Question

Last year, the company sold 32,000 of these balls, with the following results: $ Sales (32,000 balls) Variable expenses Contribution margin Fixed expenses Net operating income 800,000 480,000 320,000 211,000 109,000 $ Required: 1. Compute (a) last year's CM ratio and the break-even point in balls, and (b) the degree of operating leverage at last year's sales level. 2. Due to an increase in labor rates, the company estimates that next year's variable expenses will increase by $3.00 per ball. If this change takes place and the selling price per ball remains constant at $25.00, what will be next year's CM ratio and the break-even point in balls? 3. Refer to the data in (2) above. If the expected change in variable expenses takes place, how many balls will have to be sold next year to earn the same net operating income, $109,000, as last year? 4. Refer again to the data in (2) above. The president feels that the company must raise the selling price of its basketballs. If Northwood Company wants to maintain the same CM ratio as last year (as computed in requirement 1a), what selling price per ball must it charge next year to cover the increased labor costs? 5. Refer to the original data. The company is discussing the construction of a new, automated manufacturing plant. The new plant would slash variable expenses per ball by 40.00%, but it would cause fixed expenses per year to double. If the new plant is built, what would be the company's new CM ratio and new break-even point in balls? 6. Refer to the data in (5) above. a. If the new plant is built, how many balls will have to be sold next year to earn the same net operating income, $109,000, as last year? b. Assume the new plant is built and that next year the company manufactures and sells 32,000 balls (the same number as sold last year). Prepare a contribution format income statement and compute the degree of operating leverage.

Answer 1

32000 Balls Sales Variable Expenses contribution Margin Fixed cost Net operating income Per unit 800000 25 480000 320000 211000 109000 40% 21100 Balls 2.94 Times Question 1 CM Ratio ( contribution/Sales) (10/25) BEP In Units (Fixed Cost/CM Per unit) |(211000/10) Operating Leverage 320000/109000 Question 2 IF Variable cost increase by $3 New CM (25-18) CM Ratio (7/25) Break Even Point in Units 211000/7 Question 3 Ball To Sell to Attain the 109000 profit Number of Balls (211000+109000)/7 Question 4 Selling Price (18/(1-40%) 28.00% 30143 Balls 45714 Balls 30

422000 64.00% 26375 Balls Question 5 Variable Cost will Reduce by 40% (15*40%) Fixed cost will be double (211000*2) selling Price Variable Cost Contribution Margin CM Ratio ( contribution/Sales) BEP In Units (Fixed Cost/CM Per unit) Question 6 Ball To Sell to Attain the 109000 profit Number of Balls Contribution Margin Income Statement Sales 800000 Variable Expenses 288000 contribution Margin 512000 Fixed cost 422000 Net operating income 90000 Degree of Operating Leverage = 512000/90000 33188 Balls 5.69 Times