Feather Friends, Inc., distributes a high-quality wooden birdhouse that sells fo
ID: 2511993 • 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 $200,000 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 dollars$400,000 3. Due to an increase in demand, the company estimates that sales will increase by $50,000 during the next year. By how much should net operating income increase (or net loss decrease) assuming that fixed expenses do not change? et operating income increasesby 25,000Explanation / Answer
Solution:
Part 5a –
Contribution Income Statement
Last Year
Proposed
37,500 Units
56,250 Units (37,500*150%)
Total
Per Unit
Total
Per Unit
Sales
$2,160,000
$57.60
$2,883,375
$51.26
Variable Expenses
$1,080,000
$28.80
$1,620,000.00
$28.80
Contribution Margin
$1,080,000
$28.80
$1,263,375
$22.46
Fixed Expenses
$200,000
$272,000
Net Operating Income
$880,000
$991,375
Part 5b – Yes
Part 6 –
By increasing sales commission per unit the variable cost per unit will be increased by $2.10 per unit
Hence, the new variable cost per unit will be = 28.80 + 2.1 = $30.90 per unit
We need to prepare the income statement
Proposed
75,000 Units (37,500*2)
Total
Per Unit
Sales
$4,320,000
$57.60
Variable Expenses
$2,317,500
$30.90
Contribution Margin
$2,002,500
$26.70
Less: Existing Fixed Expenses
$72,000
Less: Net Operating Income Needed as last year
$880,000
Amount by which advertising can be increased is
$1,050,500
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Contribution Income Statement
Last Year
Proposed
37,500 Units
56,250 Units (37,500*150%)
Total
Per Unit
Total
Per Unit
Sales
$2,160,000
$57.60
$2,883,375
$51.26
Variable Expenses
$1,080,000
$28.80
$1,620,000.00
$28.80
Contribution Margin
$1,080,000
$28.80
$1,263,375
$22.46
Fixed Expenses
$200,000
$272,000
Net Operating Income
$880,000
$991,375
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