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 64,000 of these balls, with the following results: Sales (64,e00 balls) Variable expenses Contribution margin Fixed expenses Net operating income 1,600,e00 960,000 640,000 427,006e $ 213,000 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 $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, $213,000, 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, $213,000, as last year? b. Assume the new plant is built and that next year the company manufactures and sells 64,000 ball the same number as sold last year). Prepare a contribution format income statement and compute t degree of operating leverage

Answer 1

1 Contribution income statement Particulars Sales Variable expense Contribution margin Fixed cost Net operating income Total $ 16,00,000.00 $ 25.00 $ -9,60,000.00 $ 15.00 $ 6,40,000.00 $ 10.00 $ -4,27,000.00 Per unit CM ratio 100% 60% 40% Fixed costs Contribution margin per unit Break-even point in units 2,13,000.00 $ 4,27,000.00 42,700.00 10.00640000/64000 Contribution margin Operating income Degree of operating leverage $ 6,40,000.00 $ 2,13,000.00 3.00 2 Particulars Total $ 16,00,000.00 $ 25.00 $-11,52,000.00 $ 18.00 $ 4,48,000.00 $ 7.00 $ -4,27,000.00 Per unit CM ratio Sales Variable expense Contribution margin Fixed cost Net operating income 100% 72% 28% 21,000.00 Fixed costs Contribution margin per unit Break-even point in units $ 4,27,000.00 18.00 $ 23,722.22 $ 2,13,000.00 $ 4,27,000.00 7.00 $ 91,428.57 3 Profit Fixed cost Unit contribution margin Quanti 41 If Northwood wants to maintain a contribution margin of 40% as last year. It will have to charge a price of 30, which is calculated by dividing the new variable cost by last year's variable expense ratio