Question

In: Accounting

Problem 6-20 CVP Applications: Break-Even Analysis; Cost Structure; Target Sales [LO6-1, LO6-3, LO6-4, LO6-5, LO6-6, LO6-8]...

Problem 6-20 CVP Applications: Break-Even Analysis; Cost Structure; Target Sales [LO6-1, LO6-3, LO6-4, LO6-5, 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 30,500 of these balls, with the following results:

Sales (30,500 balls) $ 775,000
Variable expenses 465,000
Contribution margin 310,000
Fixed expenses 212,000
Net operating income $ 98,000

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, $98,000, 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, $98,000, as last year?

b. Assume the new plant is built and that next year the company manufactures and sells 30,500 balls (the same number as sold last year). Prepare a contribution format income statement and compute the degree of operating leverage.

Solutions

Expert Solution

Req 1
CM Ratio 40.00%
Unit Sales to break even 21200
Degree of operating leverate 0.32
CM ratio = contribution /sales
310,000/775000
40.00%
BEP(units) = fixed cost/contribution margin per unit
212000/10
21200
Degree of operating leverage = contribution/net income
310000/98000
0.32
Req 2 CM Ratio 28.00%
Unit Sales to break even 30286
CM ratio = contribution /sales
7./25
28.00%
BEP(units) = fixed cost/contribution margin per unit
212000/7
30286
Req 3
Number of balls 44286
BEP(units) =( fixed cost+ target income)/contribution margin per unit
(212000+98000)/7
44286
Req 4 selling price 30.00
CM ratio = 40%
selling price per unit be x
variable cost per unit is 18
so selling price should be =
40%              = (x-18)/x
.40x                  = (x -18)
x                         =18/.6
x                         = 30.00
Req 5 Selling price per unit 25
New variable cost (15*60%) 9
Contribution per unit 16
fixed expense   = 212000*200%= 424000
contribution margin ratio 64.00%
unit sales to break-even 26500 balls
Req 6A number of balls 32625 balls
(424000+98000)/16
Req6B Contribution income statement
Sales (30500*25) 762500
Variable expenses (30500*9) 274500
Contribution margin 488000
Fixed expenses 424,000
Net operating income 64,000
Degree of operating leverage 7.63
(contribution margin/net income)

