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A Feather Friends, Inc., distributes a high-quality wooden birdhouse that sells for 20 per unit. Variable costs are 8 per unit, and fixed costs total 180,000 per year. Answer the following independent questions:
(e) Refer to the original data. Assume that the company sold 18,000 units last year. The sales manager is convinced that a 10 % reduction in the selling price, combined with a 30,000 increase in advertising, would cause annual sales in units to increase by one-third. Prepare two contribution format income statements, one showing the results of last year's operations and one showing the results of operations if these changes are made. Would you recommend that the company do as the sales manager suggests?

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abhaydwive123

Calculation of this year’s operating income

Calculation of this year's operating inc

Sales                              20000*1.25*(20*(1-0.1))          $450,000

Variable expenses        20000*8*1.25                         $200,000

Contribution margin                                                      $250,000

Fixed expenses             180000+30000                      $210,000          

Net operating income                                                    $40,000          

Thus, this year’s net operating income would be $40,000.

Working note

Calculation of units sold last year.

Units sold = Total sales revenue-Sale price per unit =$400,000 - $20 =20,000.

Operating income refers to the company's adjusted earnings after deducting all operating expenses and depreciation. Operating expenses or operating expenses are simply the costs incurred to keep a business running. Operating profit - also known as operating profit - is the result of subtracting a company's operating expenses from its gross profit.

Learn more about operating income at

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