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 $ 1,120,000 560,000 560,000 160,000 $ 400,000 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 $48.000 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 13%. 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 $63,000 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 $1.90 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 $400,000 net operating income as last year? Complete this question by entering your answers in the tabs below. Reg 1 Rega Reg 3 Req3 Reg 4A REGAA Req AB Reg SA Reg SA | | Req se Reg 5B Reg 6 Rego What is the product's CM ratio? CM ratio

Answer 1

1.

CM ratio

50 %

CM ratio = $ ( 40 - 20 ) / $ 40 = 50 %.

5A.

Net Operating Income ( loss)

$ 281,000

New selling price = $ 40 - 14 % = $ 34.40.

Projected sales volume = 28,000 x 1.25 = 35,000

Total sales revenue = 35,000 x $ 34.40 = $ 1,204,000

Net operating income ( loss ) = $ 1,204,000 - $ ( 35,000 x 20 ) - $ ( 160,000 + 63,000) = $ 281,000

5B.

Increase ( decrease) to net operating income

- $119,000

6.

The amount by which advertising can be increased

$ 73,500

Expected sales volume = 28,000 x 1.25 = 35,000

Expected sales revenue = 35,000 x $ 40 = $ 1,400,000

Variable cost = 35,000 x $ 21.90 = $ 766,500

Contribution margin = $ 1,400,000 - $ 766,500 = $ 633,500.

Total fixed cost that can be afforded = $ 633,500 - $ 400,000 = $ 233,500

Increase in fixed cost that can be afforded = $ 233,500 - $ 160,000 = $ 73,500.