Related Solutions

Problem 6-20 CVP Applications: Break-Even Analysis; Cost Structure; Target Sales [LO6-1, LO6-3, LO6-4, LO6-5, LO6-6, LO6-8]...
Problem 6-20 CVP Applications: Break-Even Analysis; Cost Structure; Target Sales [LO6-1, LO6-3, LO6-4, LO6-5, 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 36,000 of these balls, with the following results: Sales (36,000 balls) $ 900,000...
Chapter 6 HOMEWORK Problem 6-20 CVP Applications: Break-Even Analysis; Cost Structure; Target Sales [LO6-1, LO6-3, LO6-4,...
Chapter 6 HOMEWORK Problem 6-20 CVP Applications: Break-Even Analysis; Cost Structure; Target Sales [LO6-1, LO6-3, LO6-4, LO6-5, 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 37,500 of these balls, with the following results: Sales (37,500...
Problem 6-22 CVP Applications; Contribution Margin Ratio; Break-Even Analysis; Cost Structure [LO6-1, LO6-3, LO6-4, LO6-5, LO6-6]...
Problem 6-22 CVP Applications; Contribution Margin Ratio; Break-Even Analysis; Cost Structure [LO6-1, LO6-3, LO6-4, LO6-5, LO6-6] Due to erratic sales of its sole product—a high-capacity battery for laptop computers—PEM, Inc., has been experiencing financial difficulty for some time. The company’s contribution format income statement for the most recent month is given below:    Sales (13,200 units × $20 per unit) $ 264,000 Variable expenses 158,400 Contribution margin 105,600 Fixed expenses 117,600 Net operating loss $ (12,000 ) Required: 1. Compute...
Problem 5-20 CVP Applications: Break-Even Analysis; Cost Structure; Target Sales [LO5-1, LO5-3, LO5-4, LO5-5, LO5-6, LO5-8]...
Problem 5-20 CVP Applications: Break-Even Analysis; Cost Structure; Target Sales [LO5-1, LO5-3, LO5-4, LO5-5, LO5-6, LO5-8] Northwood Company manufactures basketballs. The company has a ball that sells for $34. At present, the ball is manufactured in a small plant that relies heavily on direct labor workers. Thus, variable expenses are high, totaling $24.00 per ball, of which 71% is direct labor cost. Last year, the company sold 30,000 of these balls, with the following results: Sales (30,000 balls) $ 1,020,000...
Problem 5-20 (Algo) CVP Applications: Break-Even Analysis; Cost Structure; Target Sales [LO5-1, LO5-3, LO5-4, LO5-5, LO5-6,...
Problem 5-20 (Algo) CVP Applications: Break-Even Analysis; Cost Structure; Target Sales [LO5-1, LO5-3, LO5-4, LO5-5, LO5-6, LO5-8] 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 54,000 of these balls, with the following results: Sales (54,000 balls) $...
Problem 6-25 Changes in Fixed and Variable Costs; Break-Even and Target Profit Analysis [LO6-4, LO6-5, LO6-6]...
Problem 6-25 Changes in Fixed and Variable Costs; Break-Even and Target Profit Analysis [LO6-4, LO6-5, LO6-6] Neptune Company produces toys and other items for use in beach and resort areas. A small, inflatable toy has come onto the market that the company is anxious to produce and sell. The new toy will sell for $2.60 per unit. Enough capacity exists in the company’s plant to produce 30,300 units of the toy each month. Variable expenses to manufacture and sell one...
Problem 6-25 Changes in Fixed and Variable Costs; Break-Even and Target Profit Analysis [LO6-4, LO6-5, LO6-6]...
Problem 6-25 Changes in Fixed and Variable Costs; Break-Even and Target Profit Analysis [LO6-4, LO6-5, LO6-6] Neptune Company produces toys and other items for use in beach and resort areas. A small, inflatable toy has come onto the market that the company is anxious to produce and sell. The new toy will sell for $2.90 per unit. Enough capacity exists in the company’s plant to produce 30,500 units of the toy each month. Variable expenses to manufacture and sell one...
Problem 5-22 CVP Applications; Contribution Margin Ratio; Break-Even Analysis; Cost Structure [LO5-1, LO5-3, LO5-4, LO5-5, LO5-6]...
Problem 5-22 CVP Applications; Contribution Margin Ratio; Break-Even Analysis; Cost Structure [LO5-1, LO5-3, LO5-4, LO5-5, LO5-6] Due to erratic sales of its sole product—a high-capacity battery for laptop computers—PEM, Inc., has been experiencing financial difficulty for some time. The company’s contribution format income statement for the most recent month is given below:    Sales (13,500 units × $20 per unit) $ 270,000 Variable expenses 162,000 Contribution margin 108,000 Fixed expenses 120,000 Net operating loss $ (12,000 ) Required: 1. Compute...
Problem 5-22 CVP Applications; Contribution Margin Ratio; Break-Even Analysis; Cost Structure [LO5-1, LO5-3, LO5-4, LO5-5, LO5-6]...
Problem 5-22 CVP Applications; Contribution Margin Ratio; Break-Even Analysis; Cost Structure [LO5-1, LO5-3, LO5-4, LO5-5, LO5-6] Due to erratic sales of its sole product—a high-capacity battery for laptop computers—PEM, Inc., has been experiencing financial difficulty for some time. The company’s contribution format income statement for the most recent month is given below:    Sales (13,200 units × $20 per unit) $ 264,000 Variable expenses 158,400 Contribution margin 105,600 Fixed expenses 117,600 Net operating loss $ (12,000 ) Required: 1. Compute...
Problem 5-22 CVP Applications; Contribution Margin Ratio; Break-Even Analysis; Cost Structure [LO5-1, LO5-3, LO5-4, LO5-5, LO5-6]...
Problem 5-22 CVP Applications; Contribution Margin Ratio; Break-Even Analysis; Cost Structure [LO5-1, LO5-3, LO5-4, LO5-5, LO5-6] Due to erratic sales of its sole product—a high-capacity battery for laptop computers—PEM, Inc., has been experiencing financial difficulty for some time. The company’s contribution format income statement for the most recent month is given below:    Sales (12,700 units × $20 per unit) $ 254,000 Variable expenses 152,400 Contribution margin 101,600 Fixed expenses 113,600 Net operating loss $ (12,000 ) Required: 1. Compute...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT