Question

Feather Friends, Inc., distributes a high-quality wooden birdhouse that sells for $80 per unit. Variable expenses are $40.00 per unit, and fixed expenses total $180,000 per year. Its operating results for last year were as follows:

Sales	$	2,160,000
Variable expenses		1,080,000
Contribution margin		1,080,000
Fixed expenses		180,000
Net operating income	$	900,000

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 $46,000 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 18%. 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 12% reduction in the selling price, combined with a $78,000 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. If the sales manager's ideas are implemented, how much will net operating income increase or decrease over last year?

6. The president does not want to change the selling price. Instead, he wants to increase the sales commission by $1.60 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 still earn the same $900,000 net operating income as last year?

Answer 1

	Particulars	Amount'	%
	sales	2,160,000
	Variable Exp	1,080,000	50
	Contribution	1,080,000	50
	Fixed	180,000	8.3333333
	Net Operating	900,000	41.666667
1	CM Ratio	50%
2	Fixed Cost	180,000
	Break Even Sales	=fixed cost/cm ratio
		360,000
3	Revised Sales	2,206,000
	Contribution	1,103,000
	Fixed Cost	180,000
	Net Income	923,000
	Increse in Net Income'	23,000
4. a.	Particulars	Current Year	Last Year	Change %
	Net Profit	923,000	900,000	2.56
	Sales	2,206,000	2,160,000	2.13
	Degree of operating Leverage			0.43
b.	Revised Sales	2,548,800
	Contribution	1,274,400
	Fixed Cost	180,000
	Net Income	1,094,400
		Current Year	Last Year	Change %
	Net Profit	1,094,400	900,000	21.6
	Sales	2,548,800	2,160,000	18
	Degree of operating Leverage			3.6
5.a.
	Revised selling price	70
	Revised units	33,750
	Total sales	2,376,000
	Contribution	1,026,000
	Fixed cost revised	258,000
	Net Profit	768,000
b.	Decrease in net profit	(132,000)
6
	Revised Units	33,750
	Selling price	80
	Revised Sales	2,700,000
	Revised Variable cost per unit	42
	Revised Contribution	1,296,000
	Fixed cost	180,000
	Net Profit	1,116,000
	Last Year Profit	900,000
	Advertisement cost can be increased by	216,000