Question

Problem 6-20 CVP Applications: Break-Even Analysis; Cost Structure; Target Sales (L06-1, LO6-3, L06- 4, L06-5, LO6-6, LO6-8) 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 32,000 of these balls, with the following results: sk inces Sales (32,000 balls) Variable expenses Contribution margin Fixed expenses Net operating income 800,000 480,000 320,000 211,000 109,000 $ 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, $109,000, as last year? 1 Daar aan te the sta in hun Tha praeinant foole that the Amernice the colline Ranfite haelathalle

Answer 1

1-a)	CM Ratio	40%	(Note 1)
	Break Even Points (In Balls)	21,100	(Note 2)
	Note 1:
	CM Ratio = (Contribution margin per unit / selling price *100)
	Selling Price	25
	Less: Variable cost per unit	15
	Contribution margin per unit	10
	CM Ratio	40%
	Note 2:
	Break Even Units = Total fixed cost / Contribution margin per unit
	Total Fixed cost	211,000
	Contribution margin per unit	10
	Break Even Points (In Balls)	21,100
1-b)	Degree of Operating leverage	2.94	(Note 3)
	Note 3:
	Degree of Operating leverage =Total Contribution margin / Net Operating income
	Total Contribution margin	320,000
	Net Operating Income	109,000
	Degree of Operating leverage	2.94
2)	CM Ratio	28%	(Note 4)
	Break Even Points (In Balls)	30,143	(Note 5)
	Note 4:
	Selling Price	25
	Less: Revised Variable cost per unit	18
	Contribution margin per unit	7
	CM Ratio	28%
	Note 5:
	Total Fixed cost	211,000
	Contribution margin per unit	7
	Break Even Points (In Balls)	30,143
3)	No. of Balls to be sold next year to earn same level of income	45,714	(Note 6)
	Note 6:
	Target Units = (Fixed cost + Target Income)/Contribution per unit
	Fixed cost + target Income	320,000
	Contribution margin per unit	7
	Target UNITS	45,714