Feather Friends, Inc., distributes a high-quality wooden birdhouse that sells for $20 per unit. Variable expenses are $8 per unit, and fixed expenses total $180,000 per year. Its operating results for last year were as follows:

Sales $ 400,000
Variable expenses 160,000
Contribution margin 240,000
Fixed expenses 180,000
Net operating income $ 60,000
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 $75,000 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 20%. 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 10% reduction in the selling price, combined with a $30,000 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 $1 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 $60,000 net operating income as last year? Do not prepare an income statement; use the incremental analysis approach.

Explanation:

Sales Price p.u                           =  20

Variable Cost                             =  (8)

Contribution per unit                = 12

C.M Ratio = 12/20   = 60%

2)

break even =   fix cost/ Cm per unit

Break Even =  180,000/.6

Break Even =   300,000

3) Fix will not change due to increase in units sold

75000/20= 3750 increase in units

CM in $=   3750*12 = 45000

Net operating already given in the question =60000

Increase in operating inc. due to increase in sales= 45000

Total Net operating income = 105000

4.a)

degree of operating leverage=Change in operating income/ change in sale

degree of operating leverage=  45000/75000 = 0.6

4.b)

Sales with 20% increase = 400000*1.2 = 480000

Varible cost 20% increase = 160000*1.2 =192000

Fix Cost                                                      =180000

Operating Income                                     =108000

Net increase in operating income = 108000/60000-1 = 80%

5)

A)                                               10% Decrease   25% increase in units

Sales                 400000     360000        450000

Variable Cost-160000  0                -200000

Selling Cost                 0      -30000         -30000

Fix Cost                 -180000        0               -180000

Net Oper. Income    60000                          40000

Decrease in price will not affect the cost but sales will decrease by $40000

Increase in Sales units will also increase the Cost affects are shown above

In both case Fix cost will remain the same.

6.B)

No i will not recommend the manager's suggestion because the net operating will decrease by $ 20000 as shown above in part 5.a

6)

operating Income = 60000

Advertisement Expense = 60000

Current units sale = 20000*25% = 5000 increase in units

Net Cm * Increase in Units = 5000*12 = 60000 incremental Income Due to increase of 25% Sales

So putting the Same operating income That is 60000 and we have incremental income that can be used as Advertisement expense i.e 60000

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