Feather Friends, Inc., distributes a high-quality wooden birdhouse that sells fo
ID: 2427281 • Letter: F
Question
Feather Friends, Inc., distributes a high-quality wooden birdhouse that sells for $20 per unit. Variable costs are $8 per unit. And fixed costs total $180,000 per year. FEATHER FRIENDS, INC. Unit price $20 Variable cost per unit 8 Annual fixed costs 180,000 Estimated sales increase $75,000 Operating results last year: Sales $400,000 Less variable expenses 160,000 Contribution margin 240,000 Less fixed expenses 180,000 Net operating income $60,000 Expected percentage sales increase next year 20% Units sold last year 18,000 percentage reduction in sales price 10% Increase in advertising expense $30,000 Expected percentage increase in sales 33% Increase in sales commission per unit $1 Required: Answer the following independent questions. 1. What is the product's CM ratio? 2. Use the CM ratio to determine the break-even point in sales dollars. 3. Due to an increase in demand, the company estimates that sales will increase by $75,000 during the year. By how much should net operating income increase (or net loss decrease) assuming that fixed costs do not change? 4. Assume that the operating result for last were as stated above. a. Compute the degree of operating leverage at the current level of sales. b. The president expects sales to increase by 20% next year. By what percentage should net operating income increase? 5. Refer to the original data. Assume that the company sold 18,000 units last year. The sales manager is convinced that a 10% reduction in the selling price, combined with a $30,000 increase in advertising, would cause annual sales in units to increase by one-third. Prepare two contribution income statements, one showing the results of last year's operations and one showing the results of operations if these changes are made. Would you recommend that the company do as the sales manager suggest? 6. Refer to the original data. Assume again that the company sold 18,000 units last year. The president does not want to change the selling price. Instead, he wants to increase the sales commission by $1 per unit. He thinks that this move, combined with some increase in advertising, would increase annual sales by 25%. By how much could advertising be increased with profits remaining unchanged? Do not prepare an income statement; use the incremental analysis approach. Feather Friends, Inc., distributes a high-quality wooden birdhouse that sells for $20 per unit. Variable costs are $8 per unit. And fixed costs total $180,000 per year. FEATHER FRIENDS, INC. Unit price $20 Variable cost per unit 8 Annual fixed costs 180,000 Estimated sales increase $75,000 Operating results last year: Sales $400,000 Less variable expenses 160,000 Contribution margin 240,000 Less fixed expenses 180,000 Net operating income $60,000 Expected percentage sales increase next year 20% Units sold last year 18,000 percentage reduction in sales price 10% Increase in advertising expense $30,000 Expected percentage increase in sales 33% Increase in sales commission per unit $1 Required: Answer the following independent questions. 1. What is the product's CM ratio? 2. Use the CM ratio to determine the break-even point in sales dollars. 3. Due to an increase in demand, the company estimates that sales will increase by $75,000 during the year. By how much should net operating income increase (or net loss decrease) assuming that fixed costs do not change? 4. Assume that the operating result for last were as stated above. a. Compute the degree of operating leverage at the current level of sales. b. The president expects sales to increase by 20% next year. By what percentage should net operating income increase? 5. Refer to the original data. Assume that the company sold 18,000 units last year. The sales manager is convinced that a 10% reduction in the selling price, combined with a $30,000 increase in advertising, would cause annual sales in units to increase by one-third. Prepare two contribution income statements, one showing the results of last year's operations and one showing the results of operations if these changes are made. Would you recommend that the company do as the sales manager suggest? 6. Refer to the original data. Assume again that the company sold 18,000 units last year. The president does not want to change the selling price. Instead, he wants to increase the sales commission by $1 per unit. He thinks that this move, combined with some increase in advertising, would increase annual sales by 25%. By how much could advertising be increased with profits remaining unchanged? Do not prepare an income statement; use the incremental analysis approach.Explanation / Answer
Feather Friends INC Details Amt $ Unit Selling price 20.00 Unit Variable cost 8.00 Unit Contribution margin 12.00 1.00 CM ratio 60.00% Fixed Cost 180,000.00 2.00 Break Even $ Sales =Fixed cost/CM ratio 300,000.00 3.00 expected increase in sales 75,000.00 CM Ratio 60% Expected increase in Contribution Margin 45,000.00 As fixed cost remains unchanged Net Operating Income increase by; 45,000.00 4.00 Last Year Results Sales 400,000.00 Variable Expense 160,000.00 Contribution Margin 240,000.00 Fixed expenses 180,000.00 Net Operating Income 60,000.00 a Degree Of operating Leverage= Contribution/Net Operating Income 4.00 b If sales increase by 20% , the net operating Income should increase by 4*20=80% 5.00 If sales managers change are made CVP Income statement As per last year As per change Units sold 18,000.00 23,999.40 Unit sales price 20.00 18.00 Sales 360,000.00 431,989.20 Variable Expense 144,000.00 191,995.20 Contribution Margin 216,000.00 239,994.00 Fixed expenses 180,000.00 210,000.00 Net Operating Income 36,000.00 29,994.00 b As the net operating income decreases , I shall not recommend the company to accept sales manager's proposal 6.00 When the sales commission increased CVP Incremental Statement As per last year As per change Units sold 18,000.00 22,500.00 Unit sales price 20.00 20.00 Unit variable cost 8.00 9.00 Unit Contribution margin 12.00 11.00 Total Contribution 216,000.00 247,500.00 Incremental Contribution 31,500.00 Advertisement can be increased by $31500 with maintaining same net operating income of last year
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