Problem 6-23 CVP Applications; Contribution Margin Ratio: Degreeof Operating Leverage [LO6-1, LO6-3, LO6-4, LO6-5, LO6-8]

Feather Friends, Inc., distributes a high-quality woodenbirdhouse that sells for $80 per unit. Variable expenses are $40.00per unit, and fixed expenses total $160,000 per year. Its operatingresults for last year were as follows:

Sales	$	2,080,000
Variable expenses		1,040,000
Contribution margin		1,040,000
Fixed expenses		160,000
Net operating income	$	880,000

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 $48,000 and fixed expensesdo not change, how much will net operating income increase?

4-a. What is the degree of operating leverage based on lastyear's sales?

4-b. Assume the president expects this year's sales to increaseby 11%. 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 12% reduction in theselling price, combined with a $61,000 increase in advertising,would increase this year's unit sales by 25%.

a. If the sales manager is right, what would be this year's netoperating income if his ideas are implemented?

b. If the sales manager's ideas are implemented, how much willnet operating income increase or decrease over last year?

6. The president does not want to change the selling price.Instead, he wants to increase the sales commission by $2.30 perunit. He thinks that this move, combined with some increase inadvertising, would increase this year's sales by 25%. How muchcould the president increase this year's advertising expense andstill earn the same $880,000 net operating income as last year?