##### Question

In: Accounting

Feather Friends, Inc., distributes a high-quality wooden birdhouse that sells for $80 per unit. Variable expenses are $40.00 per unit, and fixed expenses total $180,000 per year. Its operating results for last year were as follows:

Sales | $ | 2,000,000 |

Variable expenses | 1,000,000 | |

Contribution margin | 1,000,000 | |

Fixed expenses | 180,000 | |

Net operating income | $ | 820,000 |

**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 $55,000 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 16%. 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 15% reduction in the selling price, combined with a $80,000 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. If the sales manager's ideas are implemented, how much will net operating income increase or decrease over last year?

6. The president does not want 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 increase this year's sales by 25%. How much could the president increase this year's advertising expense and still earn the same $820,000 net operating income as last year?

## Solutions

##### Expert Solution

**1) compute the contribution margin ratio**

**CONTRIBUTION MARGIN ratio = CONTRIBUTIONMARGIN/sales×100**

**= $1000000/$2000000×100**

**= 50%**

**2) COMPUTE BREAK EVEN SALES IN DOLLARS**

**BREAK EVEN SALES IN DOLLARS = FIXED COST/CONTRIBUTIONMARGIN ratio**

**=$180000/50%**

**. = $360000**

**3)if sales increase by $55000 no change in fixed costthen operating income Will be**

Particular | amount ($) |

Sales (increase by$55000) | $2055000 |

(-) variable expenses | ($1027500) |

CONTRIBUTION | $1027500 |

(-) fixed expenses | ($180000) |

New net operating income | $847500 |

Old net operating income - New net operating income =increase/DECREASE

$820000 -. $847500 = $27500

Increase by$27500

**4a) compute degree of operating leverage**

**degree of operating leverage =CONTRIBUTION/NET OPERATINGINCOME**

**= $1000000/$820000**

**=1.22**

**4b) % increase in operating income =%increase insales×degree of OPERATING LEVERAGE**

**= 1.22×16% = 0.20 %**

**new operating leverage =1.42**

**5)if selling price reduce by 15%then new sellingprice**

**=$80-15%=$68**

**Increase in advertising expenses by$80000**

**therefore new fixed cost = $180000+$80000=$260000**

**sales units increase by 25%**

$2000000/$80+25%

25000units +25= 31250units

Particular | amount ($) |

Sales (31250×$68) | 2125000 |

(-) variable expenses | (1062500) |

CONTRIBUTION MARGIN | 1062500 |

(-) fixed expenses | (260000) |

Net operating income | 802500 |

**5b) decrease in net operating income= $820000 -$802500**

**=$17500**

**6)if sales commission increases by $2.40perunit**

**then New CONTRIBUTION MARGIN PER UNIT= $80-$40 - $2.40 =$37.6**

**NEW sales volume= 25000+25%=31250units**

**Target operating income=$820000**

**Maximum fixed cost= CONTRIBUTION MARGIN - Targetoperating income**

**= (31250×$37.60)-$820000**

**= $1175000 - $820000= $355000**

**existing fixed cost=$180000**

**Therefore advertising amount can be increased by=$355000- $180000=$175000**

**ALL THE BEST**

**PLEASE DO SUPPORT US**

**ANY DOUBT PLEASE COMMENT BELOW**

**THANK YOU**

**ekkarill92** answered 9 months ago

Next > < Previous

## Related Solutions

##### Feather Friends, Inc., distributes a high-quality wooden birdhouse that sells for $80 per unit. Variable expenses...

Feather Friends, Inc., distributes a high-quality woodenbirdhouse that sells for $80 per unit. Variable expenses are $40.00per unit, and fixed expenses total $180,000 per year. Its operatingresults for last year were as follows:Sales$1,920,000Variable expenses960,000Contribution margin960,000Fixed expenses180,000Net operating income$780,0004-b. Assume the president expects this year's sales to increaseby 19%. Using the degree of operating leverage from last year, whatpercentage increase in net operating...

##### Feather Friends, Inc., distributes a high-quality woodenbirdhouse that sells for $80 per unit. Variable expenses...

Feather Friends, Inc., distributes a high-quality woodenbirdhouse that sells for $80 per unit. Variable expenses are $40.00per unit, and fixed expenses total $180,000 per year. Its operatingresults for last year were as follows: Sales $ 2,080,000 Variableexpenses 1,040,000 Contribution margin 1,040,000 Fixed expenses180,000 Net operating income $ 860,0005. The sales manager is convinced that a 13% reduction in theselling price, combined with a $69,000 increase in advertising,would increase this year's unit sales...

