Feather Friends, Inc., distributes a high-quality wooden birdhouse that sells fo
ID: 2517595 • 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. Its operating results for last year were as follows:
Required:
Answer each question independently based on the original data:
1. What is the product's CM ratio?
2. Use the CM ratio to determine the break-even point in dollar sales.
3. If this year's sales increase by $45,000 and fixed expenses do not change, how much will net operating income increase?
4-a. What is the degree of operating leverage based on last year's sales?
4-b. Assume the president expects this year's sales to increase by 13%. Using the degree of operating leverage from last year, what percentage increase in net operating income will the company realize this year?
5. The sales manager is convinced that a 13% reduction in the selling price, combined with a $72,000 increase in advertising, would increase this year's unit sales by 25%.
a. If the sales manager is right, what would be this year's net operating income if his ideas are implemented?
b. Do you recommend implementing the sales manager's suggestions?
6. The president does not want to change the selling price. Instead, he wants to increase the sales commission by $1.80 per unit. He thinks that this move, combined with some increase in advertising, would increase this year's sales by 25%. How much could the president increase this year's advertising expense and still earn the same $940,000 net operating income as last year? Do not prepare an income statement; use the incremental analysis approach.
Sales $ 2,240,000 Variable expenses 1,120,000 Contribution margin 1,120,000 Fixed expenses 180,000 Net operating income $ 940,000Explanation / Answer
Income Statement for Last Year Particular Amount Amount sales $80.00 $2,240,000.00 Less: Variable Expense $40.00 $1,120,000.00 Contribution margin $40.00 $1,120,000.00 Fixed Expense $180,000.00 Net Operating Income $940,000.00 1. Computation of CM Ratio 1.a.Contribution Margin Ratio (Contribution Margin/Sales)*100 50.00% (1120000/2240000)*100 2. Computation of Break Even Point in Dollar Sales CM Ratio 50.00% Fixed Expense $180,000.00 BEP Point ( Fixed Cost/ Contribution Margin Ratio) $360,000.00 ($180000/50%) 3. Computation of increae in Income when increase in Sales Sales Increase by $45,000 CM Ratio 50% Income increase by ($45000*50%) $22,500.00 4.a. Computation of Operating Leverage for Last Year Contribution Margin $1,120,000 Operating Income $940,000 Operating Leverage(Contribution Margin/Operating Income ($1120000/$940000) 1.19 4.a. Computation of Increase in Operating Income in case of Sales Increase Operating Leverage 1.19 % increase in Sales 13.0% Net Income increase by 15.47% 5. Computation of Revised CM Ratio, Break even Sales ball in case of new plant install Exiting Selling Price $80.00 Revised Contribution due to reduce in selling Price by 13% ($80*87%-$40) $29.60 Revised Fixed Expense due to increase in Advertising Expense ($180000+$72000) $252,000.00 Net opertaing income will be ($28000*120%*$29.60-$252000) $742,560.00 Net operating income as compare with last laste year decreased by ($940000-742560)i.e. $197440 . Hence this suggestion is not recommended Note : As per Chegg Policy , solution can be made only for 4 Part . However, 5 Part has done
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