Feather Friends, Inc., distributes a high-quality wooden birdhouse that sells fo
ID: 2336792 • Letter: F
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 $ 2,000,000
Variable expenses 1,000,000
Contribution margin 1,000,000
Fixed expenses 180,000
Net operating income $ 820,000
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 $51,000 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 10% reduction in the selling price, combined with a $74,000 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. Do you recommend implementing the sales manager's suggestions?
6. The president does not want to change the selling price. Instead, he wants to increase the sales commission by $1.60 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 $820,000 net operating income as last year?
Explanation / Answer
Answer:
1
What is the product's CM ratio
Amount $
%
Sales Price
80
100.0%
Less: Variable cost
40
50.0%
Contribution margin
40
50.0%
CM Ratio =40/80 =50%
____________________________________________
2.
break-even point in dollar sales
=Fixed Expanses / CM ratio
=180,000/50%
=$360,000
break-even point in dollar sales =$360,0000
__________________________________________
3. If this year's sales increase by $51,000 and fixed expenses do not change, how much will net operating income increase?
Net operating income increase
=increase in sales x CM ratio
=$51,000 x 50%
=$25,500
Net operating income increase =$25,500
__________________________________________________________
4-a. What is the degree of operating leverage based on last year's sales?
degree of operating leverage
=Contribution margin /Net operating income
=1,000,000/820,000
=1.22 times
_________________________________
4-b
percentage increase in net operating income will the company realize this year
=% change in Operating sales x degree of operating leverage
=11% x 1.22
=13.42%
_______________________________
5. The sales manager is convinced that a 10% reduction in the selling price, combined with a $74,000 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?
Contribution format income statement
Last year
proposed
25000 units
31250 units
Sales Price
2000000
80
2250000
72
Less: Variable cost
1000000
40
1250000
40
Contribution margin
1000000
40
1000000
32
Less: Fixed cost
180,000
252,000
Net operating income
820,000
748,000
proposed units =25000x1.25 =31250 units
Selling price =80-10% =80-8=72
_______________________
b. Do you recommend implementing the sales manager's suggestions?
No
Explanation : As there is decrease in Net operating income so sales manager's suggestions should not implemented
__________________________________
6
Expected total contribution margin
=25000 units x1.25 x (80-40-1.60)
1200000
Less; Present total Contribution
=25000*40
1000000
Advertise expanses can be increased by
200000
president increase this year's advertising expense =$200,000
Amount $
%
Sales Price
80
100.0%
Less: Variable cost
40
50.0%
Contribution margin
40
50.0%
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