PROBLEM 6-19B Basics of CVP Analysis (LO1, LO3, LO4, LO6, LO8)
CHECK FIGURE
(2) Break-even: $192,857
Bird Shelters, Inc., distributes a high-quality wooden birdhouse that sells for $15.00 per unit. Variable costs are
$4.50 per unit, and fixed costs total $135,000 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 sales dollars.
3. Due to an increase in demand, the company estimates that sales will increase by $56,250 during the next year.
By how much should net operating income increase (or net operating loss decrease), assuming that fixed costs
do not change?
4.
Assume that the operating results for last year were:
Sales
$300,000
Less variable expenses
90,000
Contribution margin
210,000
Less fixed expenses
135,000
Net operating income
$
75,000
a. Compute the degree of operating leverage at the current level of sales.
b. The president expects sales to increase by 25% next year. By what percentage should net operating income
increase?
5. Refer to the original data. Assume that the company sold 16,500 units last year. The sales manager is convinced
that a 5% reduction in the selling price, combined with a $22,500 increase in advertising, would cause annual
sales in units to increase by one-third. Prepare two contribution format income statements, one showing the
results of last year’s operations and one showing the results of operations if these changes are made. Would you
recommend that the company do as the sales manager suggests?
6. Refer to the original data. Assume again that the company sold 16,500 units last year. The president does not
want to change the selling price. Instead, he wants to increase the sales commission by $0.75 per unit. He thinks
that this move, combined with some increase in advertising, would increase annual sales by 20%. By how much
could advertising be increased with profits remaining unchanged? Do not prepare an income statement; use the
incremental analysis approach.