Problem 5-23 CVP Applications; Contribution Margin Ratio: Degree of Operating Le

Question

Problem 5-23 CVP Applications; Contribution Margin Ratio: Degree of Operating Leverage [LO5-1, LO5- 3, LO5-4, LO5-5, LO5-8 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 Variable expenses Contribution nargin Fixed expenses Net operating incone s 2,248,800 1.120,808 1,129,900 188.908 $940,808 Required: Answer eech 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 ir doltar sales 3 if this years sales ncrease oy S44:000 and fxed expenses do not change. how much wil net operating income incre 4.?. what is te degree of c perating ierernge besed on :ost yeor's sales? 4b Assume the president expects this year's sales to nce ese by 13%. Usinghe degree ofe perating teverage fan iast year what percentage increase in net operating irceme wilthe compary resize is yea 5 The sales ranager is convinced that 125 reductoi ne seling orice combined uth a $55,000 increase in advernisieg wour increase this years unit sales 25%. the sa es manage fright what nculd be this veer's net operatieg income Phsicess ane impemented? b. Do you recente empementing resees mene ger,suggestion 6 The pres dert does Fotwant to change the seltng obe heeeoihe wents 8 president increase this yesr's sozesh expense andis 55466saescommissionley $2:30 perunt.He

Explanation / Answer

1.

2.  

3.  

4.a.

4-b.

Working:

5-a.

Net operating income would be $987,000

5-b.

I would recommend the implementing the sales manager's suggestion , as this would help in incresing the net operating income by $47,000.

Working:

6.

The president can increase the current year's advertising expense by $199,500 and still earn the same net operaatig income as last year.

Working:

Contribution margin ratio = Contribution margin / sales = 1,120,000 / 2,240,000 = 50%

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