Question

Problem 5-20 CVP Applications: Break-Even Analysis; Cost Structure: Target Sales (LO5-1, LO5-3, L05-4, LO5-5, LO5-6, LO5-8] 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 direct labor cost Last year, the company sold 42,000 of these balls, with the following results Sales (42,000 balls) Variable expenses Contribution margin Fixed expenses Met operating income $1,050,000 630,000 120,000 266,000 $ 154,000 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 $2500, 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, $154,000, 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, $154.000.as last year? b. Assume the new plant is built and that next year the company manufactures and sells 42.000 balls the same number as sold last year). Prepare a contribution format income statement and computer the degree of operating leverage Complete this question by entering your answers in the tabs below. Real Reg 2 Reg 3 Reg 4 Reg 5 Heg 64 Req 6B Prey 1 of 3 Next >

All help is appreciated. Thanks for your time!

Answer 1

1-a) CM per unit= Sales per unit-Variable cost per unit

= $25-15= $10

CM ratio= Contribution margin*100/ Sales

= $10*100/25= 40%

Break even point in balls= Fixed cost/CM per unit

= $266000/10= 26600 balls

b) Degree of operating leverage= Contribution margin/ Net operating income

= $420000/154000= 2.73

2) New variable costs= $15+3= $18

New contribution per unit= Sales price-Variable costs

= $25-18= $7

CM ratio=New Contribution margin*100/ Sales

= $7*100/25= 28%

Break even point in balls= Fixed cost/CM per unit

= $266000/7= 38000 balls

3) Sales required to earn a net operating income of $154000= (Fixed expenses+Net operating income)/New contribution per unit

= ($266000+154000)/7= 60000 balls

4) Sales price per unit= Variable cost per unit+Contribution margin per unit

Let sales price per unit= X

X= $18+0.4X

0.6X= $18

X= $30

Selling price= X= $30

5) New variable cost per unit= 15*60%= $9

New contribution margin per unit= $25-9= $16

New fixed costs= $266000*2= $532000

CM ratio= Contribution margin*100/ Sales

= $16*100/25= 64%

Break even point in balls= Fixed cost/CM per unit

= $532000/16= 33250 balls

6-a) Sales required to earn a net operating income of $154000= (New Fixed expenses+Net operating income)/New CM per unit

= ($532000+154000)/16= 42875 balls

b)

Sales (42000*$25)	$1050000
Variable expenses (42000*$9)	-378000
Contribution margin	672000
Fixed expenses	532000
Net operating income	$140000

Degree of operating leverage= Contribution margin/ Net operating income

= $672000/140000= 4.8