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PROBLEM 5-23 CVP Applications; Contribution Margin Ratio: Degree of Operating Leverage Los- 05-3, LO5-4, L05-5, L05-8 Feather Friends, Inc., distributes a high-quality wooden birdhouse that sells for $20 per unit. V able expenses are $8 per unit, and fixed expenses total $180,000 per year. Its operating results last year were as follows: ri- $400,000 160,000 240,000 180,000 5 60,000 Sales . . . Contribution margin Net operating income 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 dollar sales. 3. If this year's sales increase by $75,000 and fixed expenses do not change, how muc will ni operating income increase? 4. What is the degree of operating leverage based on last year's sales? a. b. Assume the president expects this year's sales to increase by 20%. Using the degree operating leverage from last year, what percentage increase in net operating income the company realize this year? The sales manager is convinced that a 10% reduction in the selling price, combined w $30,000 increase in advertising, would increase this year's unit sales by 25%. If the sales ager is right, what would be this year's net operating income if his ideas are implemented you recommend implementing the sales manager's suggestions? Why? The president does not want to change the selling price. Instead, he wants to increase commission by $1 per unit. He thinks that this move, combined with some increase in tising, would increase this year's sales by 25%. How much could the president increase year's advertising expense and still earn the same $60.000 net operating income ith a 5. 6. ad his

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