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 $80 per unit. Variable expenses are $40.00 per unit, and fixed expenses total $160,000 per year Required: Answer the following independent questions: 1. What is the product's CM ratio'? CM ratio 2. Use the CM ratio to determine the break-even point in dollar sales. Break-even point in sales 3. Due to an increase in demand, the company estimates that sales will increase by $51,000 during the next year. By how much should net operating income increase (or net loss decrease) assuming that fixed expenses do not change? Net operating income

Explanation / Answer

Sales $2,000,000 Variable Expenses 1000000 Contribution $1,000,000 Fixed Expenses 160000 Net Operating Income $840,000 Ans 1 Contribution Margin ratio=Contribution margin per unit/Sales per unit (80-40)/80 0.5 Ans 2 sales at Brekeven Fixed Expenses/Contribution margin ratio 160000/.5 320000 $ Ans 3 Sales $2,051,000 Variable Expenses 1025500 Contribution $1,025,500 Fixed Expenses 160000 Net Operating Income $865,500 Increase in net operating income by $25500 Ans 4 A) Degree of operating leverage=Contribution Margin/Net Operating Income 1000000/105000 9.52380952 B) Sales $2,240,000 Variable Expenses 1120000 Contribution $1,120,000 Fixed Expenses 160000 Net Operating Income $960,000 There is increase in 3000 units so variable cost will also increase for 3000 units Net operating income increase by 960000-840000/840000*100 14.29 %

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