Feather Friends, Inc., distributes a high-quality wooden birdhouse that sells for $20 per unit. Variable
costs are $8 per unit. And fixed costs total $180,000 per year.
FEATHER FRIENDS, INC.
Unit price	$20
Variable cost per unit	8
Annual fixed costs	180,000
Estimated sales increase	$75,000
Operating results last year:
Sales	$400,000
Less variable expenses	160,000
Contribution margin	240,000
Less fixed expenses	180,000
Net operating income	$60,000
Expected percentage sales increase next year	20%
Units sold last year	18,000
percentage reduction in sales price	10%
Increase in advertising expense	$30,000
Expected percentage increase in sales	33%
Increase in sales commission per unit	$1
Required: Answer the following independent questions.
1. What is the product's CM ratio?
2. Use the CM ratio to determine the break-even point in sales dollars.
3. Due to an increase in demand, the company estimates that sales will increase by $75,000 during the
year. By how much should net operating income increase (or net loss decrease) assuming that fixed
costs do not change?
4. Assume that the operating result for last were as stated above.
a. Compute the degree of operating leverage at the current level of sales.
b. The president expects sales to increase by 20% next year. By what percentage should net
operating income increase?
5. Refer to the original data. Assume that the company sold 18,000 units last year. The sales manager
is convinced that a 10% reduction in the selling price, combined with a $30,000 increase in advertising,
would cause annual sales in units to increase by one-third. Prepare two contribution income
statements, one showing the results of last year's operations and one showing the results of
operations if these changes are made. Would you recommend that the company do as the sales
manager suggest?
6. Refer to the original data. Assume again that the company sold 18,000 units last year. 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 annual
sales by 25%. By how much could advertising be increased with profits remaining unchanged? Do not
prepare an income statement; use the incremental analysis approach.