Feather Friends, Incorporated, distributes a high-quality wooden birdhouse that sells for $20 per unit. Variable expenses are $12 per unit, and fixed expenses total $140,000 per year. Its operating results for last year were as follows:

Sales (25,000 units)

500,000

Variable expenses

300,000

Contribution margin

200,000

Fixed expenses

140,000

Operating income

60,000

Required:

Answer each question independently based on the original data:

1. What is the product's CM ratio?

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

3. Assume this years total sales increase by $40,000. If the fixed expenses do not change, how much will operating income increase?

Assume that the operating results for last year were as in the question data.

4-a. Compute the degree of operating leverage based on last years sales.

4-b. The president expects sales to increase by 24% next year. Using the degree of operating leverage from last year, what percentage increase in operating income will the company realize this year? Calculate the dollar increase in operating income.

5. The sales manager is convinced that a 12% reduction in the selling price, combined with a $32,000 increase in advertising, would increase this year's unit sales by 30%.

a. If the sales manager is right, what would be this year's operating income if his ideas are implemented?

b. If the sales manager's ideas are implemented, how much will operating income increase or decrease over last year?