Question

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:
Sales $ 3,000,000

Variable expenses 1,500,000

Contribution margin 1,500, 000

Fixed expenses 180, 000 1,320,000

Net operating income 1,320,000

Required:

1. What is the product's CM ratio?

2. Use the CM ratio to determine the break-even point in dollar sales.

3. If this year's sales increase by $51,000 and fixed expenses do not change, how much will net operating income increase?

Answer 1

Answer:

1. 0.5

2. $360,000

3. $25,500

Explanation:

The BEP which is the break even point is the point where the company's sales or revenue generated is equal to the cost incurred. As such, the BEP is the number of units that must be sold for the company to make neither a profit nor a loss.

Both sales and variable cost are dependent on the number of units sold.

The sales less the variable cost gives the contribution margin. The contribution margin less the fixed cost gives the net operating income.

CM Ratio

= 1500000/3000000

= 0.5

Break even point in $ = Fixed cost/ CM ratio

= $180,000/0.5

= $360,000

If the sales increase, the variable cost will also increase as both are dependent on the level of activity.

If sales increases by $51,000, number of units sold

= $51,000/$120

= 425

Increase in variable expense

= 425 * $60

= $25,500

Increase in net operating income

= $51,000 - $25,500

= $25,500