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# Student Name: Class: Problem 6-19 FEATHER FRIENDS, INC. Calculations 1. CM ratio Sales price Variable expenses Contribution margin Dollars Ratio 2....

Problem 6-19

Feather Friends, Inc. distributes a high quality wooden birdhouse that sells for \$20 per unit. Variable costs are \$8 per unit and fixed costs total \$180,000 per year.

Required:

1. What is the products CM ration?
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 \$75,000 during the next year. By how much should net operating income increase (or net loss decrease) assuming that fixed costs do not change.?
4. Assume that the operating results for last year were:

Sales …………………………………………………… \$400,000
Variable expenses……………………………….. 160,000
Contribution margin…………………………….. 240,000
Fixed Expenses…………………………………….. 180,000
Net operating income…………………………… \$ 60,000

a. Compute the degree of operating leverage at the current leel of sales.
b. The president expects sales to increase by 20% next year. By what percentage should net operating income increase?

5. Refer to the original data. Assue that the company sold 18,000 units last year. The sales manager is convinced that a 10% reduction in the selling price, combined with a \$30,000 increase in advertising, would cause annual sales in units to increase by one-third. Prepare two contribution format income statemetns, one showing the results of last year’s operations and one showing the results f operations if these changes are made. Would you recommend that the company do as the sales manager suggests?
6. Refere to the original data. Assume again that the company sold 18,000 units last year. The president does not want to change the selling price. Instead, he wants to increase the sles commission by \$1 per unit. He thinks that this move, combined with some increase in advertising, would increase annual sales by 25%. By how much could advertising be increased with profits remaining unchaged? Do not prepare an income statement, use the incremental analysis approach.
Student Name: Class: Problem 6-19 FEATHER FRIENDS, INC. Calculations 1. CM ratio Dollars Ratio Sales price Variable expenses Contribution margin 2. Dollar sales to break even Fixed expenses CM ratio Break-even sales 3. Net income increase Increased sales CM ratio Increased contribution margin Fixed costs change Net operating income increase 4. a. Degree of operating leverage Contribution margin Net operating income Degree of operating leverage b. Increase in net operating income Degree of op. leverage % Sales increase Increase in net operating income FEATHER FRIENDS, INC. Contribution Income Statement 5. Units Units Last Year: Proposed: Total Per Unit Total Per Unit Sales Variable expenses Contribution margin Fixed expenses Net operating income 6. Incremental analysis Expected total contribution margin Present total contribution margin Incremental contribution margin
Given Data Problem 6-19: 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 Variable expenses 160,000 Contribution margin 240,000 Fixed expenses 180,000 Net operating income \$60,000 Expected percentage sales increase next year 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 Expected percentage increase in sales 25%

Student Name:
Class:
Problem 6-19
FEATHER FRIENDS, INC.
Calculations
1. CM ratio
Sales price
Variable expenses
Contribution margin Dollars
\$20
8
\$12
Correct! 2. Dollar sales to break even
Fixed...

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