Question

Feather Friends, Inc., distributes a high-quality wooden birdhouse that sells for $80 per unit. Variable expenses...

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?

Homework Answers

Answer #1

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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