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 52,000 of these balls, with the following results: Sales (52,800 balls) Variable expenses Contribution margin Fixed expenses Net operating income $ 1,300,000 780,000 520,000 321.000 $ 199,000 Required: 1. Compute (a) last year's CM ratio and the break-even point in balls, and (b) the degree of operating leverage of 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 $2500, 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, $199,000, 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 foxed 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, $199.000, as last year? b. Assume the new plant is built and that next year the company manufactures and sells 52,000 balls the same number as sold last year). Prepare a contribution format income statement and compute the degree of operating leverage Colete this must went wance in the ha

Answer 1

Ques 1
i.	Selling price	$                                        25.00	100.00%
	Variable expenses	$                                        15.00	60.00%
	Contribution margin	$                                        10.00	40.00%
II.
Breakeven in units = Fixed costs / contribution per unit
breakeven=321000/10=	32,100	units
iii
degree of operating levarage = contriution margin /net operating income
DOL=520000/199000=	2.61
b.
i.	Selling price	$                                        25.00	100.00%
	Variable expenses	$                                        18.00	72.00%
	Contribution margin	$                                           7.00	28.00%
Ques 2
Breakeven in units = Fixed costs / contribution per unit
breakeven=321000/7=	45,857	units
Ques 3
Target sales = target profit + fixed expenses / contribution margin p.u
target sales(units)=(212000+199000)/7
target sales=	74,286	balls
ques 4
The contribution margin ratio last year was 40%. If we let P equal the new selling price, then
P = $18 + 0.40 P
0.60 P = $18
P=$18/0.60
P=$30
ques 5
Selling price	$                                        25.00	100%
Variable expenses	$                                           9.00	36%
Contribution margin	$                                        16.00	64%
*$15 – ($15 × 40%) = $9
double fixed expenses = 2 * 321000=		642000
Breakeven in units = Fixed costs / contribution per unit
breakeven=642000/16=	40,125	units
ques 6
Target sales = target profit + fixed expenses / contribution margin p.u
target sales(units)=(199000+642000)/16
target sales=	52,563	balls
part b
Selling price	$                          1,300,000.00
Variable expenses	$                              468,000.00
Contribution margin	$                              832,000.00
fixed expenses	$                              642,000.00
net operating income	$                              190,000.00
degree of operating levarage = contribution margin /net operating income
DOL=832000/190000=		4.38