Question

Feather Friends,Inc., distributes a high-quality wooden birdhouse that sells for$20 per unit. Variable
costs are $8 per unit. Andfixed costs total $180,000 per year.
FEATHER FRIENDS, INC.
Unit price	$20
Variable cost per unit	8
Annual fixed costs	180,000
Estimated sales increase	$75,000
Operating results last year:
Sales	$400,000
Less variable expenses	160,000
Contribution margin	240,000
Less fixed expenses	180,000
Net operating income	$60,000
Expected percentage sales increase nextyear	20%
Units sold last year	18,000
percentage reduction in sales price	10%
Increase in advertising expense	$30,000
Expected percentage increase in sales	33%
Increase in sales commission per unit	$1
Required: Answer the following independentquestions.
1. What is the product's CM ratio?
2. Use the CM ratio todetermine the break-even point in sales dollars.
3. Due to an increase indemand, the company estimates that sales will increase by $75,000during the
year.By how much should net operating income increase (or net lossdecrease) assuming that fixed
costs do notchange?
4. Assume that the operatingresult for last were as stated above.
a.Compute the degree of operating leverage at the current level ofsales.
b.The president expects sales to increase by 20% next year. By whatpercentage should net
operatingincome increase?
5. Refer to the original data.Assume that the company sold 18,000 units last year. The salesmanager
isconvinced that a 10% reduction in the selling price, combined witha $30,000 increase in advertising,
wouldcause annual sales in units to increase by one-third. Prepare twocontribution income
statements, one showing the results of last year's operations andone showing the results of
operations if these changes are made. Would you recommend that thecompany do as the sales
managersuggest?
6. Refer to the original data.Assume again that the company sold 18,000 units last year. Thepresident
doesnot want to change the selling price. Instead, he wants to increasethe sales commission by $1
perunit. He thinks that this move, combined with some increase inadvertising, would increase annual
salesby 25%. By how much could advertising be increased with profitsremaining unchanged? Do not
prepare an income statement; use the incremental analysisapproach.