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 $120 per unit. Variable expenses are $60.00 per unit, and fixed expenses total $180,000 per year. Its operating results for last year were as follows: Sales Variable expenses Contribution margin Fixed expenses Net operating income $3,000,000 1,500, 000 ,500,000 $ 1,320,000 rint 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 $57000 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 14%, 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 convincedthat a 14% reduction in the selling price, combined with a S64000 crease 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?

Explanation / Answer

Solution:

Part 1 --- CM ratio

CM Ratio = Total Contribution Margin / Sales Revenue x 100

= 1,500,000 / 3,000,000 x 100

= 50%

Part 2 –

Break Even Point in dollar sales = Total Fixed Expenses / CM Ratio

= $180,000 / 50%

= $360,000

Part 3 ---

Operating Income increase by $28,500 (Increase in Sales $57,000 * 50% Contribution Margin ratio)

Note --- Since fixed cost do not change, the operating income will increase directly by the amount of contribution margin.

Part 4(a) –

Degree of Operating Leverage = Contribution Margin / Operating Income

= 1,500,000 / 1,320,000

= 1.136

Part 4(b) –

This year Percentage Increase in Net Operating Income = Degree of Operating Leverage x Sales Increase Percentage

= 1.136*14%

= 15.904%

Hope the above calculations, working and explanations are clear to you and help you in understanding the concept of question.... please rate my answer...in case any doubt, post a comment and I will try to resolve the doubt ASAP…thank you

Pls ask separate question for remaining parts.

Related Questions

Navigate

• Browse (All)
• Browse F
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.