Question

Northwood Company manufactures basketballs. The company has a ball that sells for $30. At present, the ball is manufactured in a small plant that relies heavily on direct labor workers. Thus, variable expenses are high, totaling $18.00 per ball, of which 60% is direct labor cost.

Last year, the company sold 51,000 of these balls, with the following results:

Sales (51,000 balls)	$	1,530,000
Variable expenses		918,000
Contribution margin		612,000
Fixed expenses		492,000
Net operating income	$	120,000

Required:

1-a.	Compute last year's CM ratio and the break-even point in balls. (Do not round intermediate calculations. Round up your final break even answers to the nearest whole number.)

  

1-b.	Compute the the degree of operating leverage at last year’s sales level. (Round your answer to 2 decimal places.)

  

2.	Due to an increase in labor rates, the company estimates that next year's variable expenses will increase by $2.40 per ball. If this change takes place and the selling price per ball remains constant at $30.00, what will be next year's CM ratio and the break-even point in balls? (Do not round intermediate calculations. Round up your final break even answers to the nearest whole number.)

  

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, $120,000, as last year? (Do not round intermediate calculations. Round your answer to the nearest whole unit.)

  

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? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

  

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%, but it would cause fixed expenses per year to increase by 80%. If the new plant is built, what would be the company’s new CM ratio and new break-even point in balls? (Do not round intermediate calculations. Round up your final break even answers to the nearest whole number.)

  

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, $120,000, as last year? (Do not round intermediate calculations. Round up your final answer to the nearest whole number.)

b-1.	Assume the new plant is built and that next year the company manufactures and sells 51,000 balls (the same number as sold last year). Prepare a contribution format income statement. (Do not round your intermediate calculations.)

b-2.	Compute the degree of operating leverage. (Do not round intermediate calculations and round your final answer to 2 decimal places.)

Answer 1

Req 1
	CM Ratio			40.00%
	Unit Sales to break even			41000
	Degree of operating leverate			5.10
	CM ratio = contribution /sales
		612000/1,530,000
		40.00%
	BEP(units) = fixed cost/contribution margin per unit
		492000/12
		41000
	Degree of operating leverage = contribution/net income
			612000/120000
			5.10
Req 2	CM Ratio			32.00%
	Unit Sales to break even			51250
	CM ratio = contribution /sales
		(12-2.4)/30
		32.00%
	BEP(units) = fixed cost/contribution margin per unit
		492,000/9.60
		51250
Req 3
	Number of balls			63750
	BEP(units) =( fixed cost+ target income)/contribution margin per unit
		(492000+120000)/9.6
		63750
Req 4	selling price			34.00
	CM ratio = 40%
	selling price per unit be x
	variable cost per unit is 20.4
	so selling price should be =
	40%              = (x-20.4)/x
	.40x                  = (x -20.4)
	x                         =20.4/.6
	x                         =		34.00
Req 5	Selling price per unit				30
	New variable cost		(18*60%)		10.8
	Contribution per unit				19.2
	fixed expense   = 492000*180%=				885600
	contribution margin ratio				64.00%
	unit sales to break-even				46125	balls
Req 6A	number of balls				52375	balls
	(885600+120000)/19.2
Req6B	Contribution income statement
	Sales	(51000*30)			1530000
	Variable expenses (51000*10.8))				550800
	Contribution margin				979200
	Fixed expenses				885,600
	Net operating income				93,600
	Degree of operating leverage					10.46
	(contribution margin/net income)