Feather Friends Inc distributes a highquality wooden birdhou

Feather Friends, Inc. distributes a high-quality wooden birdhouse that sells for $40 per unit. Varlable expenses are $20.00 per unlt, and fixed expenses total $160,000 per year. Its operating results for last year were as follows: Sales Variable expenses Contribution margin Fixed expenses Net operating income $ 1,800,800 5ee,888 58e,8e8 16e,888 $ 34e,8e8 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 polnt In dollar sales. 3. If this year\'s sales Increase by $44,000 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 $73,000 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 commisslon by $2.00 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 stll earn the same $340,000 net operating Income as last year?

Solution

1) CM ratio contribution margin/sales 500,000/1,000,000 0.5 50% 2) Break even sales in dollars fixed cost/contribution margin ratio 160,000/50% 320000 3) Net operating income will increase by 44,000*50% 22000 4-a) Degree of operating leverage contribution margin/net income 500000/340,000 1.470588 or 1.47 4b) percentage increase in net income 20*1.470588 29.41176 or 29.41% 5)-a) unit sale = 1,000,000/40 25000 now unit sales =25000*125% 31250 selling price new = 40*90%=$36 sales        (31,250*36) 1125000 Variable expense (31,250*20) 625000 Contribution margin 500000 fixed expense (160,000+73000) 233000 Net operating income 267000 b) Yes per unit 6) sales 40 Variable expense 22 Contribution margin 18 increase in sales 25% (31,250*18) - (160,000+x) = 340,000 562500 - 160,000-x =340,000 x                                 = 62,500 asnwer