In: Accounting
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. 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 | 180,000 | |
Net operating income | $ | 900,000 |
Required:
Answer each question independently based on the original data:
5. The sales manager is convinced that a 11% reduction in the selling price, combined with a $61,000 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 sales by 25%. How much could the president increase this year's advertising expense and still earn the same $900,000 net operating income as last year?
5a) Calculate net operating income
Sales (27000*1.25*71.20) | 2403000 |
Variable cost (33750*40) | 1350000 |
Contribution margin | 1053000 |
Fixed cost (180000+61000) | 241000 |
Net operating income | 812000 |
5b) Increase (decrease) in net income = 812000-900000 = -88000
6) Calculate advertising expense
Sales = (27000*1.25*80) = 2700000
Variable cost = (27000*1.25*42.20) = 1424250
Net income = 900000
Sales | 2700000 |
variable expense | 1424250 |
Fixed cost | 180000 |
Net income | 900000 |
Advertising expense | 195750 |