100% Correct Solution Feather Friends, Inc distributes a high-quality wooden
Feather Friends, Incorporated, distributes a high-quality wooden birdhouse that sells for $20 per unit. Variable expenses are $10 per unit, and fixed expenses total $190,000 per year. Its operating results for last year were as follows:
| Sales (23,000 units) | $ | 460,000 |
| Variable expenses | 230,000 | |
| Contribution margin | 230,000 | |
| Fixed expenses | 190,000 | |
| Operating income | $ | 40,000 |
Required:
Answer each question independently based on the original data:
1. What is the product’s CM ratio?
2. Use the CM ratio to determine the break-even point in sales dollars.
3. Assume this year’s total sales increase by $40,000. If the fixed expenses do not change, how much will operating income increase?
Assume that the operating results for last year were as in the question data.
4-a. Compute the degree of operating leverage based on last year’s sales.
4-b. The president expects sales to increase by 16% next year. Using the degree of operating leverage from last year, what percentage increase in operating income will the company realize this year? Calculate the dollar increase in operating income.
5. The sales manager is convinced that a 12% reduction in the selling price, combined with a $32,000 increase in advertising, would increase this year’s unit sales by 30%.
a. If the sales manager is right, what would be this year’s operating income if his ideas are implemented?
b. If the sales manager’s ideas are implemented, how much will operating income increase or decrease over last year?
6. The president does not want to change the selling price. Instead, he wants to increase the sales commission by $1 per unit. He thinks that this move, combined with some increase in advertising, would increase this year’s unit sales by 30%. How much could the president increase this year’s advertising expense and still earn the same $40,000 operating income as last year?
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Step by Step Answers with Explanation – Feather Friends Inc
1.
The CM ratio is 50% and is calculated as follows;
| Selling price | $ | 20 | 100 | % | |
| Variable expenses | 10 | 50 | % | ||
| Contribution margin | $ | 10 | 50 | % | |
2. The breakeven point for Feather Friends, Incorporated will be calculated as follows;
| Break-even point in sales dollars | = | Fixed expenses |
| CM ratio |
| = | $190,000 | |
| 0.50 |
| Breakeven Point | = $380,000 |
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