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	$	2,160,000
Variable expenses		1,080,000
Contribution margin		1,080,000
Fixed expenses		180,000
Net operating income	$	900,000

Required:

Answer each question independently based on the original data:

5. The sales manager is convinced that a 11% reduction in the selling price, combined with a $61,000 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 $2.20 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 $900,000 net operating income as last year?

Answer 1

5a) Calculate net operating income

Sales (27000*1.25*71.20)	2403000
Variable cost (33750*40)	1350000
Contribution margin	1053000
Fixed cost (180000+61000)	241000
Net operating income	812000

5b) Increase (decrease) in net income = 812000-900000 = -88000

6) Calculate advertising expense

Sales = (27000*1.25*80) = 2700000

Variable cost = (27000*1.25*42.20) = 1424250

Net income = 900000

Sales	2700000
variable expense	1424250
Fixed cost	180000
Net income	900000
Advertising expense	195750