Feather Friends, Inc., distributes a high-quality wooden birdhouse that sells fo
ID: 2578357 • 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: Sales $ 2,080,000 Variable expenses 1,040,000 Contribution margin 1,040,000 Fixed expenses 180,000 Net operating income $ 860,000 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 $52,000 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 11%. 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 15% reduction in the selling price, combined with a $77,000 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 $2.40 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 $860,000 net operating income as last year?
Explanation / Answer
Answer
Amount
per unit
Units
A
Sales
2080000
80
26000
B
variable expenses
1040000
40
26000
C=A-B
Contribution margin
1040000
40
26000
D
Fixed expenses
180000
E=C-D
Net Operating Income
860000
A
Contribution Margin
1040000
B
Sales
2080000
C=A/B
CM ratio
50%
A
Fixed Cost
180000
B
CM ratio
50%
C=A/B
Break Even point in dollar Sales
360000
A
Sales increase by
52000
B
CM ratio
50%
C=A x B
Net operating income will increase y
26000
A
Contribution margin
1040000
B
Net Operating Income
860000
C=A/B
Operating leverage (in times)
1.209302326
A
Sales increase by
228800
B
CM Ratio
50%
C=A x B
Contribution margin
114400
D
Operating leverage
1.209302326
E=C/D
Increase in Net operating income
94600
F
Old Net Operating Income
860000
G=E/F
% Change
11%
Amount
per unit
Units
A
Sales
2210000
68
32500
B
variable expenses
1300000
40
32500
C=A-B
Contribution margin
910000
28
32500
D
Fixed expenses
180000
E
Advertising
77000
F=C-D-E
Net Operating Income
653000
---Since Net operating income has decreased from $860000 to $653000, Sales manager’s suggestion should not be accepted.
Amount
per unit
Units
A
Sales
2600000
80
32500
B
variable expenses
1300000
40
32500
C
Commission
78000
2.4
32500
D=A-B-C
Contribution margin
1222000
37.6
32500
E
Fixed expenses
180000
F
Advertising
x
G=D-E-F
Net Operating Income
860000
Hence, the equation will be ---: D – E – F = G
1222000 – 180000 – x = 860000
1222000 – 180000 – 860000 = x
x = 182000
Therefore, the advertising expense can be increased to $182000 to keep the Net operating Income same as last year’s at $860000
Amount
per unit
Units
A
Sales
2080000
80
26000
B
variable expenses
1040000
40
26000
C=A-B
Contribution margin
1040000
40
26000
D
Fixed expenses
180000
E=C-D
Net Operating Income
860000
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