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 $180,000 per year.

1.What is the product's CM ratio?

CM ratio

50

%

2.Use the CM ratio to determine the break-even point in dollar sales.

Break-even point in sales dollars: $360,000

3.Due to an increase in demand, the company estimates that sales will increase by $48,000 during the next year. By how much should net operating income increase (or net loss decrease) assuming that fixed expenses do not change?

Net operating income

increases

by

$24,000

4. Assume that the operating results for last year were:

Sales	$	2,160,000
Variable expenses		1,080,000
Contribution margin		1,080,000
Fixed expenses		180,000
Net operating income	$	900,000

a.Compute the degree of operating leverage at the current level of sales. (Round your answer to 2 decimal places.)

Degree of operating leverage: 1.20

b.The president expects sales to increase by 17% next year. By what percentage should net operating income increase? (Round intermediate calculations and final answer to 2 decimal places.)

Net operating income increases by

20.40

%

5.Refer to the original data. Assume that the company sold 31,500 units last year. The sales manager is convinced that a 13% reduction in the selling price, combined with a $62,000 increase in advertising, would increase annual unit sales by 50%.

a.Prepare two contribution format income statements, one showing the results of last year