Feather Friends, Incorporated, distributes a high-quality wooden birdhouse that sells for $80 per unit. Variable expense
Posted: Sun Jun 05, 2022 5:23 pm
Feather Friends, Incorporated, 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:
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. Assume this year’s unit sales and total sales increase by
58,000 units and $4,640,000, respectively. If the 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 unit sales to
increase by 17%. 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 $64,000 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 $2.20 per
unit. He thinks that this move, combined with some increase in
advertising, would increase this year's unit sales by 25%. How much
could the president increase this year's advertising expense and
still earn the same $840,000 net operating income as last year?
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:
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. Assume this year’s unit sales and total sales increase by
58,000 units and $4,640,000, respectively. If the 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 unit sales to
increase by 17%. 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 $64,000 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 $2.20 per
unit. He thinks that this move, combined with some increase in
advertising, would increase this year's unit sales by 25%. How much
could the president increase this year's advertising expense and
still earn the same $840,000 net operating income as last year?