Question
Feather Friends, Inc., distributes a high-quality wooden birdhouse that sells for $20 per unit. Variable expenses are $8 per unit, and fixed expenses total $180,000
Feather Friends, Inc., distributes a high-quality wooden birdhouse that sells for $20 per unit. Variable expenses are $8 per unit, and fixed expenses total $180,000 per year. Its operating results for last year were as follows:
Sales | $ | 400,000 |
Variable expenses | 160,000 | |
Contribution margin | 240,000 | |
Fixed expenses | 180,000 | |
Net operating income | $ | 60,000 |
Required:
Answer each question independently based on the original data:
1. What is the product's CM ratio?
CM ratio | % |
2. Use the CM ratio to determine the break-even point in dollar sales.
Break-even point in dollar sales |
3. If this year's sales increase by $75,000 and fixed expenses do not change, how much will net operating income increase?
Net operating income | by |
4-a. What is the degree of operating leverage based on last year's sales?
Degree of operating leverage |
4-b. Assume the president expects this year's sales to increase by 20%. Using the degree of operating leverage from last year, what percentage increase in net operating income will the company realize this year?
Net operating income increases by | % |
5. The sales manager is convinced that a 10% reduction in the selling price, combined with a $30,000 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?
Net operating income (loss) |
b. Do you recommend implementing the sales manager's suggestions?
Yes | |
No |
6. The president does not want to change the selling price. Instead, he wants to increase the sales commission by $1 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 $60,000 net operating income as last year?
The amount by which advertising can be increased is |
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