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 $160,000 per year. Its aperating results for last year were as follows:

Sales	$	1,120,000
Variable expenses		560,000
Contribution margin		560,000
Fixed expenses		160,000
Net operating income	$	400,000

Required:

Answer each question independently based on the original data:

The sales manager is convinced that a 14% reduction in the selling price, combined with a $70,000 increase in advertising, would increase this year's unit sales by 25%.

- If the sales manager is right, what would be this year's net operating income if his ideas are implemented? Do you recommend implementing the sales manager's suggestions?

- The president does not want to change the selling price. Instead, he wants to increase the sales commission by $1.80 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 $400,000 net operating income as last year?

Answer 1

a	Prepare contribution format income statement for the two years. One year is for the results of last year and another should belong to the result of next year
		Company Feather Friends, Inc.
		Contribution format Income Statement (Amount in $)
		Last Year		Proposed for Next Year
		28000		35000
	Particulars	Total	Amount Per Unit	Total	Amount Per Unit
	Sales	$1,120,000	$40	$1,204,000	$34.40			It is assumed that the sales price per unit of $40/Unit is pertaining to last yr
	variables Exp	$560,000	$20	$700,000	$20
	Contribution Margin	$560,000	$20	$504,000	$14.40			35000*$40*86%
	Fixed expenses	$160,000		$230,000				$160000+$70000
	Net Operating Income	$400,000		$274,000
	Therefore we can find that since in spite of the increase in sales quantity by 25 % which is coupled by reduction in sales price by 14% and increase in fixed advertising expenses the net operating income have gone down with respect to last year
	So we don’t suggest implementing the sales managers suggestions.
b	Assume that the company sold same units of sales
	Total Sales	28000*$40	$1,120,000
	Less VC	28000*$20	$560,000
	Less Incremental Sales Comm
	35000*$1.80		$63,000
	Incremental Profit		$497,000
	Hence to keep the profit unchanged
	the president would increase the avdertising expenses by $497000