Question

Northwood Company manufactures basketballs. The company has a ball that sells for $35. At present, the ball is manufactured in a small plant that relies heavily on direct labor workers. Thus, variable expenses are high, totaling $24.50 per ball, of which 70% is direct labor cost. Last year, the company sold 55,000 of these balls, with the following results:

Sales (55,000 balls) $1,925,000

Variable expenses 1,347,500

Contribution margin 577,500

Fixed expenses 472,500

Net operating income $ 105,000

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 $3.50 per ball. If this change takes place and the selling price per ball remains constant at $35.00, 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, $105,000, 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?

I am very stuck in this homework. Tried to follow steps of similar chegg questions but it is still confusing. Please help and show steps I am very stressed

Answer 1

1.

	Income statement
	Particulars	Per unit	Total
	Units		55,000
	Sales revenue	35.00	19,25,000
	Minus:
	Variable cost	24.50	13,47,500
	Contribution	10.50	5,77,500
	Minus:
	Fixed cost		4,72,500
	Net operating income		1,05,000
Contribution margin ratio
Ref	Particulars		Amount
a	Sales revenue		19,25,000
b	Contribution		5,77,500
c=b/a *100	Contribution margin ratio		30%
Break even point
a	Contribution per unit	10.50
b	Fixed costs	4,72,500
c=b/a	BEP units	45,000
Degree of operating leverage
a	contribution margin	5,77,500
b	Net operating income	1,05,000
c=a/b	Degree of operating leverage	5.50

2.

	Income statement
	Particulars	Per unit	Total
	Units		67,500
	Sales revenue	35.00	23,62,500
	Minus:
	Variable cost	28.00	18,90,000
	Contribution	7.00	4,72,500
	Minus:
	Fixed cost		4,72,500
	Net operating income		0
Contribution margin ratio
Ref	Particulars		Amount
a	Sales revenue		19,25,000
b	Contribution		3,85,000
c=b/a *100	Contribution margin ratio		20%
Break even point
a	Contribution per unit	7
b	Fixed costs	4,72,500
c=b/a	BEP units	67,500

3.

	Income statement
	Particulars	Per unit	Total
	Units		82,500
	Sales revenue	35.00	28,87,500
	Minus:
	Variable cost	28.00	23,10,000
	Contribution	7.00	5,77,500
	Minus:
	Fixed cost		4,72,500
	Net operating income		1,05,000
Contribution margin ratio
Ref	Particulars		Amount
a	Sales revenue		28,87,500
b	Contribution		5,77,500
c=b/a *100	Contribution margin ratio		20%
Break even point
a	Contribution per unit	10.50
b	Fixed costs	4,72,500
c=b/a	BEP units	45,000
Required sales:
a	Fixed costs	4,72,500
b	Required profit	1,05,000
c= a+b	Required contribution	5,77,500
d	Contribution per unit	7.00
e=c/d	Required sales	82,500.00

4. required selling price is 40.

a	Variable costs	28
b	Contribution margin ratio	30%
c= 1-b	Variable cost ratio	70%
d= a/c	Selling price	40.00