Problem 5-23 Basics of CVP Analysis [LO5-1, LO5-3, LO5-4, LO5-5, LO5-8] Feather

Question

Problem 5-23 Basics of CVP Analysis [LO5-1, LO5-3, LO5-4, LO5-5, LO5-8] Feather Friends, Inc., distributes a high-quality wooden birdhouse that sells for $80 per unit. Variable expenses are $40.00 per unit, and fixed expenses total $160,000 per year. Required: Answer the following independent questions: 1. What is the product's CM ratio? 5 % 2. Use the CM ratio to determine the break-even point in dollar sales. 320,000 sales 3. Due to an increase in demand, the company estimates that sales will increase by $58,000 during the next year. By how much should net operating income increase (or net loss decrease) assuming that fixed expenses do not change? increases 29,000

Explanation / Answer

Req 1 Selling price pr unt: $ 80 per unit Variable cost perunit: $ 40 pe unit Contribution margin per unit: Selling price- Variable cost = $ 80 -40 = $40 per unit CM ratio: Contribution per unt/ Selling price : 40 /80 *100 =50% CM ratio: 50% Req 2: Fixed cost: $160,000 Break even in $: Fixed cost / CM ratio = $ 160,000 /50% = $320,000 Req3.: Increase in Sales: $ 58,000 CM ratio: 50% Additional contribution earned: $ 58,000 *50%: $ 29,000 Additional fixed cost: Nil Increase in Net income: $ 29000

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