Feather Friends, Inc., distributes a high-quality woodenbirdhouse that sells for $40 per unit. Variable expenses are $20.00per unit, and fixed expenses total $200,000 per year. Its operatingresults for last year were as follows: Sales $ 1,120,000 Variableexpenses 560,000 Contribution margin 560,000 Fixed expenses 200,000Net operating income $ 360,000 Required: Answer each questionindependently based on the original data: 1. What is the product'sCM ratio? 2. Use the CM ratio to determine the break-even point indollar sales. 3. If this year's sales increase by $58,000 and fixedexpenses do not change, how much will net operating incomeincrease? 4-a. What is the degree of operating leverage based onlast year's sales? 4-b. Assume the president expects this year'ssales to increase by 14%. Using the degree of operating leveragefrom last year, what percentage increase in net operating incomewill the company realize this year? 5. The sales manager isconvinced that a 14% reduction in the selling price, combined witha $80,000 increase in advertising, would increase this year's unitsales by 25%. a. If the sales manager is right, what would be thisyear's net operating income if his ideas are implemented? b. Do yourecommend implementing the sales manager's suggestions? 6. Thepresident does not want to change the selling price. Instead, hewants to increase the sales commission by $2.10 per unit. He thinksthat this move, combined with some increase in advertising, wouldincrease this year's sales by 25%. How much could the presidentincrease this year's advertising expense and still earn the same$360,000 net operating income as last year? Do not prepare anincome statement; use the incremental analysis approach.
