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 unit. Variable expenses are $20.00 per unit, and fixed expenses total $200,000 per year.

What is the product's CM ratio?

       

Use the CM ratio to determine the break-even point in dollar sales.

       

Due to an increase in demand, the company estimates that sales will increase by $48,000 during the next year. By how much should net operating income increase (or net loss decrease) assuming that fixed expenses do not change?

       

520,000

320,000

Compute the degree of operating leverage at the current level of sales. (Round your answer to 2 decimal places.)

            

The president expects sales to increase by 18% next year. By what percentage should net operating income increase? (Round intermediate calculations and final answer to 2 decimal places.)

           

Refer to the original data. Assume that the company sold 36,000 units last year. The sales manager is convinced that a 15% reduction in the selling price, combined with a $80,000 increase in advertising, would increase annual unit sales by 50%.

Prepare two contribution format income statements, one showing the results of last year’s operations and one showing the results of operations if these changes are made. (Do not round intermediate calculations. Round your "Per unit" answers to 2 decimal places.)

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 $200,000 per year.

Explanation / Answer

1./

SALES PER UNIT = $40

LESS VARIABLE COST = ($20)

CONTRIBUTION MARGIN= $20

CONTRIBUTION MARGIN RATIO = (CONTRIBUTION MARGIN / SALES) * 100

   = ($20 / $40) * 100

= 50%

2./

BREAK EVEN SALES IN $ = TOTAL FIXED EXPENSES / CONTRIBUTION MARGIN RATIO

   =$200000 / 50%

   = $400000

3./

INCEREASE IN SALES = $48000

LESS INCEREASE IN VARIABLE COST ($48000 * 50%) = ($24000)

INCEREASE IN CONTRIBUTION MARGIN = $24000

LESS INCEREASE IN FIXED COST = $0

INCEREASE IN OPERATIING INCOME = $24000

4./ A./

OPERATING LEVERAGE = CONTRIBUTION MARGIN / NET OPERATING INCOME

   = $520000 / $320000

   = 1.625

B./

NEW SALES OF NEXT YEAR ($1040000 *118%) = $1227200

LESS VARIABLE COST ($520000 * 118%) = ($613600)

CONTRIBUTION MARGIN = $613600

LESS FIXED COST = ($200000)

NET OPERATING INCOME = $413200

LESS NET OPERATING INCOME LAST YEAR = ($320000)

INCEREASE IN OPERATING INCOME = $93000

% INCEREASE ($93000 / $320000) * 100 = 29.06%

5./ A./

SELLING PRICE PER UNIT ($1040000 / 36000 UNITS) = $28.89

CONTRIBUTION STATEMENT FOR LAST YEAR

CONTRIBUTION STATEMENT AFTER CHANGES MADE

PARTICULLAR AMOUNT $ SALES REVENUE 36000 * $28.89 1040000 LESS VARIABLE COST (520000) CONTRIBUTION MARGIN 520000 LESS FIXED EXPENSES (200000) NET INCOME 320000

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