Problem 5-21A Basic CVP Analysis [LO1, LO3, LO4, LO6, LO8]

Stratford Company distributes a lightweight lawn chair that sells for $40 per unit. Variable expenses are $20.00 per unit, and fixed expenses total $200,000 annually.

Required:
1.	What is the product's CM ratio? (Do not round intermediate calculations.)

CM ratio

%

2.	Use the CM ratio to determine the break-even point in sales dollars. (Do not round intermediate calculations. Round your answer to the nearest dollar amount. )

Break-even point in sales dollars

$

3.	The company estimates that sales will increase by $54,000 during the coming year due to increased demand. By how much should net operating income increase?

Net operating income increases by

$

4.	Assume that the operating results for last year were as follows:

Sales	$	1,000,000
Variable expenses		500,000
Contribution margin		500,000
Fixed expenses		200,000
Net operating income	$	300,000

a.	Compute the degree of operating leverage at the current level of sales. (Round your answer to 2 decimal places.)

Degree of operating leverage

b.	The president expects sales to increase by 13% next year. By how much should net operating income increase? (Round your intermediate calculations to 2 decimal places and final answer to the nearest dollar amount.)

Net operating income increases by

$

5.	Refer to the original data. Assume that the company sold 28,500 units last year. The sales manager is convinced that a 12% reduction in the selling price, combined with a $68,000 increase in advertising expenditures, would increase annual unit sales by 50%.

a.

Prepare two contribution format income statements, one showing the results of last years operations and one showing what the results of operations would be if these changes were made.(Input all amounts as positive values except losses which should be indicated by minus sign. Do not round intermediate calculations. Round proposed units to the nearest whole number. Round your "Per unit" answers to 2 decimal places.)

Last Year 28,500 units

Proposed units

	Total	Per Unit	Total	Per Unit
(Click to select)Variable expensesSalesContribution marginFixed expensesNet operating income (loss)	$	$	$	$
(Click to select)Fixed expensesSalesContribution marginNet operating income (loss)Variable expenses
(Click to select)Variable expensesFixed expensesNet operating income (loss)Contribution marginSales		$		$
(Click to select)Contribution marginSalesVariable expensesFixed expensesNet operating income (loss)
(Click to select)SalesContribution marginFixed expensesNet operating income (loss)Variable expenses	$		$

b.

Would you recommend that the company do as the sales manager suggests?

	No
	Yes

6.

Refer to the original data. Assume again that the company sold 28,500 units last year. The president feels that it would be unwise to change the selling price. Instead, he wants to increase the sales commission by $2.40 per unit. He thinks that this move, combined with some increase in advertising, would double annual unit sales. By how much could advertising be increased with profits remaining unchanged? Do not prepare an income statement; use the incremental analysis approach.

The amount by which advertising can be increased is

$