Original: Feather Friends, Inc., distributes a high-quality wooden birdhouse tha

Question

Original: Feather Friends, Inc., distributes a high-quality wooden birdhouse that sells for $24 per unit. Variable costs are $12.00 per unit, and fixed costs total $161,000 per year
Refer to the original data. Assume that the company sold 30,000 units last year. The sales manager is convinced that a 12% reduction in the selling price, combined with a $67,000 increase in advertising, would cause annual sales in units to increase by one-third.

1. Prepare two contribution format income statements, one showing the results of last year's operations and one showing the results of operations if these changes are made.

Last Year: Proposed:
30,000 units 40,000 units
Amount Per Unit Amount Per Unit
Sales ? ? ? ?
Variable expenses ? ? ? ?
Contribution margin ? ? ? ?
Fixed expenses ? ? ? ?
Net operating income ? ? ? ?

Explanation / Answer

Last year Sales = 30000*24 = $720000 Variable expenses = 30000*12 = $360000 Contribution margin= $360000 Fixed expenses= $161,000 Net operating income = $199000 Proposed Sales = 40000*24*(1-12%) = $844800 Variable expenses = 30000*12 = $360000 Contribution margin= $484800 Fixed expenses= $161,000 + $67,000 = $228,000 Net operating income = $256,800

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