4 Feather Friends, Inc, distributes a high-quality wooden birdhouse that sells f
ID: 2396039 • Letter: 4
Question
4 Feather Friends, Inc, distributes a high-quality wooden birdhouse that sells for $120 per unit. Varlable expenses are $60.00 per unit, and fixed expenses total $160,000 per year. Its operating results for last year were as follows: Sales Variable expenses Contrbution margin rixed expenses Net operating Ineome 3,000,000 1,500,000 160,000 S 1,340,000 Required: Answer each question independently based on the original data: eBook 1. What is the products CM ratio? 2. Use the CM ratio to determine the break-even point in dollar sales. 3. If this years sales increase by $52,000 and fixed expenses do not change, how much will net operating income increase? Print 4a. What is the degree of operating leverage based on last years sales? 4-b. Assume the president expects this years sales to increase by 11%. Using the degree of operating leverage from last year, what tee en es age increase in net operating income will the company realze this year? 5. The sales manager is convinced that a 11% reduction in the selling price, combined with a $7ZOOO increase in advertising, would increase this year's unit sales by 25%. a. If the sales manager is right, what would be this years net operating income if his ideas are implemented? b. Do you recommend implementing the sales manager's suggestions? 6. The president does not want to change the seling price. Instead, he wents to increase the sales commission by $2.10 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 stil eam the same $1,340,000 net operating income as last year? Do not prepare an income statement; use the incremental analysis approach Complete this question by entering your answers in the tabs belowExplanation / Answer
Part 1
Contribution Margin ratio
(sales-Variable Expenses)/Sales
(3000000-1500000)/3000000
CM ratio
50%
Part 2
Breakeven
(Fixed Cost/CM ratio)
($ 160000/50%)
Breakeven Point in dollar sales
$ 320,000.00
Part 3
Income Statement
Sales
$ 3,052,000.00
Variable Cost (40% of sales)
$ 1,526,000.00
Contribution Margin
$ 1,526,000.00
Fixed Cost
$ 160,000.00
Net Income
$ 1,366,000.00
Change in Income ($ 1366000-$ 1340000)
Net operating Income Increase by $ 26000.
Part 4a
Degree of Operating Leverage
Contribution/Operating Income
1500000/1340000
Degree of Operating leverage
1.12
times
Part 4b
Degree of Operating leverage is also calculated as % Change in operating income/%change in Sales
so 1.12 =
x/11%
x =
11%*1.12
x=
12.32%
Increase in Operating income =
1340000+12.32%
Increase in Operating income =
$ 1,505,088.00
Net Operating Income Increase by 12.32%
Part 5a
Current number of units sold
3000000/120
Current number of units sold
25000 units
Decrease in price (120-11%)
106.8
Increase in Units (25000+25%)
31250 unit
Income Stetement
sales(31250 units*106.8)
$ 3,337,500.00
Variable cost (31250 units*60)
$ 1,875,000.00
Contribution Margin
$ 1,462,500.00
Fixed Cost
$ 237,000.00
Net Income
$ 1,225,500.00
Net operating Income
$ 1,225,500.00
Part 5b
Sales manager's suggestion is not recommended because it decreases the net income to $ 1225500 from $ 1340000.
Part 6
Income Statement (sales 25% Increase)
sales
$ 3,750,000.00
Variable cost (31250*62.1)
$ 1,940,625.00
Contribution Margin
$ 1,809,375.00
Fixed Cost
$ 469,375.00
Net Income
$ 1,340,000.00
Increase in Advertisement expenses
Fixed cost before 25% increase in sales
$ 160,000.00
Fixed cost After 25% increase in sales
$ 469,375.00
Net Increase in Advertisement expenses
$ 309,375.00
Amount by which advertisement can be increased is
$ 309,375.00
Part 1
Contribution Margin ratio
(sales-Variable Expenses)/Sales
(3000000-1500000)/3000000
CM ratio
50%
Part 2
Breakeven
(Fixed Cost/CM ratio)
($ 160000/50%)
Breakeven Point in dollar sales
$ 320,000.00
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