 $780,000 net operating income as last year?

Answer 1

Answer 2

The answer has been presented in the supporting sheet. All the parts has been solved with detailed explanation and format. For detailed answer refer to the supporting sheet.

2 Answer Part 5) a) To calculate the net operating income of this year, we have to calculate the statement of net operating income with sales manager idea 4 Statement of Net Operating Income 5 Particulars Amount 6 sales (24000*125%*80*89%) 2136000 7 Variable expenses (24000*1259 1200000 8 Contribution Margin 936000 9 Fixed expenses (180000+66000 246000 10 Net Operating Income 690000 11 12 The net operating incomeif sales manager idea is implemented = $ 690000 13 14 B) 15 if sales manager idea is implemented net operating income will decrease by 16 = 780000-690000 17 = $ 90000 decrease 18 Thus the net operating income would decrease by $ 90000 19 20 Part 6) 21 The increase in advertising expense to earn same profit 22 = sales - variable expenses - fixed expenses - operating income 23 = (24000*125%*80) - (24000*125%*41.8) - 180000 - 780000 24 = $ 186000 25 H 26 Thus the advertising expense can be $ 186000 N Sheet7 Sheets Sheet9 Sheet10 Ready Sheet11 Sheet12 Sheet13 Sheet14 She