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 $ 1,080,000 Variable expenses 540,000 Contribution margin 540,000 Fixed expenses 180,000 Net operating income $ 360,000 The sales manager is convinced that a 12% reduction in the selling price, combined with a $74,000 increase in advertising, would increase this year's unit sales by 25%. If the sales manager is right, what would be this year's net operating income if his ideas are implemented? (Do not round intermediate calculations.) the sales manager is convinced that a 12% reduction in the selling price, combined with a $74,000 increase in advertising, would increase this year's unit sales by 25%. If the sales manager's ideas are implemented, how much will net operating income increase or decrease over last year? (Negative amounts should be input with a minus sign.)

5a) The sales manager is convinced that a 12% reduction in the selling price, combined with a $74,000 increase in advertising, would increase this year's unit sales by 25%. If the sales manager is right, what would be this year's net operating income if his ideas are implemented? (Do not round intermediate calculations.)

Answer 1

Solution 5a:

New selling price per unit = $40 * 88% = $35.20

New Fixed costs = $180,000 + $74,000 = $254,000

New sales volume = ($1,080,000/$40)*125% = 33750 units

Computation of net operating income - Feather friend Inc.
Particulars	Amount
Sales (33750 * $35.20)	1188000
Variable expenses (33750*$20)	675000
Contribution margin	513000
Fixed expenses	254000
Net operating income	259000

Solution 5b:

Net operating income will decrease by = $360000 - $259000 = $101,000