Feather Friends, Inc., distributes a high-quality woodenbirdhouse that sells for $120 per unit. Variable expenses are$60.00 per unit, and fixed expenses total $200,000 per year. Itsoperating results for last year were as follows:
Sales $ 3,360,000
Variable expenses 1,680,000
Contribution margin 1,680,000
Fixed expenses 200,000
Net operating income $ 1,480,000
Required: Answer each question independently based on theoriginal data:
1. What is the product's CM ratio? 2. Use the CM ratio todetermine the break-even point in dollar sales. 3. If this year'ssales increase by $51,000 and fixed expenses do not change, howmuch will net operating income increase? 4-a. What is the degree ofoperating leverage based on last year's sales? 4-b. Assume thepresident expects this year's sales to increase by 15%. Using thedegree of operating leverage from last year, what percentageincrease in net operating income will the company realize thisyear? 5. The sales manager is convinced that a 11% reduction in theselling price, combined with a $60,000 increase in advertising,would increase this year's unit sales by 25%. a. If the salesmanager is right, what would be this year's net operating income ifhis ideas are implemented? b. If the sales manager's ideas areimplemented, how much will net operating income increase ordecrease over last year? 6. The president does not want to changethe selling price. Instead, he wants to increase the salescommission by $1.70 per unit. He thinks that this move, combinedwith some increase in advertising, would increase this year's salesby 25%. How much could the president increase this year'sadvertising expense and still earn the same $1,480,000 netoperating income as last year?
