PROBLEM 6-1A
Basic CVP Analysis
(LO1, LO2, LO3, LO4, LO6, LO8)

CHECK FIGURE
(2) Breakeven $192,857

Feather Friends, Inc., makes a high-quality wooden birdhouse that sells for $15.00 per unit. Variable costs are $4.50 per unit, and fixed costs total $135,000 per year.

Required:

Answer the following independent questions: 1. What is the product’s CM ratio? 2. Use the CM ratio to determine the break-even point in sales dollars. 3. Due to an increase in demand, the company estimates that sales will increase by $56,250 during the next year. By how much should net operating income (or net operating loss) change, assuming that fixed costs do not change? 4. Assume that the operating results for last year were:

| |Sales |$300,000 |
| |Less variable expenses | 90,000 |
| |Contribution margin |210,000 |
| |Less fixed expenses | 135,000 |
| |Net operating income |$ 75,000 |

a. Compute the degree of operating leverage at the current level of sales. b. The president expects sales to increase by 25% next year. By what percentage should net operating income increase? 5. Refer to the original data. Assume that the company sold 16,500 units last year. The sales manager is convinced that a 5% reduction in the selling price, combined with a $22,500 increase in advertising, would cause annual sales in units to increase by one-third. Prepare two contribution income statements, one showing the results of last year’s operations and one showing the results of operations if these changes are made. Would you recommend that the company do as the sales manager suggests? 6. Refer to the original data.