m 5-23A Basics of CVP Analysis [1051, 1053, 1054, 105. 5. I o5-81 Feather Friend

Question

m 5-23A Basics of CVP Analysis [1051, 1053, 1054, 105. 5. I o5-81 Feather Friends, Inc., distributes a high-quality wooden birdhouse that sells for $120 per unit. Variable expenses are $60.00 per unit, and fixed expenses total $160,000 per year Required: Answer the following independent questions: 1. What is the product's CM ratio? CM ratio 2. Use the CM ratio to determine the break-even point in dollar sales Break-even point in sales dollars 3. Due to an increase in demand, the company estimates that sales will increase by $43,000 during the next year. By how much should net operating income increase (or net loss decrease) assuming that fíxed expenses do not change? et operating income

Explanation / Answer

Solution:

Part 1 – CM Ratio

CM Ratio = Contribution Margin per unit / Unit Selling Price x 100

Unit Selling Price = $120

Variable Cost per unit = $60

Contribution Margin Per Unit = Selling Price 120 – Variable Cost 60 = $60

CM Ratio = Contribution Margin per unit 60 / Unit Selling Price $120 x 100 = 50%

CM Ratio = 50%

Part 2 – Break Even Point in dollar sales

Break Even point in dollar sales = Total Fixed Expenses / CM Ratio

= $160,000 / 50% or 0.50

= $320,000

Part 3 –

Increase in sales = $43,000

Increase in Contribution Margin = Increase in Sales $43,000 x CM Ratio 50% = $22,500

Since, fixed cost will remain same and does not change. The Increase or decrease in Operating profit will be increase or decrease in Contribution Margin.

There is an increase in contribution margin of $22,500.

It means the Net Operating Income Increase by $22,500

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