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 $200,000 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		200,000
Net operating income	$	880,000

Required:

Answer each question independently based on the original data:

6. The president does not want to change the selling price. Instead, he wants to increase the sales commission by $2.10 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 $880,000 net operating income as last year?

Answer 1

The Calculation is presented in Tabular format below along with the required calculations:

The main point to check is that the additional advertising expense should be restricted to the additional contribution earned after taking into account 25% increase and increase in the commission expense.

Final Answer: Advertising Expenses (Additional current year) = 199,125

Working:

Particulars	Calculation	Values
Units sold in the last year	=2,160,000 / 80	27,000
Units Expected to be sold next year	=27,000 * 1.25	33,750
Variable Cost last year		40
Variable Cost after an increase in Commission	40 + 2.1	42.1
Contribution per unit	80 - 42.1	37.9
Total Contribution	33,750 * 37.9	1,279,125
Profit Required ( Same as last year)		880,000
Total Acceptable Fixed Cost in the Current year	Contribution - Operating Income
	=1,279,125 - 880,000	399,125
Fixed Cost Last Year		200,000
Additional Fixed Cost Allowed for Advertising Expenses	=399,125-200,000	199,125