Question

Northwood Company manufactures basketballs. The company has a ball that sells for $25. At present, the ball is manufactured in a small plant that relies heavily on direct labor workers. Thus, variable expenses are high, totaling $15.00 per ball, of which 60% is direct labor cost. Last year, the company sold 30,000 of these balls, with the following results: Sales (30,000 balls) $ 750,000 Variable expenses 450,000 Contribution margin 300,000 Fixed expenses 210,000 Net operating income $ 90,000

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, $90,000, as last year?

b. Assume the new plant is built and that next year the company manufactures and sells 30,000 balls (the same number as sold last year). Prepare a contribution format income statement and compute the degree of operating leverage.

Answer 1

420000 25 9 16 64% 26250 Balls Question 5 Variable Cost will Reduce by 40% (15*40%) Fixed cost will be double (210000*2) selling Price Variable Cost Contribution Margin CM Ratio contribution/Sales) (16/25 BEP In Units (Fixed Cost/CM Per unit) (420000/16 Question 6 Ball To Sell to Attain the 90,000 profit Number of Balls Contribution Margin Income Statement Sales Variable Expenses contribution Margin Fixed cost Net operating income Degree of Operating Leverage 31875 Balls 750000 270000 4800001 420000 60000 8.00 Times