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 $160,000 per year. Its operating results for last year were as follows:

Sales	$	1,920,000
Variable expenses		960,000
Contribution margin		960,000
Fixed expenses		160,000
Net operating income	$	800,000

6. The president does not want to change the selling price. Instead, he wants to increase the sales commission by $1.80 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 $800,000 net operating income as last year?

Answer 1

6.
last years unit sales = Sales / Selling price per unit = 1920000 / 80	24000
After change :
Unit sales = Last year's unit sales * ( 1 + % increase ) = 24000 * ( 1 + 25% )	30000
Variable expense per unit = Current variable expense per unit + Increase in sales commission per unit = 40 + 1.80	41.80
Net operating income = Unit sales * ( Selling price - Variable cost per unit ) - Fixed expenses
800000 = 30000 *( 80 - 41.80 ) - Fixed expense
800000 = 1146000 - Fixed expense
Fixed expense = 1146000 - 800000	346000
Increase in advertising expense = Fixed expenses after changes - Current fixed expenses = 346000 - 160000	186000