Question

answer tbe required 1-6

Check my work 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 $1500 per ball, of which 60% is direct labor cost. Last year, the company sold 37,000 of these balls, with the following results 1,100,000 660,000 440,000 238,000 $ 202,000 Sales (37,000 ba11s) on margin Fixed e 1. Compute (a) last years 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 $25.00, 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, $202,000, 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 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, $202,000, as last the new plant is built and that next year the company manufactures and sells 37,000 balls (the same number as sold last < Prev 3 of 7 Next>

Answer 1

Important assumption- from the amounts given for last year, it seems that the number of units sold in last year is 44000 units instead of the 37000 units, we assume that it's a priniting mistake. I have done all calculations below assuming it as a 44000 units 1) contribution margin per unit = total contribution / number of units sold = 440000/44000-$ 10 per unit a) contribution margin rati: contribution margin per unit / sales price x 100 : 10/25x100-40% break even units fixed cost/ contribution margin per unit 238000/10 23800 units b) operating leverage = contribution margin / net operating income = 440000 / 202000 = 2.1782 or 217.82% 2) new variable cost per unit 15+3 18 contribution margin per unit25-18- 7 per unit CM ratio : 7/25-28% break even units fixed cost/ CM per unit 238000/7 34000 units 3) desired contribution margin fixed cost+ desired profit 238000+ 202000 440000 required sales units desired contribution margin/ contribution per unit 440000/7 62857 units 4) sales price contribution per unit / desired CM ratio : 7 / 40%-$ 17.5 per unit