Reference no: EM132957401

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 as follows:

Sales $400,000
Variable Expenses 160,000
Contribution Margin 240,000
Fixed Expenses 180,000
Net Operating Income $60,000

Required:

Problem 1: What is the product's CM ratio?

Problem 2: Use the CM ratio to determine the break-even point in dollar sales.

Problem 3: Assume this year's unit sales and total sales increase by 3,750units and $75,000, respectively. If the fixed expenses do not change, how much will net operating income increase?

Problem 4: a. What is the degree of operating leverage based on last year's sales?

Problem 4: b. Assume the president expects this year's unit 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?

Problem 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 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?

Problem 6: 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 unit 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?