Check nm re 4000 per unit Feather Friends Inc distributes a

Check nm re $40.00 per unit, Feather Friends, Inc., distributes a high-quality wooden birdhouse that sells for $80 per unit. Variable expenses a and fixed expenses total $160,000 per year. Its operating results for last year were as follows: Sales Variable expenses Contribution margin- 080.000 $ 2,160,000 1,080,000 160,000 Fixed expenses Net operating income 920,000 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 $49,000 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 14%. 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 13% reduction in the selling price, combined with a $74,000 increase in advertising, would increase this year\'s unit sales by 5%. 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? K Prex 4 of 5 Next

Solution

Answer

1.

Contribution Margin Ratio = Contribution Margin / Sales

= 1,080,000 / 2,160,000

Contribution Margin Ratio = 50%

2.

Breakeven Point (In Value) = Fixed Cost / Contribution Margin Ratio

= 160,000 / 50%

Breakeven Point (In Value) = $320,000

3

We know that variable cost is 50% of selling price

If there is no change in Fixed Cost, then

Increase in Profit = Increase in Sales – Increase in Variable expenses

= $49,000 – 24,500 ($49,500*50%)

Increase in Profit = $24,500

4-a

Degree of Operating Leverage = Contribution / Earnings before Interest and Tax (EBIT)

= $1,080,000 / 920,000

Degree of Operating Leverage = 1.17

4-b

Degree of Operating Leverage = % Change in EBIT / % Change in sales

1.174 = % Change in EBIT / 14%

16.44% = Increase in Net Operating Income