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

5. The sales manager is convinced that a 14% reduction in the selling price, combined with a $72,000 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?

Answer 1

last years unit sales = Sales / Selling price per unit = 1920000 / 80	24000
After changes :
Selling price = Current selling price * ( 1 - % reduction ) = 80 * ( 1 - 14% )	68.8
Fixed expenses = Current fixed expenses + Increase in adverstising expense = 160000 + 72000	232000
Unit sales = Last year's unit sales * ( 1 + % increase ) = 24000 * ( 1 + 25% )	30000

5.
a.
Sales ( 30000 * 68.8 )	2064000
(-) Variable expenses ( 30000 * 40 )	1200000
Contribution margin	864000
(-) Fixed expenses	232000
Net operating income	632000
b.
Last year's net operating income	800000
(-) This year's budgeted net operating income	632000
Decrease in net operating income	168000