Problem# 1

Assume that the operating results for last year were: Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $400,000 Variable expenses . . . . . . . . . . . . . . . . . . . 160,000 Contribution margin . . . . . . . . . . . . . . . . . . 240,000 Fixed expenses . . . . . . . . . . . . . . . . . . . . . 180,000 Net operating income . . . . . . . . . . . . . . . . $ 60,000 (i) Compute the degree of operating leverage at the current level of sales.

(ii). The president expects sales to increase by 20% next year. By what percentage should net operating income increase?

(iii) 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.

(iv)The contribution approach net income of last year is $

(v) The net income if the above mentioned changes are made, will be $ .

(vi) 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?

Problem#2

Island Novelties, Inc., of Palau makes two products, Hawaiian Fantasy and Tahitian Joy. Present revenue, cost, and sales data for the two products follow: .................................................. Hawaiian Fantasy .............. Tahitian Joy Selling price per unit .......................... $16 .......................... $110 Variable expenses per unit ................. $9 ......................... $25 Number of units sold annually ......... 21100 ...................... 5600 Fixed expenses total $481000 per year. The Republic of Palau uses the U.S. dollar as its currency.

(a) Assuming the sales mix given above, prepare a contribution format income statement showing both dollar and percent columns for each product and for the company as a whole (using the table which is right below question(c)).

(b) The break-even point in dollars for the company as a whole is $

(c) The margin of safety in dollar is $