Feather Friends, Inc., distributes a high-quality wooden birdhouse that sells for $120 per unit. Variable expenses are $60.00 per unit, and fixed expenses total $180,000 per year.

Due to an increase in demand, the company estimates that sales will increase by $57,000 during the next year. By how much should net operating income increase (or net loss decrease) assuming that fixed expenses do not change?

Assume that the operating results for last year were:

Sales	$	3,240,000
Variable expenses		1,620,000
Contribution margin		1,620,000
Fixed expenses		180,000
Net operating income	$	1,440,000

a.

Compute the degree of operating leverage at the current level of sales. The president expects sales to increase by 14% next year. By what percentage should net operating income increase? Refer to the original data. Assume again that the company sold 34,500 units last year. The president does not want to change the selling price. Instead, he wants to increase the sales commission by $2.20 per unit. He thinks that this move, combined with some increase in advertising, would double annual unit sales. By how much could advertising be increased with profits remaining unchanged? Do not prepare an income statement; use the incremental analysis approach.