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 $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 $44,000 during the next year. By how much should net operating income increase (or net loss decrease) assuming that fixed expenses do not change?

1,000,000

820,000

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.)

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

Solution:

1) CM Ratio = Contribution Margin / Sales x100

Contribution margin = Sales – Variable Cost = $80 – 40 = $40

CM Ratio = $40 / 80 x 100 = 50%

2) the break-even point in dollar sales = Fixed Cost / CM Ratio

= $180,000 / 50%

= $360,000

3)

If sales will increase by $44,000, net operating income will be increased by contribution margin from the increase sale.

Contribution Margin = $44,000*50% = $22,000

Net Operating Income will be increased by $22,000

4)

a)

Degree of Operating Leverage = Contribution / Net Operating Income or EBIT = $1000,000 / $820,000 = 1.22

b) please ask separate question..

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