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 $200,000 per year.

Assume that the operating results for last year were:      Sales $ 3,240,000   Variable expenses 1,620,000   Contribution margin 1,620,000   Fixed expenses 200,000   Net operating income $ 1,420,000 b. The president expects sales to increase by 18% next year. By what percentage should net operating income increase? (Round intermediate calculations to 2 decimal places and final percentage answer to 2 decimal places, i.e. 22.47%)    Refer to the original data. Assume that the company sold 42,000 units last year. The sales manager is convinced that a 12% reduction in the selling price, combined with a $71,000 increase in advertising, would increase annual unit sales by 50%. a. Prepare two contribution format income statements, one showing the results of last year’s operations and one showing the results of operations if these changes are made. (Do not round intermediate calculations. Round your "Per unit" answers to 2 decimal places.) 6. Refer to the original data. Assume again that the company sold 42,000 units last year. The president does not want to change the selling price. Instead, he wants to increase the sales commission by $2.50 per unit. He thinks that this move, combined with some increase in advertising, would double annual unit sales. By how much could advertising be increased with profits remaining unchanged? Do not prepare an income statement; use the incremental analysis approach.

Answer 1

Solutions:

Total Contribution margin	1620000
/ Net operating income	1420000
Degree of operating leverage	1.14

b.

% Increase in sales	18%
*Degree of operating leverage	1.14
Net operating income Increase by	20.52%

Solution 5-a:
Feather friend Inc.
Contribution Income statement
	Last Year	Proposed
	42000	units	63000	units
Particulars	Total	Per unit	Total	Per unit
Sales	5040000	120	6652800	105.60
Variable expenses	2520000	60	3780000	60
Contribution margin	2520000	60	2872800	45.60
Fixed expenses	200000		271000
Net operating income	2320000		2601800

Solution 6:
Existing contribution margin per unit	60
Less: Increase in sales commission	2.50
New contribution margin per unit	57.50
New sales units (42000*200%)	84000
*New contribution margin per unit	57.50
Total Contribution margin	4830000
Less: Target operating income	2320000
Minimum Fixed cost	2510000
Less: existing fixed cost	200000
Amount by which advertising can be increased =	2310000