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 $24 per unit. Variable costs are $12.00 per unit, and fixed costs total $161,000 per year.
1. What is the product's CM ratio? (%)
2. Use the CM ratio to determine the break-even point in sales dollars
3. Due to an increase in demand, the company estimates that sales will increase by $44,000 during the next year. By how much should net operating income increase (or net loss decrease) assuming that fixed costs do not change?
4. Refer to the original data. Assume again that the company sold 30,000 units last year. The president does not want to change the selling price. Instead, he wants to increase the sales commission by $2.4 per unit. He thinks that this move, combined with some increase in advertising, would increase annual sales by 35%. By how much could advertising be increased with profits remaining unchanged?

Explanation / Answer

Hi, Please find answers below: a) CM Ratio = Contribution/Sales = 24-12/24 = 50% b) Break even sales = Fixed Cost/CM Ratio = 161,000/50% = 322000 c) If sales increases by 44000, increase in number of units sold would be 44000/24 = 1833 Increase in contribution = 1833*12 = 21996. Since there is no change in fixed costs, 21996 will be the increase in operating income.

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