Question

Check my work 3 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. 35 points Last year, the company sold 46,000 of these balls, with the following results: eBook Sales (46,00 balls) Variable expenses Contribution margin Fixed expenses Net operating income $ 1,150,000 699, eee 460, 880 318, eee $ 142, eee Print References Requlred: 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. $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 basketballs. If Northwood Company wants to maintain the same CM ratio as last year (as computed in requirement la), 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, $142,000, as last year? b. Assume the new plant is built and that next year the company manufactures and sells 46.000 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. Reg 1 Reg 2 Reg 3 Reg 4 Reg 5 Reg 6A Reg 6B Mς

Answer 1

Solution 1-a:
Sales Price	25
Less: Variable cost per unit	15
Contribution Margin per unit	10
Contribution Margin ratio	40%
Fixed costs	318000
/Contribution Margin per unit	10
Unit sales to Break even	31800
Solution 1-b:
Total Contribution margin	460000
/ Net operating income	142000
Degree of operating leverage	3.24
Solution 2:
Sales Price	25
Less: New Variable cost per unit (15+3)	18
Contribution Margin per unit	7
Contribution Margin ratio	28%
Fixed costs	318000
/Contribution Margin per unit	7
Unit sales to Break even	45429
Solution 3:
Fixed costs	318000
Add: Taget Profit	142000
Total Amount to be earned	460000
/Contribution Margin per unit	7
Number of balls to earn target income	65714
Solution 4:
Required Contribution margin ratio	40%
Therefore, Required Variable Cost ratio	60%
New Variable cost per unit (as computed in solution 2)	18
New Selling Price (Variable cost per unit/ratio)	30
Soltuion 5:
Sales Price	25
Less: New Variable cost per unit [$15*(1-0.40)]	9
New Contribution Margin per unit	16
Contribution Margin ratio	64%
New Fixed costs (Existing fixed cost*200%)	636000
/New Contribution Margin per unit	16
Unit sales to Break even	39750
Solution 6a:
New Fixed costs	636000
Add: Target Profit	142000
Total Amount to be earned	778000
/New Contribution Margin per unit	16
Number of balls to earn target income	48625
Solution 6b:
Northwood company
Contribution margin income statement
Particulars	Amount
Sales (46000*$25)	1150000
Variable cost (46000*$9)	414000
Contribution margin	736000
Fixed expenses	636000
Net Operating income	100000
Degree of operating leverage (Contribution / Net Operating income)	7.36