Feather Friends, Incorporated, distributes a high-quality wooden birdhouse that sells for $40 per unit. Variable expenses are $20.00 per unit, and fixed expenses total $180,000 per year. Its operating results for last year were as follows: Sales $ 1,080,000 Variable expenses 540,000 Contribution margin 540,000 Fixed expenses 180,000 Net operating income $ 360,000 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. Assume this year’s unit sales and total sales increase by 51,000 units and $2,040,000, respectively. If the 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 unit sales to increase by 11%. 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 11% reduction in the selling price, combined with a $72,000 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 $1.90 per unit. He thinks that this move, combined with some increase in advertising, would increase this year's unit sales by 25%. How much could the president increase this year's advertising expense and still earn the same $360,000 net operating income as last year?
Master Budget
A master budget can be defined as an estimation of the revenue earned or expenses incurred over a specified period of time in the future and it is generally prepared on a periodic basis which can be either monthly, quarterly, half-yearly, or annually. It helps a business, an organization, or even an individual to manage the money effectively. A budget also helps in monitoring the performance of the people in the organization and helps in better decision-making.
Sales Budget and Selling
A budget is a financial plan designed by an undertaking for a definite period in future which acts as a major contributor towards enhancing the financial success of the business undertaking. The budget generally takes into account both current and future income and expenses.
Feather Friends, Incorporated, distributes a high-quality wooden birdhouse that sells for $40 per unit. Variable expenses are $20.00 per unit, and fixed expenses total $180,000 per year. Its operating results for last year were as follows:
| Sales | $ 1,080,000 |
|---|---|
| Variable expenses | 540,000 |
| Contribution margin | 540,000 |
| Fixed expenses | 180,000 |
| Net operating income | $ 360,000 |
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. Assume this year’s unit sales and total sales increase by 51,000 units and $2,040,000, respectively. If the 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 unit sales to increase by 11%. 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 11% reduction in the selling price, combined with a $72,000 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 $1.90 per unit. He thinks that this move, combined with some increase in advertising, would increase this year's unit sales by 25%. How much could the president increase this year's advertising expense and still earn the same $360,000 net operating income as last year?
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