Answer 5-a to 6 with solutions

Sales $2, 460,000 Less: Variable expenses 615,000 Contribution margin 1, 845,000 Less: Fixed expenses 922 ,500 Net operating income 922,500 a. Compute the degree of operating leverage at the current level of sales. (Round your answer to 1 decimal place.) Degree of operating leverage b. The president expects sales to increase by 60% next year. By how much should net operating income increase? Increase in operating income 5-a. Refer to the original data. Assume that the company sold 43,000 units last year. The sales manager is convinced that a 12% reduction in the selling price, combined with a $154,000 increase in advertising expenditures, would increase annual unit sales by 30%. 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. (Do not round intermediate calculations. Round "Per Unit" answers to 2 decimal places.) Last Year Proposed Total Per Unit Total Per Unit Sales 5-b. Would you recommend that the company do as the sales manager suggests? O Yes O No 6. Refer to the original data. Assume again that the company sold 43,000 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 $3 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. Increase in advertisement cost