Feather Friends, Inc., distributes a high-quality wooden birdhouse that sells fo
ID: 2426671 • 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.
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 $43,000 during the next year. By how much should net operating income increase (or net loss decrease) assuming that fixed expenses do not change?
540,000
360,000
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 13% next year. By what percentage should net operating income increase? (Round intermediate calculations to 2 decimal places and final answer to the nearest percentage.)
Net operating income increases by what %
Refer to the original data. Assume that the company sold 42,000 units last year. The sales manager is convinced that a 13% reduction in the selling price, combined with a $71,000 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.)
Refer to the original data. Assume again that the company sold 42,000 units last year. The president does not want to change the selling price. Instead, he wants to increase the sales commission by $2.40 per unit. He thinks that this move, combined with some increase in advertising, would double annual unit sales. By how much could advertising be increased with profits remaining unchanged? Do not prepare an income statement; use the incremental analysis approach. The amount by which advertising can be increased by is...?
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.
Explanation / Answer
1
Calculation of product's CM ratio:
Selling Price per unit (A)
$ 40.00
Less: Variable expense per unit
$ (20.00)
Contribution Margin Per unit (B)
$ 20.00
Contribution Margin (CM) Ratio = B/A = 20 /40 =
50%
2
Calculation of break-even point in dollar sales:
Total fixed expenses
$ 180,000.00
Contribution Margin (CM) Ratio
50%
Break-even point in dollar sales = 180000 /50% =
$ 360,000.00
3
Calculation of Increase or Decrease in Net income:
Increase in sales =
$ 43,000.00
Contribution Margin (CM) Ratio
50%
Increase in net income = 43000*50% =
$ 21,500.00
4a.
Calculation of degree of operating leverage at the current level of sales:
Contribution margin
540000
Net operating income
360000
Degree of operating leverage = 540000/360000 =
1.50
1
Calculation of product's CM ratio:
Selling Price per unit (A)
$ 40.00
Less: Variable expense per unit
$ (20.00)
Contribution Margin Per unit (B)
$ 20.00
Contribution Margin (CM) Ratio = B/A = 20 /40 =
50%
2
Calculation of break-even point in dollar sales:
Total fixed expenses
$ 180,000.00
Contribution Margin (CM) Ratio
50%
Break-even point in dollar sales = 180000 /50% =
$ 360,000.00
3
Calculation of Increase or Decrease in Net income:
Increase in sales =
$ 43,000.00
Contribution Margin (CM) Ratio
50%
Increase in net income = 43000*50% =
$ 21,500.00
4a.
Calculation of degree of operating leverage at the current level of sales:
Contribution margin
540000
Net operating income
360000
Degree of operating leverage = 540000/360000 =
1.50
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