Question

Do just 5, 6A and 6B!!!!!

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 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 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: Reg 2 Req3 Req4 Req6A Reg 68 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 buit, what would be the company's new CM ratio and new break-even point in balls? (Round "CM Ratio" to 2 decimal places and "Unit sales to break even to the nearest whole unit.) Show in CMR Unt sales to break even balls < Reg4 Req6A > Complete this question by entering your answers in the tabs below. Reg Reg2 Res 3 Req Res RGA Res 66 If the new plant is buit, how many bels will have to be sold next year to earn the same net operating income, $97,000, as last year?(round your answer to the nearest whole unit.) Number of balls Reqs Raq GB Complete this question by entering your answers in the tabs below. Reg 1 Req 2 Reg 3 Reg 4 Reqs Req 6A Reg 68 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 contribution format income statement and compute the degree of operating leverage. (Round "Degree of operating leverage" to 2 decimal places.) Northwood Company Contribution Income Statement 0 S 0 Degree of operating leverage

Answer 1

Soltuion 5:
Sales Price	25
Less: New Variable cost per unit [$15*(1-0.40)]	9
New Contribution Margin per unit	16
Contribution Margin ratio	64%
New Fixed costs (Existing fixed cost*200%)	526000
/New Contribution Margin per unit	16
Unit sales to Break even	32875
Solution 6a:
New Fixed costs	526000
Add: Target Profit	97000
Total Amount to be earned	623000
/New Contribution Margin per unit	16
Number of balls to earn target income	38938
Solution 6b:
Northwood company
Contribution margin income statement
Particulars	Amount
Sales (36000*$25)	900000
Variable cost (36000*$9)	324000
Contribution margin	576000
Fixed expenses	526000
Net Operating income	50000
Degree of operating leverage (Contribution / Net Operating income)	11.52