PROBLEM 4-23 Basics of CVP Analysis (L01, LO3, L04, LOS, L08] Feather Friends, Inc., distributes a high-quality wooden birdhouse that sells for $20 per unit. Vari- able expenses are $8 per unit, and fixed expenses total $180,000 per year. Required: Answer the following independent questions: 1. What is the product's CM ratio? 2. Use the CM ratio to determine the break-even point in dollar sales. 3. Due to an increase in demand, the company estimates that sales will increase by $75,000 during the next year. By how much should net operating income increase (or net loss decrease) assuming that fixed expenses do not change? 4. Assume that the operating results for last year were: Sales ... Variable expenses Contribution margin. Fixed expenses Net operating income $400,000 160,000 240,000 180,000 $ 60,000 a. Compute the degree of operating leverage at the current level of sales. b. The president expects sales to increase by 20% next year. By what percentage should net operating income increase? 5. Refer to the original data. Assunie 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 increase annual unit sales by one-third. Prepare two contri- bution format income statements, one showing the results of last year's operations and one showing the results of operations if these changes are made. Would you recommend that the company do as the sales manager sugges!s? 6. Refer to the original data. Assume again that the company sold 18,000 units last year. The pres- ident does not want to change the selling price. Instead, he wants to increase the sales commis- sion 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? Do not prepare an income statement; use the incremental analysis approach. Chapte: 4 PROBLEM 4-27 Sales Mix; Break-Even Analysis; Margin of Salety (LG7, L09] Island Novelties, Inc.. of Palau makes two products. Hawaiiar fantasy and Tahitian Joy Present revenue, costs and sales data for the two products follow: Selling price per unit. Variable expenses per unit Number of units sold annually Hawaiian Tahitian Fantasy: Joy $15 $100 $9 $20 20,000 5,000 Fixed expenses total $475,800 per year. Required: 1. Assuming the sales mix given above, do the following: a. Prepare a contribution format income statement showing both dollar and percent col- umns for each product and for the company as a whole. b. Compute the break-even point in dollar sales for the company as a whole and the margin of safety in both dollars and percent. 2. The company has developed a new product to be called Samoan Delight. Assume that the company could sell 10,000 units at $45 cach. The variable expenses would be $36 each. The company's fixed expenses would not change. a. Prepare another contribution format income statement, including sales of the Samoan Delight (sales of the other two products would not change). b. Compute the company's new break-even point in dollar seles and the new inargin of safety in both dollars and percent. 3. The president of the company examines pour figures and says, "There's something strange here. Our fixed expenses haven't changed and you show greater total contribution margin contribution margin, the break-even point should go down, not up. You've niade mistake somewhere." Explain to the president what has happened