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https//newcor html Feather Friends, Inc. distributes a high-quality wooden birdhouse that sells for $20 per unit. Varlable expenses are $8 per unit, and fixed expenses total $180,000 per year. Its operating results for last year were as follows: 489,000 Sales Variable expenses Contribut Lon margin Fixed expenses Net operating income Net operat ing Income 60,600 Required: Answer each question independently based on the orliginal 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 years 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 years 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, con bined with a S 000 increase in advertising, would increase this year\'s unit sales by 25%. a. If the sales manager is right, what would be this years net operating income if his Ideas are implemented? b. Do you recommend Implementing the sakes managers 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 cold the president increase this year\'s advertising expense and still earn the same $60000 net operating income as last year? ?Prey 1of2 Next > e to search

Solution

Part 1

Contribution Margin ratio

(sales-Variable Expenses)/Sales

(400000-160000)/400000

CM ratio

60%

Part 2

Breakeven

(Fixed Cost/CM ratio)

($ 180000/60%)

Breakeven Point in dollar sales

$ 300,000.00

Part 3

Income Statement

Sales

$ 475,000.00

Variable Cost (40% of sales)

$ 190,000.00

Contribution Margin

$ 285,000.00

Fixed Cost

$ 180,000.00

Net Income

$ 105,000.00

Change in Income ($ 105000-$ 60000)

Net operating Income Increase by $45000.

Part 4a

Degree of Operating Leverage

Contribution/Operating Income

240000/60000

Degree of Operating leverage

4

times

Part 4b

Degree of Operating leverage is also calculated as % Change in operating income/%change in Sales

so 4 =

x/20%

x =

20%*4

x=

80%

Increase in Operating income =

60000+80%

Increase in Operating income =

$108000.00

Net Operating Income Increase by 80%

Part 5a

Current number of units sold

400000/20

Current number of units sold

20000 units

Decrease in price (20-10%)

18

Increase in Units (20000+25%)

25000 unit

Income Statement

sales(25000 units*18)

$ 450,000.00

Variable cost (25000 units*8)

$ 200,000.00

Contribution Margin

$ 250,000.00

Fixed Cost

$ 210,000.00

Net Income

$    40,000.00

Net operating Income

$    40,000.00

Part 5b

Sales manager\'s suggestion is not recommended because it decreases the net income to $ 40000 from $ 60000.

Part 6

Income Statement (sales 25% Increase)

sales

$ 500,000.00

Variable cost (25000*9)

$ 225,000.00

Contribution Margin

$ 275,000.00

Fixed Cost

$ 215,000.00

Net Income

$    60,000.00

Increase in Advertisement expenses

Fixed cost before 25% increse in sales

$ 180,000.00

Fixed cost After 25% increse in sales

$ 215,000.00

Net Increase in Advertisement expenses

$    35,000.00

Amount by which advertisement can be increased is

$    35,000.00

Part 1	Contribution Margin ratio
	(sales-Variable Expenses)/Sales
	(400000-160000)/400000
	CM ratio	60%
Part 2	Breakeven	(Fixed Cost/CM ratio)
		($ 180000/60%)
	Breakeven Point in dollar sales	$ 300,000.00