Dog Dandy distributes a dog collar made of wooden beads that sells for $40 per unit. Variable expenses are $20 per unit, and fixed expenses total $120,000 per year. Its operating results for last year were as follows:

Required

Answer each of the following independent questions based on the original data.
1. What is the product's CM ratio?
2. Use the CM ratio to determine the break-even point in dollar sales.
3. Assume this year's unit sales and total sales decrease by $50,000. If the fixed expenses do not change, how much will operating income decrease?
4. What is the degree of operating leverage based on last year's sales?
5. Assume the this year's unit sales will decrease by 20% next year. Using the degree of operating leverage from last year, what percentage decrease in operating income will the company incur this year?
6. The sales manager is convinced that a 10% reduction in the selling price, combined with a $20,000 increase in advertising, would increase this year's unit sales by 40%. If the sales manager is right, what would be this year's operating income if his ideas are implemented? Do you recommend implementing the sales manager's suggestions? Why?

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Sales..... Variable expenses... Contribution margin... Fixed expenses... Operating income. $400,000 200,000 200,000 120,000 $ 80,000