Question

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%. 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.)

Answer 1

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:

Particulars                           Amount ($)  

Sales                                   2,880,000

Variable expenses            (1,440,000)

Contribution margin           1,440,000

Fixed expenses                   (180,000)

Net operating income      1,260,000

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:

Particulars                                          Amount ($)                            

Sales                                                    3,204,000

Variable expenses                             (1,800,000)

Contribution margin                             1,404,000

Increase in selling expenses                  (71,000)

Fixed expenses                                    (180,000)  

Net operating income                         1,153,000  

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.