Question

Note* I have answered the majority but need assitance with the rest of the problem. Please start at 5a

Problem 5-23A Basics of CVP Analysis [LO5-1, LO5-3, LO5-4, LO5-5, LO5-8]

Feather Friends, Inc., distributes a high-quality wooden birdhouse that sells for $120 per unit. Variable expenses are $60.00 per unit, and fixed expenses total $180,000 per year.

Required:
Answer the following independent questions:
1.	What is the product's CM ratio?

       

2.	Use the CM ratio to determine the break-even point in dollar sales.

       

3.	Due to an increase in demand, the company estimates that sales will increase by $45,000 during the next year. By how much should net operating income increase (or net loss decrease) assuming that fixed expenses do not change?

       

4.	Assume that the operating results for last year were:

Sales	$	3,240,000
Variable expenses		1,620,000
Contribution margin		1,620,000
Fixed expenses		180,000
Net operating income	$	1,440,000

a.	Compute the degree of operating leverage at the current level of sales. (Round your answer to 2 decimal places.)

            

b.	The president expects sales to increase by 14% next year. By what percentage should net operating income increase? (Round intermediate calculations to 2 decimal places and final percentage answer to 2 decimal places, i.e. 22.47%)

           

5.	Refer to the original data. Assume that the company sold 27,000 units last year. The sales manager is convinced that a 10% reduction in the selling price, combined with a $70,000 increase in advertising, would increase annual unit sales by 50%.

a.	Prepare two contribution format income statements, one showing the results of last year’s operations and one showing the results of operations if these changes are made. (Do not round intermediate calculations. Round your "Per unit" answers to 2 decimal places.)

          

b.

Would you recommend that the company do as the sales manager suggests?

	No
	Yes

6.

Refer to the original data. Assume again that the company sold 27,000 units last year. The president does not want to change the selling price. Instead, he wants to increase the sales commission by $1.90 per unit. He thinks that this move, combined with some increase in advertising, would double annual unit sales. By how much could advertising be increased with profits remaining unchanged? Do not prepare an income statement; use the incremental analysis approach.

     

Answer 1

5a
	Last Year		Proposed
	27000	units	40500	units
	Total	Per unit	Total	Per unit
Sales	3240000	120	4374000	108
Variable expenses	1620000	60	2430000	60
Contribution margin	1620000	60	1944000	48
Fixed expenses	180000		250000
Net Operating income	1440000		1694000
5b
Yes, as operating income would increase
6
Expected total contribution margin	3137400
Less: Present total contribution margin	1620000
Incremental contribution margin	1517400
Advertising can be increased by $1517400 with profits remaining unchanged
Workings:
5A
Proposed units = 27000+(27000*0.5) = 40500
Selling price = 120*(1-0.10) = $108
6
Expected total contribution margin=27000*2*(60-1.90) = $3137400