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4. Assume that the operating results for last year were as follows: Sales $360,000 Less: Variable expenses 144,000 Contribution margin 216,000 Less: Fixed expenses 198,000 Net operating income $ 18,000 a. Compute the degree of operating leverage at the current level of sales. b. The president expects sales to increase by 15% next year. By how much should net operating income increase? 5. Refer to the original data. Assume that the company sold 28,000 units last year. The sales manager is convinced that a 10% reduction in the selling price, combined with a $60,000 increase in advertising expenditures, would increase annual unit sales by 50%. Prepare two contribution format income statements: one showing the results of last year's operations, and one showing what the results of operations would be if these changes were made. Would you recommend that the company do as the sales manager suggests? 6. Refer to the original data. Assume again that the company sold 28,000 units last year. The president feels that it would be unwise to change the selling price. Instead, she wants to increase the sales commission by $2 per unit. She thinks that this move, combined with some increase in advertising, would double annual unit sales. By how much could advertising be increased with profits remaining unchanged? Do not prepare an income statement; use the incremental analysis approach.

4. Assume that the operating results for last year were as follows: Sales $360,000 Less: Variable expenses 144,000 Contribution margin 216,000 Less: Fixed expenses 198,000 Net operating income $ 18,000 a. Compute the degree of operating leverage at the current level of sales. b. The president expects sales to increase by 15% next year. By how much should net operating income increase? 5. Refer to the original data. Assume that the company sold 28,000 units last year. The sales manager is convinced that a 10% reduction in the selling price, combined with a $60,000 increase in advertising expenditures, would increase annual unit sales by 50%. Prepare two contribution format income statements: one showing the results of last year's operations, and one showing what the results of operations would be if these changes were made. Would you recommend that the company do as the sales manager suggests? 6. Refer to the original data. Assume again that the company sold 28,000 units last year. The president feels that it would be unwise to change the selling price. Instead, she wants to increase the sales commission by $2 per unit. She thinks that this move, combined with some increase in advertising, would double annual unit sales. By how much could advertising be increased with profits remaining unchanged? Do not prepare an income statement; use the incremental analysis approach.

Principles of Accounting Volume 2
Principles of Accounting Volume 2
19th Edition
ISBN:9781947172609
Author:OpenStax
Publisher:OpenStax
Chapter3: Cost-volume-profit Analysis
Section: Chapter Questions
Problem 12EB: Manufacturing builds and sells switch harnesses for glove boxes. The sales price and variable cost...
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Answer 4, 5 and 6

4. Assume that the operating results for last year were as follows: Sales $360,000 Less: Variable expenses 144,000 Contribution margin 216,000 Less: Fixed expenses 198,000 Net operating income $ 18,000 a. Compute the degree operating leverage at the current level of sales. b. The president expects sales to increase by 15% next year. By how much should net operating income increase? 5. Refer to the original data. Assume that the company sold 28,000 units last year. The sales manager is convinced that a 10% reduction in the selling price, combined with a $60,000 increase in advertising expenditures, would increase annual unit sales by 50%. Prepare two contribution format income statements: one showing the results of last year's operations, and one showing what the results of operations would be if these changes were made. Would you recommend that the company do as the sales manager suggests? 6. Refer to the original data. Assume again that the company sold 28,000 units last year. The president feels that it would be unwise to change the selling price. Instead, she wants to increase the sales commission by $2 per unit. She thinks that this move, combined with some increase in advertising, would double annual unit sales. By how much could advertising be increased with profits remaining unchanged? Do not prepare an income statement; use the incremental analysis approach.
Transcribed Image Text:4. Assume that the operating results for last year were as follows: Sales $360,000 Less: Variable expenses 144,000 Contribution margin 216,000 Less: Fixed expenses 198,000 Net operating income $ 18,000 a. Compute the degree operating leverage at the current level of sales. b. The president expects sales to increase by 15% next year. By how much should net operating income increase? 5. Refer to the original data. Assume that the company sold 28,000 units last year. The sales manager is convinced that a 10% reduction in the selling price, combined with a $60,000 increase in advertising expenditures, would increase annual unit sales by 50%. Prepare two contribution format income statements: one showing the results of last year's operations, and one showing what the results of operations would be if these changes were made. Would you recommend that the company do as the sales manager suggests? 6. Refer to the original data. Assume again that the company sold 28,000 units last year. The president feels that it would be unwise to change the selling price. Instead, she wants to increase the sales commission by $2 per unit. She thinks that this move, combined with some increase in advertising, would double annual unit sales. By how much could advertising be increased with profits remaining unchanged? Do not prepare an income statement; use the incremental analysis approach.
Performing Basic CVP Analysis [LO1 – CC4; LO2 – CC6, 7, 10] CHECK FIGURE (2) Break-even: 22,000 units Stratford Company distributes a lightweight lawn chair that sells for $15 per unit. Variable expenses are 40% of sales, and fixed expenses total $198,000 annually. Required: Answer the following independent questions: 1. What is the product's CM per unit? 2. Use the CM per unit to determine the break-even point in units. 3. The company estimates that sales will increase by $45,000 during the coming year due to increascd demand. By how much should net operating income increase?
Transcribed Image Text:Performing Basic CVP Analysis [LO1 – CC4; LO2 – CC6, 7, 10] CHECK FIGURE (2) Break-even: 22,000 units Stratford Company distributes a lightweight lawn chair that sells for $15 per unit. Variable expenses are 40% of sales, and fixed expenses total $198,000 annually. Required: Answer the following independent questions: 1. What is the product's CM per unit? 2. Use the CM per unit to determine the break-even point in units. 3. The company estimates that sales will increase by $45,000 during the coming year due to increascd demand. By how much should net operating income increase?
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