Question

Feather Friends, Inc., distributes a high-quality wooden birdhouse that sells for $80 per unit. Variable expenses are $40.00 per unit, and fixed expenses total $180,000 per year. Its operating results for last year were as follows:

Sales	$	2,000,000
Variable expenses		1,000,000
Contribution margin		1,000,000
Fixed expenses		180,000
Net operating income	$	820,000

Required:

Answer each question independently based on the original data:

4-b. Assume the president expects this year's sales to increase by 17%. 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 14% reduction in the selling price, combined with a $79,000 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. Do you recommend implementing the sales manager's suggestions?

6. The president does not want to change the selling price. Instead, he wants to increase the sales commission by $1.60 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 $820,000 net operating income as last year?

Answer 1

Particulars	Unit	Price	Amount
Sales	25000*	80	20,00,000
- Variable Cost	25000	40	10,00,000
=Contribution	25000	40	10,00,000
Fixed Cost			1,80,000
= Profit	25000		820,000

*20, 00,000 /80= 25000 Units

Answer 4B. New Sales Value = 20,00,000 + (20,00,000 *17%)= 23,40,000

                      Units=23, 40,000/ 80 = 29250

Particulars	Unit	Price	Amount
Sales	29250	80	23,40,000
- Variable Cost	29250	40	11,70,000
=Contribution	29250	40	11,70,000
Fixed Cost			1,80,000
= Profit			9,90,000

Percentage Increase in profit = (9, 90,000-8, 20,000) / 820,000 *100=20.73%

5a. New Selling Price = (80- 80*14%) = 68.8

New unit sales = (25000 + 25000 *25%) = 31250

Particulars	Unit	Price	Amount
Sales	31250	68.8	21,50,000
- Variable Cost	31250	40	1250,000
=Contribution	31250	40	9,00,000
Fixed Cost			1,80,000
= Profit			7,20,000

5B. The Company should not decrease the selling price as the net operating profit will be decline due to decrease in selling price.

6. New Sales = 20, 00,000 + 20, 00,000*25%= 25,00,000

    Sales Unit = 25, 00,000/ 80= 31250

Particulars	Unit	Price	Amount
Sales	31250	80	25,00,000
- Variable Cost	31250	40	12,50,000
=Contribution	31250	40	12,50,000
Fixed Cost			1,80,000
= Profit			10,70,000

Calculation of Maximum permissible advertisement expense = 10,70,000- 8,20,000 ( Current Profit) - 50,000 ( Commission on 31250 @ 1.60)= 2,00,000