Feather Friends, Inc., distributes a high-quality wooden birdhouse that sells for $40 per unit. Variable expenses are $20.00 per unit, and fixed expenses total $160,000 per year. Its operating results for last year were as follows: Sales 960,000 480,000 Variable expenses Contribution margin Fixed expenses 480,000 160,000 Net operating income 320,000 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 $54,000 and fixed expenses do not change, how much will net operating income increase? 4-a. What is the degree of operating leverage based on last year's sales? 4-b. Assume the president expects this year's sales to increase by 16%. Using the degree of operating leverage from last year, what percentage increase in net operating income will the company realize this year?
Feather Friends, Inc., distributes a high-quality wooden birdhouse that sells for $40 per unit. Variable expenses are $20.00 per unit, and fixed expenses total $160,000 per year. Its operating results for last year were as follows: Sales 960,000 480,000 Variable expenses Contribution margin Fixed expenses 480,000 160,000 Net operating income 320,000 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 $54,000 and fixed expenses do not change, how much will net operating income increase? 4-a. What is the degree of operating leverage based on last year's sales? 4-b. Assume the president expects this year's sales to increase by 16%. Using the degree of operating leverage from last year, what percentage increase in net operating income will the company realize this year?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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I am stuck in questions 5 a. b. an 6. Can someone help?
Transcribed Image Text:Feather Friends, Inc., distributes a high-quality wooden birdhouse that sells for $40 per unit. Variable expenses are $20.00 per unit,
and fixed expenses total $160,000 per year. Its operating results for last year were as follows:
Sales
Variable expenses
Contribution margin
Fixed expenses
$
960,000
480,000
480,000
160,000
Net operating income
320,000
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 $54,000 and fixed expenses do not change, how much will net operating income increase?
4-a. What is the degree of operating leverage based on last year's sales?
4-b. Assume the president expects this year's sales to increase by 16%. Using the degree of operating leverage from last year, what
percentage increase in net operating income will the company realize this year?
Transcribed Image Text:Sales
Variable expenses
Contribution margin
Fixed expenses
960,000
480,000
480,000
160,000
Net operating income
$
320,000
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 $54,000 and fixed expenses do not change, how much will net operating income increase?
4-a. What is the degree of operating leverage based on last year's sales?
4-b. Assume the president expects this year's sales to increase by 16%. Using the degree of operating leverage from last year, what
percentage increase in net operating income will the company realize this year?
5. The sales manager is convinced that a 13% reduction in the selling price, combined with a $73,000 increase in advertising, would
increase this year's unit sales by 25%.
a. If the sales manager is right, what would be this year's net operating income if his ideas are implemented?
b. If the sales manager's ideas are implemented, how much will net 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 $2.20 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 $320,000 net operating income as last year?
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