Question

Feather Friends, Inc., distributes a high quality wooden birdhouse that sells for $80 per unit. Variable expenses are $1000 per unit, and fixed expenses total $200,000 per year. Its operating results for last year were as follows: Sales Variable expenses Contribution martin Fixed expenses Net operating Incore $ 2,080,000 1,040,000 1.040,000 200.000 840,000 int ences 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 $50,000 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 11%. 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 14% reduction in the selling price, combined with a $73,000 increase in advertising < Prey 4 of 4 Next

Answer 1

Part-1

CM Ratio= Contribution/ Sales

( Sales - Variable cost)/ Sales

( 80-40)/80= 50%

Part-2

BEP ( $)= Fixed Cost/ CM Ratio

$200000/50%=$400000

Part-3

Net operating Increase = Increase sales X CM Ratio

=$50000X 50%=$25000

Part-4 (a)

Degree of Operating Leverage = Contribution Margin / Net Operating Income

(1040000/840000)=1.24 times

part-4(b)

% increase in Net operating Income = % increase in sales X DOL

=11%X 1.24 = 13.64%

As HOMEWORKLIB RULES only 4 part can be solved.