Question

Klein Company distributes a high-quality bird feeder that sells for $30 per unit. Variable costs are $12 per unit, and fixed costs total $279,000 annually.

Required:

Answer the following independent questions:

1. What is the product’s CM ratio?

2. Use the CM ratio to determine the break-even point in sales dollars.

3. The company estimates that sales will increase by $63,000 during the coming year due to increased demand. By how much should operating income increase?

4. Assume that the operating results for last year were as follows:

Sales	$	600,000
Variable expenses		228,000
Contribution margin		372,000
Fixed expenses		279,000
Operating income	$	93,000

a. Compute the degree of operating leverage at the current level of sales.

b. The president expects sales to increase by 12% next year. By how much should operating income increase?

5-a. Refer to the original data. Assume that the company sold 30,000 units last year. The sales manager is convinced that a 12% reduction in the selling price, combined with a $67,000 increase in advertising expenditures, would cause annual sales in units to increase by 20%. Prepare two contribution format income statements, one showing the results of last year’s operations and one showing what the results of operations would be if these changes were made. (Round "Per Unit" answers to 2 decimal places.)

5-b. Would you recommend that the company do as the sales manager suggests?

multiple choice

• Yes

• No

6. Refer to the original data. Assume again that the company sold 30,000 units last year. The president feels that it would be unwise to change the selling price. Instead, he wants to increase the sales commission by $5 per unit. He thinks that this move, combined with some increase in advertising, would increase annual unit sales by 50%. By how much could advertising be increased with profits remaining unchanged? Do not prepare an income statement; use the incremental analysis approach.

Answer 1

1)	CM ratio
	contribution margin/sales
	18/30
	0.6
	60%
2)	Break even sales in dollars
	fixed cost/contribution margin ratio
	279,000 / 60%
	465,000
3)	Net operating income will increase by
	63,000 * 60%
	37,800
4-a)	Degree of operating leverage
	contribution margin/net income
	372,000 / 93,000
	4
4b)	percentage increase in net income
	12 * 4
	48
	or 48%

5)	Contribution Margin income statement

		last year		proposed
		25,000	units	30000	units
		Total	per unit	Total	per unit
	Sales	900,000	30.00	950,400	26.40
	variable cost	360,000	12.00	432,000	12.00
	contributiion margin	540,000	18.00	518,400	14.40
	fixed expense	279,000		346,000
	operating income	261,000		172,400
5-b)	No

6)	unit sales	30,000	*	150%	=	45,000
	new variable cost	12	+	5	=	17
	new conribution	30	-	17	=	13

Contribution =	Fixed expense + operating income + advertisng expense
Advertising expense=	45,000*13 - 261,000 - 279,000
Advertising expense=	45,000