PROBLEM 4-23 Basics of CVP Analysis LOL. LOJ.LO4. LO5, 108) Feather Friends Ire distribute a high quality wooden birdhouse that sells for $20 per unit. Vi ale ape 58 par unit and fixed axpenses toul S180,000 per year. Answer the following independent questions 1 War as the products ? the ratio determine the breaker min dollar sales. 1 Due to a intrat in demand the company estime that sales will increase by 875.000 daring the year By howard sace'd net operating income increase (or tet lou decreze suming that fixed peas de coche? 1 sm the sperating results for last year were Contribution margin $400.000 160,000 240.000 180,000 $ 60 000 Met operatrg come Compute the degree of operating leverage at the current level of sales The prendent expects saket to increase by 204 next yeu By what percentage should not operating income increase? $Reler we the crinaldita Asume that the company sold 18.000 units last year. The sales manager is cominced that a 10% reduction in the selling price, combined with a $30.000 increate an advertising, would increase maua unit sales by one third. Prepare we conti bution format income statements, one showing the results of last year's operation and come showing the results of operations of these changes are made. Would you recommend that te company do the sales manager suggesta? & Rela to the anpinal data Asume again that the company sold 18.000 units last year the pro Wat doen want to change the selling price. Instead, he wants to increase the sales como son by St sa unst. He thinks that ts more, combined with scene increase in advertising week e tnnual sales by 2.2 Bybew much could advertising be increased with proces remaining unchanged? Do not prepare an income statement, use the intenta analysis reach Island Novelties. Inc. of Palau makes two products, Hawaiian Fantasy and Tahitian Joy. Present PROBLEM 4-27 Sales Mix: Break-Even Analysis, Margin of Safety L07, L09) revenue, cost and sales data for the two products follow Selling price per un Vanable expenses per unt Number of units sold annually Hawalan Jahitan Fantasy Joy $15 $100 $9 $20 20.000 5,000 Fixed expenses total $475.800 a year Regure 1. Assuming the sales mis given above, do the following Prepare a cautica format income catement show.ng both dolar and percent col- umas for cach product and for the company as a whole. Compute the break even point in dollar sales for the ...ipany as a whole and the margin of safety in both dollars and percent 2. The company has developed a new pidut to be called Samoan Delight. Assume that the company could sell 10.000 units at 545 chciable expenses would be $36 can. The company fixed openses would not change . Prepare another contribution format income statement, including sales of the Samoar. Delight sales of the other two products would not change). Compute the company's new break-even point in do!lar sales and the new margin of safety in both dollars and percent 3. The president of the company examines your figures and says, "There's something strange here. Our fired expenses haven't changed and you show greater total contribution margin if we add the new product, but you also show our break-even point going up. With greater contribution marpin, the break-even point should go down, not up. You've made a mistake somewhere "Explain to the president what has happened. 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. PROBLEM 4-23 Basics of CVP Analysis LOL. LOJ.LO4. LO5, 108) Feather Friends Ire distribute a high quality wooden birdhouse that sells for $20 per unit. Vi ale ape 58 par unit and fixed axpenses toul S180,000 per year. Answer the following independent questions 1 War as the products ? the ratio determine the breaker min dollar sales. 1 Due to a intrat in demand the company estime that sales will increase by 875.000 daring the year By howard sace'd net operating income increase (or tet lou decreze suming that fixed peas de coche? 1 sm the sperating results for last year were Contribution margin $400.000 160,000 240.000 180,000 $ 60 000 Met operatrg come Compute the degree of operating leverage at the current level of sales The prendent expects saket to increase by 204 next yeu By what percentage should not operating income increase? $Reler we the crinaldita Asume that the company sold 18.000 units last year. The sales manager is cominced that a 10% reduction in the selling price, combined with a $30.000 increate an advertising, would increase maua unit sales by one third. Prepare we conti bution format income statements, one showing the results of last year's operation and come showing the results of operations of these changes are made. Would you recommend that te company do the sales manager suggesta? & Rela to the anpinal data Asume again that the company sold 18.000 units last year the pro Wat doen want to change the selling price. Instead, he wants to increase the sales como son by St sa unst. He thinks that ts more, combined with scene increase in advertising week e tnnual sales by 2.2 Bybew much could advertising be increased with proces remaining unchanged? Do not prepare an income statement, use the intenta analysis reach Island Novelties. Inc. of Palau makes two products, Hawaiian Fantasy and Tahitian Joy. Present PROBLEM 4-27 Sales Mix: Break-Even Analysis, Margin of Safety L07, L09) revenue, cost and sales data for the two products follow Selling price per un Vanable expenses per unt Number of units sold annually Hawalan Jahitan Fantasy Joy $15 $100 $9 $20 20.000 5,000 Fixed expenses total $475.800 a year Regure 1. Assuming the sales mis given above, do the following Prepare a cautica format income catement show.ng both dolar and percent col- umas for cach product and for the company as a whole. Compute the break even point in dollar sales for the ...ipany as a whole and the margin of safety in both dollars and percent 2. The company has developed a new pidut to be called Samoan Delight. Assume that the company could sell 10.000 units at 545 chciable expenses would be $36 can. The company fixed openses would not change . Prepare another contribution format income statement, including sales of the Samoar. Delight sales of the other two products would not change). Compute the company's new break-even point in do!lar sales and the new margin of safety in both dollars and percent 3. The president of the company examines your figures and says, "There's something strange here. Our fired expenses haven't changed and you show greater total contribution margin if we add the new product, but you also show our break-even point going up. With greater contribution marpin, the break-even point should go down, not up. You've made a mistake somewhere "Explain to the president what has happened. 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