Question

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 $180,000 per year. Its operating results for last year were as follows:

Sales	$	1,040,000
Variable expenses		520,000
Contribution margin		520,000
Fixed expenses		180,000
Net operating income	$	340,000
5. The sales manager is convinced that a 12% reduction in the selling price, combined with a $77,000 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 $1.50 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 $340,000 net operating income as last year?

Answer 1

(5)

	Before	After
Sale	(26000 * 40) =1040000	(26000 * 125%) * (40 * 88%) =1144000
(-) VC	(26000 * 20) =520000	(32500 * 20) =650000
Contribution	520000	494000
(-) Fixed Exp	180000	180000
(-) Additional Advertisement Exp	----	77000
Net Operating Income	340000	237000

There is no need to implement this idea

(6)

	After
Sale	[(26000 * 125%) * 40] =1300000
(-) VC	(32500 * 20) =650000
(-) Commission	(32500 * 1.5) =48750
Contribution	601250
(-) Fixed Exp	180000
(-) Additional Advertisement Exp	“X”
Net Operating Income	340000

Let “X” be the advertising Exp

601250 – 180000 – X = 340000

X = 81250