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 46,000 of these balls with the following results Sales (46,000 balls) Variable expenses Contribution margin Piced expenses Wet operating income Required: 1. Computea last year's CM ratio and the break even point in balls, and the degree of cperating leverage at last year's sales level 2. Due to an increase in laborates 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 $25.00, what will be next year's CM ratio and the break-even point in balko 3. Refer to the data in (2) above 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. $142,000, 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 basketball Northwood Company wants to maintain the same CM ratio as last year las computed in requirement to what selling price perball must 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 4000K, but it would cause foed expenses per year to double. If the new plant is built what would be the company's new CM and new break even point in bals? 6. Refer to the data in above a. If the new plant is built how many balls will have to be sold next year to earn the same met operating income, $142.000, as last year? b. Assume the new plant is built and that next year the company manufactures and sels 45.000 balls the same number as sold last year, Prepare a contribution format income statement and compute the degree of operating leverage Complete this question by entering your answers in the tabs below 2 3 Reg The the conta plant would share w plant is but what would be the company's new Chat adne place and sales to break e c turing ryear to The new the < Prev 102

Answer 1

5. Contribution Margin per unit = $25 - ($15x60%) = $16 per unit
Fixed Costs = $318000x2 = $636000

CM Ratio = $16/25 = 64%

Break Even Point = Fixed Expenses / Contribution Margin per unit
= $636000 / 16 = 39750 units

6.
a. Sales units to earn $142000 = (Fixed Expenses+Target Income) / Contribution Margin per unit
= ($636000+142000) / 16 = 48625 units

b.

Sales Revenue	$    1,150,000	=46000*25
Variable Costs	$       414,000	=46000*9
Contribution Margin	$       736,000
Fixed Costs	$       636,000
Operating Income	$       100,000

Degree of Operating Leverage = Contribution Margin / Sales Revenue
= $736000 / 100000 = 7.36