PROBLEM 5-23 CVP Applications; Contribution Margin Ratio: Degree of Operating Leverage LO5-1, LO5-3, LO5-4, LO5-5, LO5-8 Feather Friends, Inc., distributes a high-quality wooden birdhouse that sells for $20 per unit. Vari- able expenses are $8 per unit, and fixed expenses total $180,000 per year. Its operating results for last year were as follows: 4. Sales Variable expenses.. Contribution margin Fixed expenses Net operating income.. 6. $400,000 160,000 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? 240,000 180,000 $ 60,000 5. 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 man- ager 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? 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 adver- tising, 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?
PROBLEM 5-23 CVP Applications; Contribution Margin Ratio: Degree of Operating Leverage LO5-1, LO5-3, LO5-4, LO5-5, LO5-8 Feather Friends, Inc., distributes a high-quality wooden birdhouse that sells for $20 per unit. Vari- able expenses are $8 per unit, and fixed expenses total $180,000 per year. Its operating results for last year were as follows: 4. Sales Variable expenses.. Contribution margin Fixed expenses Net operating income.. 6. $400,000 160,000 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? 240,000 180,000 $ 60,000 5. 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 man- ager 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? 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 adver- tising, 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
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Transcribed Image Text:PROBLEM 5-23 CVP Applications; Contribution Margin Ratio: Degree of Operating Leverage LO5-1,
LO5-3, LO5-4, LO5-5, LO5-8
Feather Friends, Inc., distributes a high-quality wooden birdhouse that sells for $20 per unit. Vari-
able expenses are $8 per unit, and fixed expenses total $180,000 per year. Its operating results for
last year were as follows:
1.
2.
3.
4.
Required:
Answer each question independently based on the original data:
What is the product's CM ratio?
Use the CM ratio to determine the break-even point in dollar sales.
If this year's sales increase by $75,000 and fixed expenses do not change, how much will net
operating income increase?
5.
Sales
Variable expenses.
Contribution margin
Fixed expenses.
Net operating income.
6.
$400,000
160,000
240,000
180,000
$ 60,000
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?
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 man-
ager 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?
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 adver-
tising, 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?
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