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 36,000 of these balls, with the following results: Sales (36,000 balls) Variable expenses Contribution margin Fixed expenses Net operating income $ 900,000 540,000 360,000 263,000 $ 97,000 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, $97,000, 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, $97,000, as last year? b. Assume the new plant is built and that next year the company manufactures and sells 36,000 balls (the same number ac nid lact von Pranare artistinin

Answer 1

Please hit LIKE button if this helped. For any further explanation, please put your query in comment, willę Part 1 b Sales Less: Variable Expense Contribution Margin Contribution Margin Ratio Total per unit $ 900,000 $ 25.00 $ (540,000) $ (15.00) $ 360,000 $ 10.00 40.00% 40.00% a-b=c c/a=d Fixed Expense e $ 263,000 e/c 26,300 Units sales to BEP $263,000/$10 Degree of Operating Leavarage: f Contribution margin Operating Income $ $ 360,000 97,000 C-e=g Degree of Operating Leavarage: f/g 3.71 Part 2 b Sales Less: Variable Expense Contribution Margin Contribution Margin Ratio per unit $ 25.00 $ (18.00) $ 7.00 28.00% a-bac c/a=d Fixed Expense e e $ 263,000 e/c 37,571 Units sales to BEP $263,000/$7 Part 3 a b Sales Less: Variable Expense Contribution Margin Contribution Margin Ratio per unit $ 25.00 $ (18.00) $ 7.00 28.00% a-b=c c/ard Fixed Expense e $ 263,000 e/c 51,429 Units sales to earn Nl of $161,000 ($263,000+$97,000)/$7

Part 4 Contribution Margin Ratio Variable Expense Selling Price ($18/(1-0.40) $ $ 40.00% 18 30 Part 5 Total a b Sales Less: Variable Expense (40% Reduction) Contribution Margin Contribution Margin Ratio per unit $ 25.00 $ (9.00) $ 16.00 64.00% a-b=C c/ard Fixed Expense ($263,000*2) $ 526,000 e/c 32,875 Units sales to BEP $526,000/$16 Part 6a a b Sales Less: Variable Expense Contribution Margin Contribution Margin Ratio per unit $ 25.00 $ (9.00) $ 16.00 64.00% a-b=C c/a-d Fixed Expense e $ 526,000 e/c 38,938 Units sales to BEP ($526,000+$97,000)/$16 Part 6b a Sales (36,000*$25) Less: Variable Expense (58,000*$9) Contribution Margin Fixed Expense Net Loss b a-b=C Total $ 900,000 $ 324,000 $ 1,224,000 $ (526,000) $ 698,000 e Degree of Operating Leavarage f Contribution margin Operating Income $ 1,224,000 $ 1,750,000 C-e=g Degree of Operating Leavarage f/g 0.70