Feather Friends, Inc., distributes a high-quality wooden birdhouse that sells fo
ID: 2413121 • Letter: F
Question
Feather Friends, Inc., distributes a high-quality wooden birdhouse that sells for $40 per unit. Variable expenses are $20.00 per unit, and fixed expenses total $180,000 per year. Its operating results for last year were as follows:
5. The sales manager is convinced that a 12% reduction in the selling price, combined with a $77,000 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 $1.50 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 $340,000 net operating income as last year?
Sales $ 1,040,000 Variable expenses 520,000 Contribution margin 520,000 Fixed expenses 180,000 Net operating income $ 340,0005. The sales manager is convinced that a 12% reduction in the selling price, combined with a $77,000 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 $1.50 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 $340,000 net operating income as last year?
Explanation / Answer
(5)
Before
After
Sale
(26000 * 40)
=1040000
(26000 * 125%) * (40 * 88%)
=1144000
(-) VC
(26000 * 20)
=520000
(32500 * 20)
=650000
Contribution
520000
494000
(-) Fixed Exp
180000
180000
(-) Additional Advertisement Exp
----
77000
Net Operating Income
340000
237000
There is no need to implement this idea
(6)
After
Sale
[(26000 * 125%) * 40]
=1300000
(-) VC
(32500 * 20)
=650000
(-) Commission
(32500 * 1.5)
=48750
Contribution
601250
(-) Fixed Exp
180000
(-) Additional Advertisement Exp
“X”
Net Operating Income
340000
Let “X” be the advertising Exp
601250 – 180000 – X = 340000
X = 81250
Before
After
Sale
(26000 * 40)
=1040000
(26000 * 125%) * (40 * 88%)
=1144000
(-) VC
(26000 * 20)
=520000
(32500 * 20)
=650000
Contribution
520000
494000
(-) Fixed Exp
180000
180000
(-) Additional Advertisement Exp
----
77000
Net Operating Income
340000
237000
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.