Feather Friends, Inc., distributes a high-quality wooden birdhouse that sells for $80 per unit. Variable expenses are $40.00 per unit, fixed expenses total $200,000 per year. Its operating results for last year were as follows:
Sales $2,160,000
Variable expenses $1,080,000
Contribution margin $1,080,000
Fixed expenses $200,000
Net operating income $ 880,000
Answer:
$732,625
Explanation:
The contribution per unit is:
Contribution per unit = Selling price per unit - variable cost per unit - Sales commission per unit
Contribution per unit = $80 - $40 - $1.7 = $38.3 per unit
The increase in advertisement expense can be calculated under the new condition by the following formula:
New Sales ($) = (Fixed cost + Profit) * Sales Prices per unit / Contribution Per unit
By putting values we have:
$2,160,000 * 125% = (Fixed cost + $360,000)* $80 per unit / $38.3 per unit
$2,700,000 * $38.3 per unit / $80 per unit = Fixed Cost + $360,000
$1,292,625 - $360,000 = Fixed Cost
Fixed Cost = $932,625
This means that the maximum amount of increase in the advertisement expense would be $732,625 to earn a profit of $360,000
