Feather Friends, Inc., distributes a high-quality woodenbirdhouse that sells for $20 per unit. Vari- able expenses are $8per unit, and fixed expenses total $180,000 per year. Its operatingresults for last year were as follows:

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

Required:

Answer each question independently based on the originaldata:
1. What is the product’s CM ratio?
2. Use the CM ratio to determine the break-even point in dollarsales.
3. If this year’s sales increase by $75,000 and fixed expenses donot change, how much will net

operating income increase?
4. a. What is the degree of operating leverage based on last year’ssales?

b. Assume the president expects this year’s sales to increase by20%. Using the degree of operating leverage from last year, whatpercentage increase in net operating income will the companyrealize this year?

5. The sales manager is convinced that a 10% reduction in theselling price, combined with a $30,000 increase in advertising,would increase this year’s unit sales by 25%. If the sales man-ager is right, what would be this year’s net operating income ifhis ideas are implemented? Do you recommend implementing the salesmanager’s suggestions? Why?

6. The president does not want to change the selling price.Instead, he wants to increase the sales commission by $1 per unit.He thinks that this move, combined with some increase in adver-tising, would increase this year’s sales by 25%. How much could thepresident increase this year’s advertising expense and still earnthe same $60,000 net operating income as last year?