Question

Check my work Last year, the company sold 30,000 of these balls, with the following results: Sales 30,000 balls) Variable expenses Contribution margin Fixed expenses Net operating income Required: 1. Compute (a) last year's CM ratio and the break-even point in balls, and to 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, $90,000, 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 ta), 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 at the new plant is but how many balls will have to be sold next year to earn the same net operating income $90.000, as last year? b. Assume the new plant is b and that next year the company manufactures and sells 30.000 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 Req Req2 Req3 Reg Re Re 68 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

Answer 1

in case there are more than 4 questions, first 4 would be answered, request you to kindly repost the balance questions separately.

Question data:

Sales	$750,000.00
Variable expense	$450,000.00
Contribution margin	$300,000.00
Fixed expenses	$210,000.00
Net operating income	$90,000.00

Sales = 30,000 units @ $25

Variable expenses per unit = 450,000/30,000= $15

Contribution per unit = 300,000/30,000 = $10

Answer 1:

a. Contribution Margin ratio = contribution margin/sales = 300,000/750,000 = 40%.

break even point = Total Fixed cost/contribution per unit = 210,000 / 10 = 21,000 units.

b. Degree of Operating leverage = contribution / Net operating Income = 300,000/90,000 = 3.33

Answer 2:

SP = $25, Contribution per unit = 25-18 (15+3) = $7.

Contribution margin ratio = 7/25 = 28%.

Break even point =210,000/7 = 30,000 units.

Answer 3:

Target profit = $90,000

Sales = (Target Profit + Fixed Cost)/Contribution per unit = (90,000+210,000)/ 7 = 42,858 units.

Answer 4:

The contribution margin ratio was 40%, i.e variable cost ration = 60%, variable cost in the next year would be $18, to maintain same contribution margin selling price should be 18/60% = $30.

Thus the company has to increase selling price to $30 to maintain same CM ratio.