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

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

Req.6

• Requirement 6: President’s View

		Amount	per unit	Units
A	Sales	2,700,000	80	33,750
B	variable expenses	1,350,000	40	33,750
C	Commission	54000	1.60	33,750
D=A-B-C	Contribution margin	1,296,000	38.40	33,750
E	Fixed expenses	180000
F	Advertising	216,000
G=D-E-F	Net Operating Income	900,000

Hence, the equation will be

D – E – F = G
1,296,000 -180,000 - X = $ 900,000

X =$ 1,296,000 - 180,000 - 900,000

X = $ 216,000

Therefore, the advertising expense can be increased to $ 216,000 to keep the Net operating Income same as last year’s at $900,000

Explanation:

1) $ 2,160,000 ÷ $80= 27,000 Unit ×1.25 = 33,750 Unit