w History Sun 102 AM 23 Feether Friendspage 2345 Help Save E

w History Sun 1:02 AM 23 (Feether Friends-page 234)-5... Help Save &Exit; Submit Check my work Feather Friends, Inc., distibutes a high-quality wooden birdhouse that sells for and fixed expenses total $200,000 per year. lts operating results for last year were as follows $40 per unit. Variable expenses are $20.00 per unit, Sales Variable expenses cContribution margin Pixed expenses Set operating iscome $ 960,000 480,000 280,000 s Required: Answer each question independenty based on the original data: 1. What is the product\'s CM ratio? 3. If this year\'s sales increase by $41000 and 4-a. What is the degree of operating leverage based on lest years sales? CM ratio to determine the break-even point in dollar sales point in dollar sales fixed expenses do not change, how much will net operating income increase? the president expects this year\'s sales to increase by 12%, using the degree of operating leverage from last yea, what 4b. Assume percentage increase in net operating income will the company realize this year? 5. The sales manager is convinced that a 13% reduction in the selling price, combined with a $65,000 increase in advertising, would increase this year\'s unit sales by 25%. If the sales manager is right b. Do you recommend implementing the sales manager\'s suggestions? a Itf the sales manager is right. what would be this year\'s net operating income if his ideas are implemented? ?Prev 1of2 Score answer> 808 r 3 5

Solution

1.To calculate the contribution margin ratio, divide the contribution margin by sales. The contribution margin is calculated by subtracting all variable costs from sales. The formula is:

(Sales - Variable expenses) / Sales *100

= ($40 - $20) / $40 *100 = $20/$40 *100

= 50%

2. Breakeven Point( in $ Sales) = Fixed costs / CM ratio

= $200000 / 50%

= $400000

Explanation : At $40000, there will be no profit and No loss situation.

3. If sales increases by $41000 and there is a contribution margin of 50%, our Contribution in $ will increase by $20500 (i.e. 41000 - Variable Costs 20500) and since there is no increase in fixed costs. SO OUR NET MARGIN WILL ALSO BE INCREASED BY $20500.

4-A. The degree of operating leverage is calculated by subtracting variable costs from sales and dividing it by sales minus variable costs and fixed costs i.e.Contribution dividing by net operating income( in this case)[It takes assumption that Fixed costs remain same]

= 480000 / 280000

=1.71 times

4-B. If sales are expected to increase by 12% and the last year operating leverage is used as 1.71 times, therefore Net operating income will increase by 20.52%(12*1.71)  

5.A No. of units sold last year = $960000/$40 = 24000 units

New Selling price = 40 *87%(after 13 % reduction) = $34.80 per unit

New sales unit = 24000 * 125%( after 25 % increase) = 30000 units

Total sales value will be = 30000 * $34.80 =$1044000

Less: Variable costs: 30000* 20 = $600000

Contribution margin $ 444000

Less: Fixed costs( 200000+ 65000 advt) $265000

Net operating Income $179000

5B. I will not recommend the proposal by Sales manager as it will be going to reduce our Net operating margin. The reeason is Incremental sales revenue is less than incremental expenses of adertising.

6. New Sales = 960000 * 125% = $1200000

No. Of units = $1200000/$40 = 30000 units

Now,

Desired Net operating income = Sales - Variable costs - sales commission - advertising costs - fixed costs

$280000 = { $1200000 -( 30000 * $20)} -($1.70 * 30000) - Advertising costs - $200000

$280000 = $1200000 - $600000 - $51000 - Advt Costs - $200000

Solving this we get,

New Advertising costs = $69000

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