Feather Friends, Inc., distributes a high-quality wooden birdhouse that sells fo
ID: 2474570 • Letter: F
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 $180,000 per year.
Required:
Answer the following independent questions:
Due to an increase in demand, the company estimates that sales will increase by $57,000 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
increases
by
By___
Assume that the operating results for last year were:
Sales
$
2,160,000
Variable expenses
1,080,000
Contribution margin
1,080,000
Fixed expenses
180,000
Net operating income
$
900,000
The president expects sales to increase by 10% next year. By what percentage should net operating income increase? (Round intermediate calculations and final answer to 2 decimal places.)
Net operating income increases by
%
5.
Refer to the original data. Assume that the company sold 36,000 units last year. The sales manager is convinced that a 11% reduction in the selling price, combined with a $65,000 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.)
6.
Refer to the original data. Assume again that the company sold 36,000 units last year. The president does not want to change the selling price. Instead, he wants to increase the sales commission by $2.30 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 is___________
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 $180,000 per year.
Explanation / Answer
1. Due to an increase in demand, the company estimates that sales will increase by $57,000 during the next year. By how much should net operating income increase (or net loss decrease) assuming that fixed expenses do not change?
The president expects sales to increase by 10% next year. By what percentage should net operating income increase?
net operating income percentage = Net operating income / Sales *100
net operating income percentage for last year = 900,000 / 2,160,000 * 100 = 41.67%
net operating income percentage for next year = 1,008,000 / 2,376,000 * 100 = 42.42%
Percentage of net operating income increase = 42.42% - 41.67% = 0.75%
5. a .Preparing two contribution format income statements, one showing the results of last year’s operations and one showing the results of operations .
6. incremental analysis approach
Net operating income = contribution margin - fixed expenses
here, Net operating income = 1,260,000 we know
contribution margin = units * (selling price - variable cost)
as per the given information their is no change in selling price = $80
and variable cost = 40 + selling commition = 40+2.3 = $42.3
units means = 72,000 i.e, ( double units are produced = 36,000 + 36,000 = 72,000)
Therefore, contribution margin = units * (selling price - variable cost)
= 72,000 * (80 - 42.3) = 72,000 * 37.7 = 2,714,400
fixed expenses = 180,000 + advertisement cost
Therefore, Net operating income = contribution margin - fixed expenses
1,260,000 = 2,714,400 - (180,000 + advertisement cost )
1,260,000 = 2,714,400 - 180,000 + advertisement cost
advertisement cost = 2,714,400 - 180,000 - 1,260,000
advertisement cost = 1,274,400
As per the part 5 above we have taken $65,000, now anditional we need to increase it by 1,209,400 (i.e, 1,274,400 - 65,000)
Last year next year calculation next year Sales 2,160,000 2,160,000 +57,000 2,217,000 Variable expenses 1,080,000 1,108,500 Contribution margin 1,080,000 1,108,500 Fixed expenses 180,000 180,000 Net operating income 900,000 928,500Related Questions
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