PROBLEM 418 CostVolumeProfit Analysis; Degree of Operating Leverage [LO1, LO3, LO4, LO5, LO8] Feather Friends Inc. distributes a high-quality wooden birdhouse that sells for $20 per unit. Variable expenses are $8 per unit, and fixed expenses total $180,000 per year. Its operating results for last year were as follows:

Sales (20,000 units) . . . . . . . . . . . . . . . . . . . . . . . . . $400,000 Variable expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 160,000 Contribution margin . . . . . . . . . . . . . . . . . . . . . . . . . 240,000 Fixed expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 180,000 Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 60,000

Required: Answer the following independent questions: 1. What is the products CM ratio? 2. Use the CM ratio to determine the break-even point in sales dollars. 3. Assume this years total sales increase by $75,000. If the fixed expenses do not change, how much will operating income increase?

4. Assuming that the operating results for last year were as above: a. Compute the degree of operating leverage based on last years sales. b. The president expects sales to increase by 20% next year. Using the degree of operating lever-age 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 10% reduction in the selling price, combined with a $30,000 increase in advertising, would increase this years unit sales by 25%. If the sales manager is right, what would be this years operating income if his ideas are implemented? Do you recommend im-plementing the sales managers suggestions? Why?

6. 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 this years unit sales by 25%. How much could the president increase this years advertising expense and still earn the same $60,000 operating income as last year?