Question:
Feather Friends, Inc., distributes a high-quality wooden birdhouse that sells for $80 per unit. Variable expenses are $40.00 per unit, fixed expenses total $200,000 per year. Its operating results for last year were as follows:
Sales $2,160,000
Variable expenses $1,080,000
Contribution margin $1,080,000
Fixed expenses $200,000
Net operating income $ 880,000
Answer:
As the net profit is $783,000 which is lower than $880,000, my advice would be that this strategy must not be implemented because doesn't brings value to the company.
Step-by-step explanation:
The contribution per unit is:
Contribution per unit = Selling price per unit - variable cost per unit
Contribution per unit = $80*89% - $40 = $31.2 per unit
The increase in advertisement expense can be calculated under the new condition by the following formula:
New Sales ($) = (Fixed cost + Profit) * Sales Prices per unit / Contribution Per unit
Here we have total fixed cost of $270,000 by including the $70000 increase in advertising cost.
By putting values we have:
$2,160,000 * 125% = ($270,000 + Profit)* $80 per unit / $38.3 per unit
$2,700,000 *31.2 / 80 = $270,000 + Profit
$1,053,000 - $270,000 = Profit
Profit = $783,000