Solution
Northwood Company
CM ratio –
CM ratio = (contribution margin/sales price) x 100
Contribution margin = sales price – variable cost
Sales price = $25
Variable cost = $15
Contribution margin = $10
CM ratio = (10/25) x100 = 40%
Break-even point in balls –
Break-even point in units = fixed cost/contribution margin
Fixed cost = $373,000
Contribution margin = $10
Break-even point in balls = $373,000/$10 = 37,300 balls
Degree of Operating leverage = contribution/net income
Net income = $187,000
Contribution = $560,000
Degree of operating leverage = $560,000/187,000 = 2.99
New variable cost = $15 + $3 = $18
Revised contribution margin = $25- $18 = $7
CM ratio = (7/25) x 100 = 28%
Break-even point in balls –
= fixed cost/contribution margin
Fixed cost = $373,000
Contribution margin = $7
Break-even point in balls = 373,000/7 = 53,285 balls
So, the company needs to sell 53,285 balls to break-even when the variable cost increases by $3 per ball.
Desired units = (Fixed cost + target profit)/contribution margin
Fixed cost = $373,000
Target profit = $187,000
Contribution margin = $7 per ball
Desired units = (373,000 + 187,000)/7 = 80,000 balls
The company has to sell 80,000 balls to earn the same net profit of $187,000, as last year.
Given,
CM ratio = 40%
Variable cost - $18
CM ratio = (sales price – variable cost)/sales price x 100
40%SP = (SP - $18)/SP
0.4SP = SP – 18
0.6 SP = 18
SP = 18/0.6 = $30
Hence, the required selling price per ball to maintain the CM ratio of 40% with an increase in variable cost per unit of $3 is $30.
Variable cost per ball = $9
Fixed expenses doubled, = 2 x $373,000 = $746,000
New CM ratio,
Contribution margin = $25 - $9 = $16
CM ratio = (16/25) x 100 =64%
Break-even point in balls = fixed cost/contribution margin
Fixed cost = $746,000
Contribution margin = $16
Break-even point in balls = $746,000/$16 =46,625
6a. Desired units to earn the profit of $187,000 with revised variable cost and fixed cost:
Desired units = (fixed cost + target profit)/contribution margin
Fixed cost = $746,000
Target profit = $187,000
Contribution margin = $16
Desired number of balls = (746,000 + 187,000)/16
=58,312 balls
6b.
Contribution Margin Format Income Statement |
||
Per Unit |
Amount |
|
Sales |
$25 |
$1,400,000 |
Variable Expenses |
$9 |
$504,000 |
Contribution Margin |
$16 |
$896,000 |
Fixed Expenses |
$746,000 |
|
Operating Income |
$150,000 |
Degree of operating leverage = contribution/net income
Contribution = $896,000
Net income = $150,000
Degree of operating leverage = 896,000/150,000 = 5.97
Northwood Company manufactures basketballs. The company has a ball that sells for $25. At present, the...
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 56,000 of these balls, with the following results: Sales (56,000 balls) Variable expenses Contribution margin Fixed expenses Net operating income $ 1,400,000 840,000 560,000 373,000 $ 187,000 Required: 1....
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 56,000 of these balls, with the following results: Sales (56,000 balls) $ 1,400,000 Variable expenses 840,000 Contribution margin 560,000 Fixed expenses 373,000 Net operating income $ 187,000 5. Refer...
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 40,000 of these balls, with the following results: Sales (40,000 balls) $ 1,000,000 Variable expenses 600,000 Contribution margin 400,000 Fixed expenses 265,000 Net operating income $ 135,000 Required: 1....
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 52,000 of these balls, with the following results: Sales (52,000 balls) Variable expenses Contribution margin Fixed expenses Net operating income $ 1,300,000 780,000 520,000 321,000 $ 199,000 Required: 1....
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 34,000 of these balls, with the following results: $ Sales (34,000 balls) Variable expenses Contribution margin Fixed expenses Net operating income 850,000 510,000 340,000 212,000 128,000 $ Required: 1....
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) Variable expenses Contribution margin Fixed expenses Net operating income 750,000 450.000 300,000 210,000 90,000 Required: 1. Compute...
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 42,000 of these balls, with the following results: Sales (42,000 balls) $ 1,050,000 Variable expenses 630,000 Contribution margin 420,000 Fixed expenses 266,000 Net operating income $ 154,000 Required: 1....
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 Required: 1....
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 62,000 of these balls, with the following results: Sales (62,000 balls) $ 1,550,000 Variable expenses 930,000 Contribution margin 620,000 Fixed expenses 426,000 Net operating income $ 194,000 Required: 1....
Saved Help 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 56,000 of these balls, with the following results: Sales (56,000 balls) Variable expenses Contribution margin Fixed expenses Net operating income $ 1,400,000 840,000 560,000 373,000 $ 187,000...