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 $ 2,240,000 Variable expenses 1,120,000 Contribution margin 1,120,000 Fixed expenses 160,000 Net operating income $ 960,000 Required: Answer each question independently based on the original data: Only question 5 and 6 are needed

1. What is the product's CM ratio? 2. Use the CM ratio to determine the break-even point in dollar sales. 3. If this year's sales increase by $55,000 and fixed expenses do not change, how much will net operating income increase? 4-a. What is the degree of operating leverage based on last year's sales? 4-b. Assume the president expects this year's sales to increase by 12%. Using the degree of operating leverage from last year, what percentage increase in net operating income will the company realize this year?

5. The sales manager is convinced that a 14% reduction in the selling price, combined with a $62,000 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. Do you recommend implementing the sales manager's suggestions? 6. 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 increase this year's sales by 25%. How much could the president increase this year's advertising expense and still earn the same $960,000 net operating income as last year? Do not prepare an income statement; use the incremental analysis approach.

Answer 1

Ans 5
Now if selling price is reduced by 14% tha new selling price is (80*86%)`	$68.80
So sales units will increase by 25%
28000*125%	$35,000
Sales (35000*68.8)	$2,408,000
Less: variable cost (35000*40)	$1,400,000
Contribution Margin	$1,008,000
Fixed expenses (160000+62000)	$222,000
Net operating income	$786,000
No it is not recommended as net operating income
is decreasing from $960000 to $786000
ans 6
Expected contribution margin (35000*(80-40-1.9)) A	$1,333,500
Current total contribution margin B	$1,120,000
Incremental contribution margin (A-B)	$213,500
So maximum advertising expenses is equal to incremental
contribution margin
Advertising expenses	$213,500