WeLoveBabies Company sells a baby food maker for $30 per unit. Variable costs are $15 per unit, and fixed costs total $162,000 annually.

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. The company estimates that sales will increase by $51,000 during the coming year due to increased demand. By how much should operating income increase?

4-a. Refer to the original data. Assume that the company sold 24,000 units last year. The sales manager is convinced that a 11% reduction in the selling price, combined with a $31,000 increase in advertising expenditures, would cause annual sales in units to increase by 25%. 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.

4-b. Would you recommend that the company do as the sales manager suggests?

5. Refer to the original data. Assume again that the company sold 24,000 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 $3 per unit. He thinks that this move, combined with some increase in advertising, would increase annual unit sales by 50%. By how much could advertising be increased with profits remaining unchanged? Do not prepare an income statement; use the incremental analysis approach.