##### Feather Friends, Inc., distributes a high-quality wooden birdhouse that sells for $80 per unit. Variable expenses...

Feather Friends, Inc., distributes a high-quality woodenbirdhouse that sells for $80 per unit. Variable expenses are $40.00per unit, and fixed expenses total $180,000 per year. Its operatingresults for last year were as follows: Sales $ 2,080,000 Variableexpenses 1,040,000 Contribution margin 1,040,000 Fixed expenses180,000 Net operating income $ 860,000 Required: Answer eachquestion independently based on the original data:1. What is theproduct's CM ratio?2. Use the CM ratio to determine the break-evenpoint in dollar...

##### Feather Friends, Inc., distributes a high-quality woodenbirdhouse that sells for $80 per unit. Variable expenses...

Feather Friends, Inc., distributes a high-quality woodenbirdhouse that sells for $80 per unit. Variable expenses are $40.00per unit, and fixed expenses total $200,000 per year. Its operatingresults for last year were as follows:Sales$2,240,000Variable expenses1,120,000Contribution margin1,120,000Fixed expenses200,000Net operating income$920,000Required:Answer each question independently based on the originaldata:1. What is the product's CM ratio?2. Use the CM ratio to determine the break-even point...

##### Feather Friends, Inc., distributes a high-quality wooden birdhouse that sells for $80 per unit. Variable expenses...

Feather Friends, Inc., distributes a high-quality wooden birdhouse that sells for $80 per unit. Variable expenses are $40.00 per unit, and fixed expenses total $160,000 per year. Its operating results for last year were as follows:Sales$2,160,000Variable expenses1,080,000Contribution margin1,080,000Fixed expenses160,000Net operating income$920,000Required: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 $46,000 and fixed expenses do not change, how much will net operating income increase?4-a. What...

##### Feather Friends, Inc., distributes a high-quality woodenbirdhouse that sells for $80 per unit. Variable expenses...

Feather Friends, Inc., distributes a high-quality woodenbirdhouse that sells for $80 per unit. Variable expenses are $40.00per unit, and fixed expenses total $180,000 per year. Its operatingresults for last year were as follows:Sales$2,000,000Variable expenses1,000,000Contribution margin1,000,000Fixed expenses180,000Net operating income$820,000Required:Answer each question independently based on the originaldata:5. The sales manager is convinced that a 10% reduction in theselling price, combined with a...

Feather Friends, Inc., distributes a high-quality woodenbirdhouse that sells for $80 per unit. Variable expenses are $40.00per unit, and fixed expenses total $180,000 per year. Its operatingresults for last year were as follows:Sales$1,920,000Variable expenses960,000Contribution margin960,000Fixed expenses180,000Net operating income$780,000Required:Answer each question independently based on the originaldata:1. What is the product's CM ratio?2. Use the CM ratio to determine the break-even point...

Feather Friends, Inc., distributes a high-quality woodenbirdhouse that sells for $80 per unit. Variable expenses are $40.00per unit, and fixed expenses total $180,000 per year. Its operatingresults for last year were as follows:Sales$2,160,000Variable expenses1,080,000Contribution margin1,080,000Fixed expenses180,000Net operating income$900,000Required:Answer each question independently based on the originaldata:5. The sales manager is convinced that a 11% reduction in theselling price, combined with a...

Feather Friends, Inc., distributes a high-quality woodenbirdhouse that sells for $80 per unit. Variable expenses are $40.00per unit, and fixed expenses total $180,000 per year. Its operatingresults for last year were as follows:Sales$2,000,000Variable expenses1,000,000Contribution margin1,000,000Fixed expenses180,000Net operating income$820,000Required:Answer each question independently based on the originaldata:1. What is the product's CM ratio?2. Use the CM ratio to determine the break-even point...

Feather Friends, Inc., distributes a high-quality woodenbirdhouse that sells for $80 per unit. Variable expenses are $40.00per unit, and fixed expenses total $160,000 per year. Its operatingresults for last year were as follows:Sales$2,080,000Variable expenses1,040,000Contribution margin1,040,000Fixed expenses160,000Net operating income$880,000Required:Answer each question independently based on the originaldata:1. What is the product's CM ratio?2. Use the CM ratio to determine the break-even point...