Problem 5-23A Basics of CVP Analysis [LO5-1, LO5-3, LO5-4, LO5-5, LO5-8] Feather

Question

Problem 5-23A Basics of CVP Analysis [LO5-1, LO5-3, LO5-4, LO5-5, LO5-8]

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 $200,000 per year.

What is the product's CM ratio?

Use the CM ratio to determine the break-even point in dollar sales.

Due to an increase in demand, the company estimates that sales will increase by $59,000 during the next year. By how much should net operating income increase (or net loss decrease) assuming that fixed expenses do not change?

1,120,000

920,000

Compute the degree of operating leverage at the current level of sales. (Round your answer to 2 decimal places.)

The president expects sales to increase by 19% next year. By what percentage should net operating income increase? (Round intermediate calculations to 2 decimal places and final percentage answer to 2 decimal places, i.e. 22.47%)

Refer to the original data. Assume that the company sold 34,500 units last year. The sales manager is convinced that a 14% reduction in the selling price, combined with a $63,000 increase in advertising, would increase annual unit sales by 50%.

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. (Do not round intermediate calculations. Round your "Per unit" answers to 2 decimal places.)

Refer to the original data. Assume again that the company sold 34,500 units last year. The president does not want to change the selling price. Instead, he wants to increase the sales commission by $1.60 per unit. He thinks that this move, combined with some increase in advertising, would double annual unit sales. By how much could advertising be increased with profits remaining unchanged? Do not prepare an income statement; use the incremental analysis approach.

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 $200,000 per year.

Explanation / Answer

Solution:

Problem 5-23A

Part 1 – CM Ratio

CM Ratio = Contribution Margin Per Unit / Selling Price Per Unit x 100

Contribution Margin Per Unit = Selling Price per unit – Variable expense per unit

= $80 – 40

= $40

CM Ratio = Contribution Margin Per Unit $40 / Selling Price Per Unit $80 x 100 = 50%

Part 2 --- Break Even Point in dollar sales

Break Even Point in dollar Sales = Total Fixed Expenses / CM Ratio

= $200,000 / 50%

= $400,000

Part 3 – This part is not clear. Please provide complete data to solve this part.

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