Question

Problem 3-20 Various CVP Questions: Break-Even Point: Cost Structure: Target Sales [LO 3-1, LO 3-3, LO 3-4. LO 3-5. LO 3-6. LO 3-8] Northwood Company manufactures basketballs. The company has a ball that sells for $49. At present, the ball is manufactured in a small plant that relies heavily on direct labor workers. Thus, variable expenses are high, totaling $34.30 per ball, of which 70% is direct labor cost. Last year, the company sold 58,000 of these balls with the following results: Sales (58,000 balls) Variable expenses Contribution margin Fixed expenses Net operating income $2,842.000 1,989,400 852,600 705.600 $ 147,000 Required: 1-a. Compute last year's CM ratio and the break-even point in balls. (Do not round intermediate calculations.) CM Ratio Unit sales to break balls even 1-5. Compute the the degree of operating leverage at last year's sales level. (Round your answer to 2 decimal places.) Degree of operating leverage 2. Due to an increase in labor rates, the company estimates that next year's variable expenses will increase by $4.90 per ball. If this change takes place and the selling price per ball remains constant at $49.00, what will be next year's CM ratio and the break-even point in balls? (Do not round intermediate calculations.) CM Ratio Unit sales to break even 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, $147,000, as last year? (Do not round intermediate calculations. Round your answer to the nearest whole unit.) Number of balls 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 18), what selling price per ball must it charge next year to cover the increased labor costs? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Selling price 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 30%, but it would cause fixed expenses per year to increase by 66%. If the new plant is built, what would be the company's new CM ratio and new break-even point in bals? (Do not round intermediate calculations. Round "Unit sales to break even" to the nearest whole unit.) CM Ratio Unit sales to break even

Answer 1

Selling price of ball = $2842000/58000 balls = $49

1-a)

Contribution margin ratio

= Contribution / sales * 100

= $852600/$2842000*100

= 30%

Break even = fixed cost / contribution ratio

= $705600/30%

= $2352000

Break even in balls = $2352000/$49 = 48000 units

1-b)

Degree of Operating leverage = contribution/ operating income

= $852600/$147000

= 5.8

2 -

New variable cost = $34.3 + $4.90 = $39.20

contribution per unit = $49 - $39.20 = $9.80

New contribution ratio = $9.80/$49 = 20%

New break even = $705600/$9.80 = 72000 units

3. Required Operating profit = $147000

Fixed cost = $705600

Required contribution = $852600

Units to be sold = $852600/$9.80 = 87000 units

4. Last year CM ratio = 30%

For this contribution ratio variable cost should be 70%

New variable cost is $39.20

So new selling price = $39.20/70% = $56

Rise in selling price = $56 - $49 = $7

5. New variable cost = $34.3 - 30% = $24.01

New fixed cost = $705600 + 86% = $1312416

New contribution = $49 - $24.01 = $24.99

New contribution ratio = $24.99/$49 = 51%

New break even units = $1312416/$24.99 = 52518 units

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