Reference no: EM132524308

Feather Friends, Inc., distributes a high-quality wooden birdhouse that sells for $20 per unit. Variable costs are $8 per unit, and fixed costs total $180,000 per year.

Required:

Answer the following independent questions:

Question 1. What is the product's CM ratio?

Question 2. Use the CM ratio to determine the break-even point in sales dollars.

Question 3. Due to an increase in demand, the company estimates that sales will increase by $75,000 during the next year. By how much should net operating income increase (or net loss decrease) assuming that fixed costs do not change?

Question 4. Assume that the operating results for last year were:

Sales .......................................................................... $400,000

Variable expenses ..................................................... 160,000

Contribution margin ................................................... 240,000

Fixed expenses .......................................................... 180,000

Net operating income ................................................ $ 60,000

a. Compute the degree of operating leverage at the current level of sales.

b. The president expects sales to increase by 20% next year. By what percentage should net operating income increase?