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Feather Friends, Inc., distributes a high-quality wooden birdhouse that sells for $40 per unit. Variable expenses...

Feather Friends, Inc., distributes a high-quality wooden birdhouse that sells for $40 per unit. Variable expenses are $20.00 per unit, and fixed expenses total $200,000 per year. Its operating results for last year were as follows:

Sales $ 1,080,000
Variable expenses 540,000
Contribution margin 540,000
Fixed expenses 200,000
Net operating income $ 340,000

Use the CM ratio to determine the break-even point in dollar sales. If this year's sales increase by $47,000 and fixed expenses do not change, how much will net operating income increase?

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Answer #1

Contribution margin ratio = Contribution / net sales * 100

Contribution margin ratio = 540000 / 1080000 * 100

Contribution margin ratio = 50%

Break even sales = Fixed cost / Contribution margin ratio

Break even sales = 200000 / 0.5

Break even sales = $ 400000

Computation of net operating income after increase in sale:

sales revenue (1080000 + 47000) 1127000
Variable expense (28175 * 20) 563500
Contribution 563500
Fixed expenses 200000
Net operating income 363500

Increase in net operating income = 363500 - 340000

Increase in net operating income = $ 23500

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