Problem 6-23 CVP Applications; Contribution Margin Ratio: Degree of Operating Leverage [LO6-1, LO6- 3, LO6-4, LO6-5, LO6-8] Feather Friends, Inc., distributes a high-quality wooden birdhouse that sells for $120 per unit. Variable expenses are $60.00 per unit, and fixed expenses total $180,000 per year. Its operating results for last year were as follows: Sales Variable expenses Contribution margin Fixed expenses Net operating income 3,240,000 1,620,000 1,620,000 180,000 s1,440,000 Required Answer each question independently based on the original data 1. What is the product's CM ratio? 2. Use the CM ratio to determine the break-even point in dollar sales. 3. If this year's sales increase by $49,000 and fixed expenses do not change, how much will net operating income increase? 4-a. What is the degree of operating leverage based on last year's sales? 4-b. Assume the president expects this year's sales to increase by 19%. Using the degree of operating leverage from last year, what percentage increase in net operating income will the company realize this year? 5. The sales manager is convinced that a 13% reduction in the selling price, combined with a $77,000 increase in advertising, would increase this year's unit sales by 25%. a. If the sales manager is right, what would be this year's net operating income if his ideas are implemented? b. Do you recommend implementing the sales manager's suggestions? 6. The president does not want to change the selling price. Instead, he wants to increase the sales commission by $1.80 per unit. He thinks that this move, combined with some increase in advertising, would increase this year's sales by 25%. How much could the president increase this year's advertising expense and still earn the same $1,440,000 net operating income as last year? Req 1 Req 2 Req 3 Req 4A Req 4B Req SA Req 5B Req 6 What is the product's CM ratio? CM ratio Req 1 Req 2 Req 1 Req 2 Req 3 Req 4A Req 4B Req 5A Req 5B Req 6 Use the CM ratio to determine the break-even point in dollar sales Break-even point in dollar sales Req Req 3 Req 4A Req 5A Req 1 If this year's sales increase by $49,000 and fixed expenses do not change, how much will net operating income increase? Net operating income Req 2 Req 3 Req 4B Req 5B Req 6 by K Req2 Req 4A > Req 1 Req 2 Req 3 Req 4A Req 4B Req SA Req 5B Req 6 What is the degree of operating leverage based on last year's sales? (Round intermediate calculations and final answer to 2 decimal places.) Degree of operating leverage Req 3 Req 4B > Req 1 Req 2 Req 3 Req 4A Req 4B Req 5A Req 5B Req 6 Assume the president expects this year's sales to increase by 19%. Using the degree of operating leverage from last year, what percentage increase in net operating income will the company realize this year? (Round intermediate calculations and final answer to 2 decimal places.) Net operating income increases by KReq 4A Req5A Req 1 Req 2 Req 3 Req 4A Req 4B Req 5A Req 5B Req 6 The sales manager is convinced that a 13% reduction in the selling price, combined with a S77.000 Increase in advertising. would increase this year's unit sales by 25%. If the sales manager is right, what would be this year's net operating income if his ideas are implemented? (Do not round intermediate calculations.) Net operating income (loss) Req 4B Req 5B > Req 5A Req 5B Req 6 Req 2 Req 3 Req 4A Req 4B Req 1 The sales manager is convinced that a 13% reduction in the selling price, combined with a $77,000 increase in advertising would increase this year's unit sales by 25%. Do you recommend implementing the sales manager's suggestions? Yes ONo KReq 5A Req 6 Req 1 Req 2 Req 3 Req 4A Req 4B Req SA Req 5B Req 6 The president does not want to change the selling price. Instead, he wants to increase the sales commission by $1.80 per unit. He thinks that this move, combined with some increase in advertising, would increase this year's sales by 25%. How much could the president increase this year's advertising expense and still earn the same $1,440,000 net operating income as last year? (Do not round intermediate calculations.) Show lessA The amount by which advertising can be increased is Req 6B Re
