Feather Friends Inc distributes a highquality wooden birdhou

Feather Friends, Inc., distributes a high-quality wooden birdhouse that sells for $120 per unit. Variable expenses are $60.00 per unit, and fixed expenses total $180,000 per year. Its operating results for last year were as follows: Sales Variable expenses Contribution margin Fixed expenses $3,240,000 1,620,000 1,620,000 180,000 $1,440,000 Net operating income

Solution

a) Contribution Margin per unit = Sales per unit - Variable Expenses per unit

= $120 per unit - $60 per unit = $60 per unit

CM ratio = Contribution Margin per unit/Sales per unit

= $60/$120 = 0.50 or 50%

b) Break Even Point in Dollar Sales = Fixed Expenses/CM ratio

= $180,000/50% = $360,000

c) If fixed expenses do not change and sales increase by $56,000, then net operating income will increase by additional Contribution margin from additional sales (i.e. $56,000*50% = $28,000)

Therefore net operating income will increase by $28,000.

d) Degree of Operating Leverage = Contribution Margin/Net Operating Income

= $1,620,000/$1,440,000 = 1.125