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: 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.
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:
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.
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