value: 30.00 points Feather Friends, Inc., distributes a high-quality wooden bir
ID: 2549940 • Letter: V
Question
value: 30.00 points 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. Required: Answer the following independent questions: 1. What is the product's CM ratio? ratio 2. Use the CM ratio to determine the break-even point in dollar sales Break-even point in sales dollars360,000 3. Due to an increase in demand, the company estimates that sales will increase by $52,000 during the next year. By how much should net operating income increase (or net loss decrease) assuming that fixed expenses do not change? Net operating income by DOLLExplanation / Answer
Req 1. Selling price per unit: $ 80 Variable cost per unit: $40 CM per unitt: Selling price - Variable cost = 80-40 = 40 per unit CM ratio: CM / Selling price = 40/80 *100 = 50% Req 2: Fixed Cost: $ 180,000 Break even in $: Fixed csot / Cm ratio = 180,000 /50% = $360,000 Req3: Increase in sales: $ 52,000 CM ratio : 50% No increase in fixed cost; Therfore, Net income increases by: 52000*50% = $ 26,000 Req 4-a: Degree of Operating leverage: DOL = Contribution margin /Net income = 1080,000 /900,000 = 1.2 Req 4-b: Sales increase by 18% Nnet increase by 21.60% (i.e. 18%*1.2) Req 5 CONTRIBUTION MARGIN INCOME STATEMENT: LAST YEAR PROPOSED 33000 UNITS 49500 UNITS Amount Per unit Amount Per unit Sales revenue 2640000 80 3564000 72 Less: Variable cost 1320000 40 1980000 40 Contribution margin 1320000 40 1584000 32 Less: Fixed cost 180000 251000 Net income 1140000 1333000 Yes the company shall made proposed changes Req 6 Incremental analysis: Incremental revenue 2640000 (33000 units @80) Less: Incremental cost 1425600 (66000 units @41.60-33,000 units @40) Incremental contribution 1214400 Advertisement cost shall be increased by maximum of $1214,400
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