Question

In: Accounting

Feather Friends, Inc., distributes a high-quality wooden birdhouse that sells for $80 per unit. Variable expenses...

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.

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 dollar sales.

       

3. Due to an increase in demand, the company estimates that sales will increase by $53,000 during the next year. By how much should net operating income increase (or net loss decrease) assuming that fixed expenses do not change?

       

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


Sales $ 2,160,000
Variable expenses 1,080,000
Contribution margin 1,080,000
Fixed expenses 180,000
Net operating income $ 900,000


a. Compute the degree of operating leverage at the current level of sales. (Round your answer to 2 decimal places.)

            

b. The president expects sales to increase by 17% next year. By what percentage should net operating income increase? (Round intermediate calculations and final answer to 2 decimal places.)

  

Solutions

Expert Solution

Part 1

CM Ratio

(A)

Sale Price

$    80.00

(B)

Variable cost

$    40.00

(C=(A-B))

Contribution margin

$    40.00

(D=C/A*100)

Contribution margin ratio

50%

Part 2

(A)

Contribution margin ratio

50%

(B)

Fixed cost

$ 180,000.00

(C= (B/A)

Breakeven in Dollars

$ 360,000.00

Part 3

(A)

Increase in sales

$    53,000.00

(B)

Proportionate increase in Variable Cost (53000*50%)

$    26,500.00

(C=(A-B))

Increase in Net Operating Income

$    26,500.00

Part 4 a

Degree of operating leverage = sales − variable costs / sales − variable costs − fixed costs

Degree of operating leverage =   (2160000-1080000)/(2160000-1080000-180000)

Degree of operating leverage =    1.2

Part 4 b

Degree of operating leverage =

%change in Operating income/%change in sales

Change in sales

17%

Change in Operating income =

(%change in Sales*Operating Leverage)

Change in Operating income =

(17%*1.2)

Change in Operating income in %=

20.40%

ekkarill92 answered 1 year ago
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