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 $200,000 per year. Its operating results for last year were as follows:

Sales	$	2,160,000
Variable expenses		1,080,000
Contribution margin		1,080,000
Fixed expenses		200,000
Net operating income	$	880,000

Required:

Answer each question independently based on the original data:

5. The sales manager is convinced that a 10% reduction in the selling price, combined with a $68,000 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

Req 5 :
After changes :
Selling price = Current selling price * ( 1 - % reduction ) = 80 * ( 1 -10% )	72
Fixed expenses = Current fixed expenses + Increase in adverstising expense = 200000 + 68000	268000
Last year's unit sales = Sales / Unit selling price = 2160000 / 80	27000
Proposed Unit sales = Last year's unit sales * ( 1 + % increase ) = 27000 * ( 1 + 25% )	33750

a.
Sales ( 33750 * 72 )	2430000
(-) Variable expenses ( 33750 * 40 )	1350000
Contribution margin	1080000
(-) Fixed expenses	268000
Net operating income	812000
b.
Last year's net operating income	880000
(-) This year's budgeted net operating income	812000
Decrease in net operating income	68000