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	$	2,160,000
Variable expenses		1,080,000
Contribution margin		1,080,000
Fixed expenses		180,000
Net operating income	$	900,000
4-b. Assume the president expects this year's sales to increase by 13%. 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 12% reduction in the selling price, combined with a $66,000 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 $2.10 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 $900,000 net operating income as last year?

Answer 1

Degree of Operating Leverage = Contribution / Net Operating Income

= $1080000/$900000

= 1.2 times

4b) % increase in Net Operating Income:-

Degree of Operating Leverage = % Change in Net Operating Income / % Change in Sale

1.2 = % Change in Net operating Income / 13%

% change in Net Operating Income = 13% * 1.2 = 15.6%

% Increase in Net Operating Income = 15.6%

5a) no. of unit sold = Total Sales / Selling Price per unit

= $2160000/$80

= 27000 units

as per Question 5a :-

Selling Price Reduce by 12%

New Selling Price = $80*(100%-12%) =$70.4 per unit

Sales Volume Increase by 25%

New Sales Volume = 27000*125% = 33750 Units

Contrtibution Margin (%) = (Selling Price Per unit - Variable Cost per Unit / Selling Price Per Unit)*100

= (($80 - $40) / $80)*100

= 50%

Total New Sales = New Sales Volume * New Selling Price per Unit

= 33750 * $70.4

= $2376000

New Contribution = New Sales * Contribution Margin

= $2376000 * 50%

= $1188000

New Fixed Cost = Old Fixed Cost + advertising Cost

= $180000 + $66000

= $246000

Net Operating Income = New Contribution - New Fixed Cost

= $1188000 - $246000

= $942000

5b) Yes, Recommend that Suggestion.

6) Sales Price Per Unit = $80

New Variable Cost Per unit = Old Variable Cost Per unit + Commission Expemse

= $40 + $2.10

= $42.1 per unit

New Contribution Per unit = Selling Price per unit - New Variable Cost per Unit

= $80 - $42.1

= $37.9

New Sale Volume = Old Sales Volume * 125%

= 27000*125%

= 33750 units

New Contribution Margin = New Sale Volume * New Contribution Per unit

= 33750 * $37.9

= $1279125

Net Operating Income = New Contribution Margin - New Fixed Cost

New Fixed Cost = New Contribution Margin - Net Operating Income

= $1279125 - $900000

= $379125

Advertising Expense = New Fixed Cost - Old Fixed Cost

= $379125 - $180000

= $199125