Feather Friends, Inc., distributes a high-quality wooden birdhouse that sells fo
ID: 2538829 • Letter: F
Question
Feather Friends, Inc., distributes a high-quality wooden birdhouse that sells for $120 per unit. Variab and fixed expenses total $180,000 per year. Its operating results for last year were as follows: e expenses are $60.00 per unit 3,000,000 ,500,000 Variable expenser Contribution margin rixed expenses Set operating inoome 180,000 . 3 320,000 each question independently based on the original data: 1. What is the products CM ratio? 2. Use the CM ratio to determine the break-even point in dollar sales. 3. If this years sales increase by $45,000 and fxed 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? percentage increase in net operating income will the company realize this year? the president expects this year's sales to increase by 13% Using the degree o operating leverage from last yeat what 5. The sales manager is convinced that a 0% reduct n r the selling price, combined with a S6100 ncrease in a vertising 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 $170 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 years advertising expense and stil earn the same $1,320,000 net operating income as last year? Complete this question by entering your answers in the tabs below. Rea 1 Rea 2 Req 3 Req 44Req 48Req SA Reg 58 s8 Req Prev 10, 9 Next > 2 3Explanation / Answer
1. Contribution Margin Ratio (or) CM Ratio:
= (Sales - Variable Cost)/Sales x 100
= ($120-$60)/$120 x 100 = 50%
2. Break-even point in dollar sales:
= Fixed Cost / CM Ratio
= $ 180,000 / 50%
= $ 360,000
3. If the year's sales increases by $ 45,000 with no change in Fixed cost, the net operating income would increase by,
Increase in sales x CM ratio
= $ 45,000 x 50%
= $ 22,500.
4-a. Degree of Operating Leverage based on last year's sales:
= % Change in Net operating income / % Change in Sales
Current year Net operating income = $ 1,320,000 + $ 22,500 = $ 1,342,500
Previous year Net operating income = $ 1,320,000
Current year Sales = $ 3,000,000 + $ 45,000 = $ 3,045,000
Previous year Sales = $ 3,000,000
% change in Net operating income = $ 1,342,500/$ 1,320,000 - 1 = 1.7045%
% change in Sales = $ 3,045,000 / $ 3,000,000 - 1 = 1.5%
Degree of Operating leverage = 1.7045/1.5 = 113.63%
4-b. Percentage increase in net operating income for the current year is
= Increase in sales x degree of operating leverage
= 13% x 113.63%
= 14.7723%
Hope it is helpful!!
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