Question

$223.500 000 (1.050 units), and (1.050 SC S2.00005 als dat d an Prepare a beid 2 C he l s dollars for the othed on the actual Clothermal point s for the month based on the actual de C idering the fact that the commenceded is 500.000 sales budget for the demiska ows on your come statements above. Pre for the pri c e why be the operating results and the break-even point Structures 525. At PROBLEM - Beste Cost-Volume-Profit Analysis, Break-Eren Point: Cost Struct Sales LOL LOL LOLLOS LOS LOS Northwood C a ctures basketballs. The company has a ball that sells for $25 the m a tured in a small plant that relies heavily on direct labour workers. The expenses are big. 515 per ball of which 605 is direct labour cost. Last year the company sold 30.000 of these balls, with the following results Sales... Variable expenses. Contribution margin... Fixed expenses. Operating income..... $750.000 450.000 300.000 210.000 $ 90.000 Required: Compute(a) the CM ratio and the break-even point in balls, and (b) the degree of operating lee age at last year's sales level. 2 Due to an increase in laborates, the company estimates that variable expenses will increase $3 per ball next year. If this change takes place and the selling price per ball remains constant $25 what will be the new CM ratio and break-even point in balls?

Question #4-21

Answer 1

Solution:

1.a.)

Selling price	$25	100%
Variable expenses	$15	60%($15/$25)
Contribution margin	$10	40%

Units sales to break even = Fixed expenses /Unit contribution margin

= $210,000/$10 =21,000 balls

1.b.)

The degree of operating leverage is:

Degree of operating leverage =Contribution margin / net operating income

= $300,000/$90,000 =3.33(rounded)

2.)

The new CM ratio will be:

Selling price	$25	100%
Variable expenses	$18	72%($18/$25)
Contribution margin	$7	28%

The new break - even point will be:

Unit sales to break even = Fixed expenses / Unit contribution margin

=$210,000/$7 = 30,000 balls

3.)

Units sales to attain target profit = Target profit + Fixed expenses /Unit contribution margin

=$90000 + $ 210,000 = 42857.14

=42,857 balls

4.

Let selling price per ball is Y.

(Y - 15 - 3)/Y =40%

Y - 18 = 0.40 ×Y

Y - 18 = 0.40Y

-18 = 0.40Y - Y

-18 = -0.60Y

Y = 18/0.60

=30

Selling price per ball must increase to $30

5.)

Contribution margin ratio = (Sales - Variable Expenses) Sales

=($750,000 - $270,000)/750,000

=0.64 or 64%

New contribution margin =25 - (15 ×0.6) =16

Break - even point in unit sales = Fixed expenses / Contribution margin per unit

=$420,000/ $16

=26,250 balls

6.)

a.) New plant is built :

( Fixed expenses +Net operating income ( same as last year) /Contribution margin per unit

=($420,000 + $90,000)/$16

=$510,000/$16 = 31,875 balls

b.)

Revenue	$750,000(25 × 30,000)
Less:	$ (270,000)
Contribution margin	$480,000
Fixed expenses	$420,000
Net operating income	$60,000
Degree of operating leverage = CM / Net operating income	$480,000/$60,000 =$8

c.)

No, I would not be in favour of constructing the new plant because although the contribution margin increased from 40% to 64%, the net operating income declined by 33% (from $90,000/$60,000). Fixed cost doubled and sales should sell (31,875 - 30,000 =1,875) more balls in order to maintain the $90,000 income they achieved last year.