Question

           

Northwood Company manufactures basketballs. The company has a ball that sells for $23. At present, the ball is manufactured in a small plant that relies heavily on direct labor workers. Thus, variable costs are high, totaling $15 per ball, of which 65% is direct labor cost.

Last year, the company sold 30,000 of these balls, with the following results:                   

Sales (30000 balls)	$690,000
Variable expenses	450,000
Contribution margin	240,000
Fixed expenses	150,000
Net operating income	$90,000

                             

1. Compute the CM ratio

2. Compute the Break-even point

3. Find the Margin of Safety at the last year's sales.

4. Due to an increase in labor rates, the company estimates that variable costs will increase by $2 per ball next year. If this change takes place and the selling price per ball remains constant at $23, what will be the new CM ratio and break-even point in balls?

5. Refer to the data in (point 4) above. If the expected change in variable costs takes place, how many balls will have to be sold next year to earn the same net operating income $90,000 as last year?

6. Refer again to the data in (point 4) 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, what selling price per ball must it charge next year to cover the increased labor costs?

7. Refer to the original data. The company is discussing the construction of a new, automated manufacturing plant. The new plant would slash variable costs per ball by 40%, but it would cause fixed costs 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?

8. Refer to the original data. Find the multi-product breakeven point, if the company decides to produce another types of balls (of higher quality) it is expected that the sell at a price of $40 of which 60% is variable cost and no more fixed cost is required. If the company is expecting to have sales at a value of 890,000 of which this new balls would be about 20% of the total sales value. All information related to the original types of balls remains the same.                                            

Answer 1