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 $180,000 per year.

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 $50,000 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	$	2,080,000
Variable expenses		1,040,000
Contribution margin		1,040,000
Fixed expenses		180,000
Net operating income	$	860,000

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 12% next year. By what percentage should net operating income increase? (Round intermediate calculations and final answer to 2 decimal places.)

           

5. Refer to the original data. Assume that the company sold 42,000 units last year. The sales manager is convinced that a 14% 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?

         

	Yes
	No

6. Refer to the original data. Assume again that the company sold 42,000 units last year. 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 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

· First 4 Requirements solved [ Total 5, as 4 has two sub parts]

A	Unit sale price	$80
B	Unit Variable cost	$40
C = A - B	Unit contribution margin	$40
D = C/A	CM Ratio	50%	Answer [1]
E	Fixed expenses	$180,000
F = E/D	Break even point I dollars	$360,000	Answer [2]
G	Increase in sales	$50,000
H = G x D	Net Operating increase	$25,000	Answer [3]

A	Contribution margin	$1,040,000
B	Net Operating Income	$860,000
C = A/B	Degree of Operating Leverage	1.21	Answer [4a]
D	% increase in sales	12%
E = C x D	% increase in income	14.52%	Answer [4b]