Feather Friends, Inc., distributes a high-quality wooden birdhouse that sells fo
ID: 340830 • 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:
The sales manager is convinced that a 12% reduction in the selling price, combined with a $75,000 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?
Sales $ 2,240,000 Variable expenses 1,120,000 Contribution margin 1,120,000 Fixed expenses 180,000 Net operating income $ 940,000The sales manager is convinced that a 12% reduction in the selling price, combined with a $75,000 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?
Explanation / Answer
Answer:-a)-
b)-Net opreating income will decrease from $131000($940000-$809000), hence company should not go with sales manager's suggestion.
Feather Friends Inc. Contribution Format Income statement Particulars Amount $ Sales 28000 units*125%*($80.00 per unit*88%) 2464000 Less:- Variable costs 35000 units*$40 per unit 1400000 Contribution margin 1064000 Less:- Fixed costs $180000+$75000 255000 Net opreating income 809000Related Questions
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