The president of Lynbrook, Inc. recently asked you to evaluate one of the company's profitable product...

 

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The president of Lynbrook, Inc. recently asked you to evaluate one of the company's profitable product lines in response to some new competition that will be entering the market next year. Your accounting department gave you the following information for your analysis. Sales Variable expenses Contribution margin (CM) Fixed expenses Net operating income Required: Total Per unit $ 400,000 $ 20.00 $ 160,000 8.00 240,000 $12.00 180,000 60,000 Answer each question independently 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 increase by 3,750 units and $75,000, respectively. If the fixed expenses do not change, how much will net operating income increase? 4. a. What is the degree of operating leverage based on last year's sales? b. Assume the president expects this year's unit sales to increase by 20%. Using the degree of operation leverage from last year, what percentage increase in net operating income will the company realize this year? 5. The sales manager is convinced that a 10% reduction in the selling price, combined with a $30,000 increase in advertising would increase this year's unit sales by 25%. If the sales manager is right, what would this year's net operating income be if his ideas were implemented? Do you recommend implementing the sales manager's suggestions? Why? 6. The president does not want to change the selling price. Instead, she wants to increase the sales commission by $1 per unit. She thinks that this move, combined with some increase in advertising, would increase this year's unit sales by 25%. How much could the president increase this year's advertising expense and still earn the same $60,000 net operating income as last year? The president of Lynbrook, Inc. recently asked you to evaluate one of the company's profitable product lines in response to some new competition that will be entering the market next year. Your accounting department gave you the following information for your analysis. Sales Variable expenses Contribution margin (CM) Fixed expenses Net operating income Required: Total Per unit $ 400,000 $ 20.00 $ 160,000 8.00 240,000 $12.00 180,000 60,000 Answer each question independently 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 increase by 3,750 units and $75,000, respectively. If the fixed expenses do not change, how much will net operating income increase? 4. a. What is the degree of operating leverage based on last year's sales? b. Assume the president expects this year's unit sales to increase by 20%. Using the degree of operation leverage from last year, what percentage increase in net operating income will the company realize this year? 5. The sales manager is convinced that a 10% reduction in the selling price, combined with a $30,000 increase in advertising would increase this year's unit sales by 25%. If the sales manager is right, what would this year's net operating income be if his ideas were implemented? Do you recommend implementing the sales manager's suggestions? Why? 6. The president does not want to change the selling price. Instead, she wants to increase the sales commission by $1 per unit. She thinks that this move, combined with some increase in advertising, would increase this year's unit sales by 25%. How much could the president increase this year's advertising expense and still earn the same $60,000 net operating income as last year?