Question

Feather Friends, Inc., distributes a high-quality wooden birdhouse that sells for $40 per unit. Variable expenses are $20.00 per unit, and fixed expenses total $180,000 per year. Its operating results for last year were as follows: Sales $ 1,000,000 Variable expenses 500,000 Contribution margin 500,000 Fixed expenses 180,000 Net operating income $ 320,000 Required: Answer each question independently based on the original data: 5. The sales manager is convinced that a 14% reduction in the selling price, combined with a $64,000 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. If the sales manager's ideas are implemented, how much will net operating income increase or decrease over last year? 6. The president does not want to change the selling price. Instead, he wants to increase the sales commission by $2.20 per unit. He thinks that this move, combined with some increase in advertising, would increase this year's unit sales by 25%. How much could the president increase this year's advertising expense and still earn the same $320,000 net operating income as last year?

Answer 1

Solution 5-a:
Feather friend Inc.
Contribution Income statement
	Last Year	Proposed
	25000	units	31250	units
Particulars	Total	Per unit	Total	Per unit
Sales	1000000	40	1075000	34.40
Variable expenses	500000	20	625000	20
Contribution margin	500000	20	450000	14.4
Fixed expenses	180000		244000
Net operating income	320000		206000
Solution 5-b:
Increase (Decrease) in net operating income	-114000
Solution 6:
Existing contribution margin per unit	20
Less: Increase in sales commission	2.20
New contribution margin per unit	17.80
New sales units	31250
*New contribution margin per unit	17.80
Total Contribution margin	556250
Less: Target operating income	320000
Minimum Fixed cost	236250
Less: existing fixed cost	180000
Amount by which advertising can be increased =	56250