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

Required:

Answer each question independently based on the original data:

5. The sales manager is convinced that a 13% reduction in the selling price, combined with a $72,000 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? (Do not round intermediate calculations.)

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 $1.90 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? (Do not round intermediate calculations.)

Answer 1

Answer:-Current sales units =Sales value/Selling price per unit

=$2160000/$80 per unit =27000units

New selling price =$80 per unit –($80 per unit*13%)

=$80 per unit- $10.40 per unit =$69.60 per unit

New increase sales units =27000 units+(27000 units*25%)

=33750 units

Operating income
Sales	33750 unit*$69.60 per unit	2349000
Less:- Variable cost	33750 unit*$40 per unit	1350000
Contribution		999000
Less:- Fixed costs		180000
Less:-Advertising expense		72000
Net operating income		747000

a)-If sales manager ideas is implemented new operating income will be $ $747000.

b)-The sales manager suggestion should not implemented because net operating income is decreased from $153000(ie-$900000-$747000).

6)- In this option the sales managercan increase advertising expenses upto $205875 to earn same net operating income $900000 compare to last year.

Operating income
Sales	33750 unit*$80 per unit	2700000
Less:- Variable cost	33750 unit*$40 per unit	1350000
Contribution		1350000
Less:- Fixed costs		180000
Less:-Commission expense	33750 unit*$1.90 per unit	64125
Less:-Advertising expense	(Balancing figure)	205875
Net operating income	(Same as last year)	900000