Question

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: 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 51,000 units and $4,080,000, respectively. If the fixed expenses do not change, how much will net operating income increase? 4-a. What is the degtee of operating leverage based on last year's sales? 4-b. Assume the president expects this year's unit sales to increase by 14%. 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 11% reduction in the selling price, combined with a $76,000 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 $2.00 per unit. He thinks that this move, combined with some increase in advertising. 5. The sales manager is convinced that a 11% reduction in the selling price, combined with a $76,000 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 $2.00 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 $860,000 net operating income as last year? Complete this question by entering your answers in the tabs below. Assume this year's unit sales and total sales increase by 51,000 units and $4,080,000, respectively. If the f not change, how much will net operating income increase? (Do not round intermediate calculations.)

Answer 1

The product's CM ratio is 0.5. The break-even point in dollar sales is $360,000. If the unit sales and total sales increase by 51,000 units and $4,080,000 respectively, the net operating income will increase by $2,040,000. The degree of operating leverage based on last year's sales is approximately -0.00000278. If this year's unit sales increase by 14%, the company will realize a net operating income increase of approximately -0.00003892%. If the sales manager's ideas are implemented, this year's net operating income would be -$141,000 and it would decrease by -$136,000 compared to last year. The president can increase this year's advertising expense by approximately $113,962 to maintain the same net operating income as last year.

Step-by-step explanation:

To answer the questions based on the given data:

The Contribution Margin (CM) ratio can be calculated by subtracting variable expenses from the selling price and dividing by the selling price. In this case, CM ratio = (80-40)/80 = 0.5.

The break-even point in dollar sales can be calculated using the formula: Break-even point (in dollar sales) = Fixed expenses / CM ratio. In this case, the Break-even point = 180,000 / 0.5 = $360,000.

To calculate the increase in net operating income, we need to calculate the increase in contribution margin. The increase in contribution margin is equal to the increase in unit sales multiplied by the selling price minus the variable expenses per unit. In this case, the increase in contribution margin = 51,000 * (80-40) = $2,040,000. Since fixed expenses do not change, the increase in net operating income is equal to the increase in contribution margin. Therefore, net operating income will increase by $2,040,000.

a. The degree of operating leverage (DOL) can be calculated by dividing the contribution margin by the net operating income. In this case, DOL = (80-40) / (80-40-180,000) = 0.5 / (-179,920) ≈ -0.00000278. b. To calculate the percentage increase in net operating income, we can use the formula: Percentage increase in net operating income = Degree of operating leverage x Percentage increase in unit sales. In this case, the percentage increase in net operating income = (-0.00000278) x 14% = -0.0000003892 ≈ -0.00003892%.

a. If the selling price is reduced by 11%, the new selling price would be $80 - (11% x 80) = $71.20 per unit. If unit sales increase by 25%, it would be a 125% increase in total sales. The new total sales would be $4,080,000 x 1.25 = $5,100,000. Total variable expenses will still be $40.00 per unit. The new contribution margin per unit is ($71.20 - $40.00) = $31.20. Therefore, net operating income can be calculated as the new contribution margin per unit multiplied by the new unit sales, minus the fixed expenses. In this case, net operating income = ($31.20 x 1.25) - $180,000 = $39,000 - $180,000 = -$141,000, which means net operating income would decrease by $141,000 if the sales manager's ideas are implemented.

b. If the sales manager's ideas are implemented, net operating income would decrease by $141,000 - (-$5,000) = -$136,000 compared to last year.

To maintain the same net operating income of $860,000, the president can increase the advertising expense without changing the selling price. Let's use x to represent the increase in advertising expenses. The new contribution margin per unit would be ($80 - $40 - $2) = $38. If unit sales increase by 25%, it would be a 125% increase in total sales. The new total sales would be $4,080,000 x 1.25 = $5,100,000. The new fixed expenses would be $180,000 + x. Net operating income can be calculated as the new contribution margin per unit multiplied by the new unit sales, minus the new fixed expenses. In this case, $38 x 1.25 - ($180,000 + x) = $860,000. Solving for x, we get x ≈ $113,962. Therefore, the president can increase this year's advertising expense by approximately $113,962 and still earn the same net operating income as last year.