6. 5-23 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 sales by 25%. How much could the president increase this year’s advertising expense and still earn the same $60,000 net operating income as last year?
6. 5-23 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 sales by 25%. How much could the president increase this year’s advertising expense and still earn the same $60,000 net operating income as last year?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
Related questions
Question
6. 5-23 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 sales by 25%. How much could the president increase this year’s advertising expense and still earn the same $60,000 net operating income as last year?
Transcribed Image Text:**Chapter 5: Cost-Volume-Profit Relationships**
**Problem 5-23 CVP Applications: Contribution Margin Ratio; Degree of Operating Leverage**
Feather Friends, Inc. distributes a high-quality wooden birdhouse that sells for $20 per unit. Variable expenses are $8 per unit, and fixed expenses total $180,000 per year. Its operating results for last year were as follows:
- **Sales**: $400,000
- **Variable expenses**: $160,000
- **Contribution margin**: $240,000
- **Fixed expenses**: $180,000
- **Net operating income**: $60,000
**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 dollar sales.
3. If this year's sales increase by $75,000 and fixed expenses do not change, how much will net operating income increase?
- a. What is the degree of operating leverage based on last year’s sales?
- b. Assume the president expects this year’s sales to increase by 20%. Using the degree of operating leverage from last year, what percentage increase in net operating income will the company realize this year?
4. The sales manager is convinced that a 10% reduction in the selling price, combined with a $30,000 increase in advertising, would increase this year’s unit sales by 25%. If the sales manager is right, what would be this year’s net operating income if his ideas are implemented? Do you recommend implementing the sales manager’s suggestions? Why?
5. 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 sales by 25%. How much could the president increase this year’s advertising expense and still earn the same $60,000 net operating income as last year?
(Note: There are no graphs or diagrams to explain in this image.)
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 2 steps
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.Recommended textbooks for you
Accounting
Accounting
ISBN:
9781337272094
Author:
WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:
Cengage Learning,
Accounting Information Systems
Accounting
ISBN:
9781337619202
Author:
Hall, James A.
Publisher:
Cengage Learning,
Accounting
Accounting
ISBN:
9781337272094
Author:
WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:
Cengage Learning,
Accounting Information Systems
Accounting
ISBN:
9781337619202
Author:
Hall, James A.
Publisher:
Cengage Learning,
Horngren's Cost Accounting: A Managerial Emphasis…
Accounting
ISBN:
9780134475585
Author:
Srikant M. Datar, Madhav V. Rajan
Publisher:
PEARSON
Intermediate Accounting
Accounting
ISBN:
9781259722660
Author:
J. David Spiceland, Mark W. Nelson, Wayne M Thomas
Publisher:
McGraw-Hill Education
Financial and Managerial Accounting
Accounting
ISBN:
9781259726705
Author:
John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting Principles
Publisher:
McGraw-Hill Education