Feather Friends, Inc., distributes a high-quality wooden birdhouse that sells fo

Question

Feather Friends, Inc., distributes a high-quality wooden birdhouse that sells for $40 per unlt. Variable expenses are and fixed expenses total $200,000 per year. its operating results for last year were as follows: 3 1,000,000 500,000 500,000 200,000 300,000 Sales Contribation margin Pixed expenses Set operating incone Required: Answer each question independently based on the original data . What Is the product's CM ratio? 2. Use the CM ratio to determine the break-even point in dolar sales. 3. It this years 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 years sales? 4a 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 comince that a 14% reduction in the sell prico com rede ha m o i emoe n aammn. 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 seling price, Instead, he wants to Increase the sales commission by $170 per unt He thinks that this move, combined with some increase in president increase this year's advertising expense and stil earn the same advertising, would increase this year' sales by 25%. How much could the $300,000 net operating income as last year? Complete this question by entering your answers in the tabs below. Rea 3 Req 4A Req SA Req 50 Rea 6 2 3 4 5

Explanation / Answer

1 CM ratio=Contribution margin/Sales=500000/1000000=0.50 2 Break-even point in $=Fixed cost/CM ratio=200000/0.50=$400000 3 Increase in sales 50000 Increase in contribution margin (50000*0.50) 25000 Less: Increase in fixed expense 0 Increase in net operating income 25000 4-a. Degree of operating leverage=Contribution/Operating Income=500000/300000=1.7 times 4-b. Expected % increase in net operating income=Degree of operating leverage*expected % increase in sales=1.7*19=32.3% 5 a. $ Sales (31250 units at $34.4 per unit) 1075000   Less: Variable expenses 537500 (1075000*0.50)   Contribution margin 537500   Less: Fixed expenses (200000+70000) 270000   Net operating income 2,67,500 Note: Current units sold=Sales/Selling price per unit=1000000/40=25000 units Increase in units=25% Propsed units sales=25000*1.25=31250 units Reduction in selling price=14% Revised selling price per unit=40*(1-0.14)=40*0.86=$ 34.4 per unit b. No. since the revised income of $267500 is lower than the current income of $300000. 6 $ Sales (31250 units at $40 per unit) 1250000 Less: Variable expenses (1250000*0.50) 625000 Sales commission (31250*1.70) 53125   Contribution margin 571875 Less: Desired  Net operating income 300000 Fixed expenses 271875 Less: Current fixed expense 200000 Increase in Advertising expense 71875 Note: Current units sold=Sales/Selling price per unit=1000000/40=25000 units Increase in units=25% Propsed units sales=25000*1.25=31250 units I appreciate your ratings

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