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:
5. The sales manager is convinced that an 11% reduction in the selling price, combined with a $66,000 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?
Assuming all other things same and with following changes:
Selling Price per unit = $80 * 89% = $71.2
Variable Cost per unit = $40
Existing sales Quantity = $2,160,000 / $80 per unit = 27,000 units
New Sales Quantity = 27,000 units * 125% = 33,750 units
Increase in Fixed Costs = $66,000 due to advertisement
Calculation of net operating income
Sales (33,750 units * $71.2 per unit) $2,403,000
Less:
Variable Expenses (33,750 units * $40 per unit) $1,350,000
Contribution Margin $1,053,000
Less:
Fixed Expenses ( $180,000 + $66,000) $246,000
Net Operating Income $807,000
Net operating income of last year = $900,000
Net operating income of current year = $807,000
Decrease in net operating income = $93,000
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