Question

question 2

Last year, the company sold 40,000 of these balls, with the following results: Sales (40,000 balls) Variable expenses Contribution margin Fixed expenses Net operating income $1,000,000 600,000 400,000 265,000 $ 135,000 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, $135,000, 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, $135,000, as last year? b. Assume the new plant is built and that next year the company manufactures and sells 40,000 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 Req 6B Compute (a) last year's CM ratio and the break-even point in balls, and (b) the degree of operating leverage at sales level. (Round Unit sales to break even to the nearest whole unit and other answers to 2 decimal places CM Ratio Unit sales to break even Degree of operating leverage

Answer 1

Dear student, we cannot able to post solution more than four sub-parts of the question as per our policy.

Part 1

	Contribution margin	$            400,000
Divided by:	Sales	$        1,000,000
	Contribution margin ratio	40.00%
	Contribution margin	$            400,000
Divided by:	number of balls	40,000
	Contribution margin per unit	$                      10
	Fixed expenses	$            265,000
Divided by:	Contribution margin per unit	$                      10
	Units sales to break-even points	26,500
	Contribution margin	$            400,000
Divided by:	Net operating income	$            135,000
	Degree of operating leverage	2.96

Part 2

	Contribution margin per unit	$                      10
Less:	Increase in variable cost	$                         3
	Revised contribution margin per unit	$                         7
	Contribution margin (7*40000)	$            280,000
Divided by:	Sales (25*40000)	$        1,000,000
	Contribution margin ratio	28.00%
	Fixed expenses	$            265,000
Divided by:	Revised contribution margin per unit	$                         7
	Units sales to break-even points	37,857

Part 3

	Desired net operating income	$            135,000
Add:	Fixed expenses	$            265,000
	Total contribution required	$            400,000
Divided by:	Revised contribution margin per unit	$                         7
	Units sales to break-even points	57,143

Part 4

	Old variable cost per unit (600000/40000)	$                      15
Add:	Increase in variable cost	$                         3
	Revised variable cost per unit	$                      18
Desired contribution margin ratio is 40%, then ratio to variable cost to sales would be 60% (100%-40%)
	Revised variable cost per unit	$                      18
Divided by:	Ratio to variable cost to sales	60%
	New Selling price	$                      30