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 relles heavilly on direct labor workers. Thus, varlable expenses are high, totallng $15.00 per ball, of which 60% Is dlrect labor cost Last year, the company sold 36,000 of these balls, with the following results: $1,050,000 630,000 420,000 234,000 Sales (36,000 balls) Variable expenses Contribution margin Fixed expenses $ 186,000 Net operating income 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 vear'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, $186,000, 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 orlginal 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 bult, 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 bult, how many balls will have to be sold next year to earn the same net operating income $186,000, 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 as sold last year). Prepare a contribut on format income statement and compute thee degree of operating leverage. Complete this question by entering your answers in the tabs helnw

Answer 1

1.a. CM Ratio=Contribution Margin*100/Sales

                       =($ 25-$15)*100/$25=40%

     Break-Even Point= Fixed Cost/Contribution Margin per unit

                                   =$ 234000/$25-$15=23400 units

b. Degree of Operating Leverage=Contribution Margin/Net Operating Income

                                             =$ 420,000/$ 186,000=2.26

2. a. Next year CM Ratio=Contribution Margin*100/Sales

                             =($ 25-$18)*100/$ 25=28%

        Next Year Break-Even Point= Fixed Cost/Contribution Margin per unit

                                 =$ 234000/$ 7=33429 units

3. Required units to be sold=60,000 units

    Target Profit=$1860,000

    New Contribution per unit=$ 7/unit

    Target Contribution=$ 420,000

Therefore Number of units to be sold are=$ 420000/$7 per unit=60,000 units

4. New Selling Price=$ 30 per unit

   Required CM Ratio=40%

    Variable Cost=$ 18/unit

    Therefore CM ratio=(Selling Price per unit-Variable Cost per unit)*100/Selling Price per unit

      Let Selling Price per unit= X

Therefore 40=(100X-1800)/X

      =40X=100X-1800 i.e 60X=1800

     X=30 Per unit