Answer:
(a) This year's net operating income would be $1,153,000.
(b) Net operating income will decrease by $107,000 over last year.
Explanation:
Note: This question is not complete, the complete question is therefore provided before answering the question as follows:
Feather Friends, Inc., distributes a high-quality wooden birdhouse that sells for $120 per unit. Variable expenses are $60.00 per unit, and fixed expenses total $180,000 per year. Its operating results for last year were as follows:
<u>Particulars Amount ($) </u>
Sales 2,880,000
Variable expenses <u> (1,440,000) </u>
Contribution margin 1,440,000
Fixed expenses <u> (180,000) </u>
Net operating income <u> 1,260,000 </u>
The sales manager is convinced that a 11% reduction in the selling price, combined with a $71,000 increase in advertising, would increase this year's unit sales by 25%.
Required:
(a) If the sales manager is right, what would be this year's net operating income if his ideas are implemented? (Do not round intermediate calculations.)
(b) If the sales manager's ideas are implemented, how much will net operating income increase or decrease over last year
Explanation to the answer is now given as follows:
(a) If the sales manager is right, what would be this year's net operating income if his ideas are implemented? (Do not round intermediate calculations.)
This year’s selling price per unit = Last year’s selling price per unit * (100% - Percentage of reduction) = $120 * (100% - 11%) = $120 * 89% = $106.80
Last year’s unit sales = Last year’s sales / Last year’s selling price = $2,880,000 / $120 = 24,000 units
This year’s unit sales = Last year’s unit sales * (1 + Percentage increase) = 24,000 + (1 + 25%) = 30,000 units
This year’s sales = This year’s unit sales * This year’s selling price per unit = 30,000 * $106.80 = $3,204,000
This year’s variable expenses = This year’s unit sales * Variable expenses per unit = 30,000 * $60.00 = 1,800,000
Its operating results for this year will be as follows:
<u>Particulars Amount ($) </u>
Sales 3,204,000
Variable expenses <u> (1,800,000) </u>
Contribution margin 1,404,000
Increase in selling expenses (71,000)
Fixed expenses <u> (180,000) </u>
Net operating income <u> 1,153,000 </u>
Therefore, this year's net operating income would be $1,153,000.
(b) If the sales manager's ideas are implemented, how much will net operating income increase or decrease over last year
Decrease in net operating income = Last year's net operating income - This year's net operating income = $1,260,000 - $1,153,000 = $107,000
Therefore, net operating income will decrease by $107,000 over last year.
