Problem 1 - 5-6

Feather Friends, Inc., distributes a high-quality wooden birdhouse that sells for $20 per unit.
Variable
Expenses are $8 per unit, and fixed expenses total $180,000 per year, 20,000 unit sold. Its operating
results 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.
Problem:
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 advertising, would
increase this year’s sales by 25%.
Question:
How much could the president increase this year’s advertising expense and still earn the same $60,000
net operating income as last year?
Will the suggestion of $1 increase in commission, and retain selling price result to 25% increase of this
year’s sales?
Answer:
To determine how much the president can increase this year’s advertising expense and still earn the
same $60,000 net operating income as last year, we need to analyze the impact of the proposed
changes.
First, let’s calculate the contribution margin per unit. The contribution margin is the difference between
the selling price and the variable expenses per unit. In this case, the selling price is $20 per unit, and the
variable expenses are $8 per unit. Therefore, the
contribution margin per unit is $20 - $8 = $12.
Next, let’s calculate the number of units sold last year. We are given that 20,000 units were sold.
Using the contribution margin per unit, we can calculate the total contribution margin for last year. The
contribution margin is the difference between sales and variable expenses. In this case, the sales were
$400,000, and the variable expenses were $160,000. Therefore, the
contribution margin for last year was $400,000 - $160,000 = $240,000.
Since the fixed expenses were $180,000, the

net operating income for last year was $240,000 - $180,000 = $60,000.
Now, let’s consider the proposed changes.

The president wants to increase the sales commission by $1 per unit and increase advertising to achieve
a 25% increase in sales.
To maintain the same net operating income of $60,000, the increase in sales must cover the increase in
variable expenses (sales commission) and the increase in fixed expenses (advertising).
The increase in variable expenses due to the sales commission is equal to the number of units sold
multiplied by the increase in commission per unit. In this case, the increase in commission is $1 per unit,
and the number of units sold is expected to increase by 25%. Therefore, the
increase in variable expenses is 20,000 units * $1 = $20,000.
To maintain the same net operating income, the increase in sales must also cover the increase in fixed
expenses. Let’s denote the increase in advertising expense as X.
The increase in sales Is equal to the current sales multiplied by the expected increase of 25%. Therefore,
the increase in sales is $400,000 * 25% = $100,000.
The total increase in expenses is the sum of the increase in variable expenses and the increase in fixed
expenses.
Therefore, the total increase in expenses is $20,000 + X.
To maintain the same net operating income, the increase in sales must cover the total increase in
expenses. Therefore, we can set up the following equation:
Increase in sales = Total increase in expenses $100,000 = $20,000 + X
Solving for X, we find that X = $80,000.
Therefore, the president can increase this year’s advertising expense by $80,000 and still earn the
same $60,000 net operating income as last year.
Regarding the second question, we cannot determine whether the suggestion of a $1 increase in
commission and retaining the selling price will result in a 25% increase in this year’s sales without
additional information. The increase In sales depends on various factors such as market demand,
competition, and customer response to the proposed changes.
Problem:
Feather Friends, Inc., distributes a high-quality wooden birdhouse that sells for $20 per unit. Variable
expenses are $8 per unit, and fixed expenses total $180,000 per year, 20,000 unit sold. Its operating
results 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.
The sales manager Is convinced that a 10% reduction in the selling price, combined with a $30,000
increase in advertising, would increase this year’s unit sales by 25%.
Questions:
If the sales manager is right, What would be this year’s net operating income if his ideas are
implemented?
Do you recommend implementing the sales manager’s suggestions? Why?
Answer:
Calculation of Net Operating Income
To calculate this year’s net operating income, we need to consider the changes in sales, expenses, and
contribution margin.
Change in Sales: The sales manager suggests a 10% reduction in the selling price, which would result in a
new selling price of $18 per unit. Additionally, the manager expects a 25% increase in unit sales.
Calculation:
Original selling price per unit: $20

New selling price per unit: $20 – (10% of $20) = $18
Original unit sales: 20,000 units
New unit sales: 20,000 units + (25% of 20,000 units)
= 20,000 units + 5,000 units
= 25,000 units
Total sales: $18 per unit * 25,000 units = $450,000
Change in Variable Expenses: Variable expenses remain constant at $8 per unit.

Change in Contribution Margin: Contribution margin is the difference between sales and variable
expenses.
Calculation:
Original contribution margin: $240,000

New contribution margin: $450,000 – ($8 per unit * 25,000 units)
= $450,000 - $200,000
= $250,000
Fixed Expenses: Fixed expenses remain constant at $180,000 + $30,000 additional advertising expense
Net Operating Income: Calculation:
Original net operating income: $60,000

New net operating income: New contribution margin – Fixed expenses
= $250,000 - $210,000
= $40,000
Recommendation:
Based on the calculations, if the sales manager’s suggestions are implemented, this year’s net operating
income would be $40,000.
As for whether to recommend implementing the sales manager’s suggestions, it depends on the
company’s goals and strategy.
Advantages of implementing the suggestions:
Increase in unit sales by 25%

Potential for higher market share and customer base
Possibility of increased future profits
Disadvantages of implementing the suggestions:
Reduction in selling price may result in lower profit margins

Increase in advertising expenses by $30,000
Considering the potential benefits and drawbacks, a thorough analysis of the market, competition, and
financial projections should be conducted before making a recommendation.

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Feather Friends, Inc., distributes a high-quality wooden birdhouse that sells for $20 per unit.

Variable expenses 160,000

Contribution margin 240,000

Fixed expenses 180,000

Net operating income $ 60,000.

contribution margin per unit is $20 - $8 = $12.

contribution margin for last year was $400,000 - $160,000 = $240,000.

Since the fixed expenses were $180,000, the

Now, let’s consider the proposed changes.

Increase in sales = Total increase in expenses $100,000 = $20,000 + X

Solving for X, we find that X = $80,000.

Do you recommend implementing the sales manager’s suggestions? Why?

Original selling price per unit: $20

Change in Variable Expenses: Variable expenses remain constant at $8 per unit.

Original contribution margin: $240,000

Net Operating Income: Calculation:

Original net operating income: $60,000

Advantages of implementing the suggestions:

Increase in unit sales by 25%

Disadvantages of implementing the suggestions:

Reduction in selling price may result in lower profit margins

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