Question

Feather Friends, Inc., distributes a high-quality wooden birdhouse that sells for $120 per unit. Variable expenses are $60.00 per unit, and fixed expenses total $160,000 per year. Its operating results for last year were as follows:

Sales	$	3,360,000
Variable expenses		1,680,000
Contribution margin		1,680,000
Fixed expenses		160,000
Net operating income	$	1,520,000
5. The sales manager is convinced that a 15% reduction in the selling price, combined with a $71,000 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 $2.30 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 $1,520,000 net operating income as last year? Do not prepare an income statement; use the incremental analysis approach.

Answer 1

No. Of units Sold= Total Sales/price per unit

= 3360000/120

= 28000 Units

If sales price reduce by 15% then new sales price is

= 120-(120*15%) =120- 18= $102

Number of units increse in sales= 28000*25%

= 7000

Contribution Margin per unit on new selling price =

=102-60

= $42

Answer 5)

Particular	Operating income Statement	Incremental Income Statement
Contribution Margin (35000 Units)	1470000 (35000*42)	(210000)
Less: Fixed Cost	231000 (160000+71000)	71000
Profit/(Loss)	$1239000	(281000)

a) if the sales manager ideas will be implemented the profit will be $ 1239000.

b) It is preferable to not implement to sales manager ideas, because it reduce the profit by $ 281000

Answe 6)

Contribution Margin per unit = 120-(60+2.30) = $57.70

Total Contribution Margin = 35000*57.70

= $2019500

Fixed Cost to earn Profit of $ 1520000 = 2019500-1520000

= $499500

Increment in Fixed Cost = $339500 (499500-160000)

Particulars	Incremental Income Statement
Contribution Margin	339500 (2019500-168000)
Less: Fixed Cost	339500
Profit	0

The president can increase the advertisement cost by $339500 to earn same profit.