Question

hw 3.2

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 50,000 of these balls, with the following results:

Sales (50,000 balls)	$	1,500,000
Variable expenses		900,000
Contribution margin		600,000
Fixed expenses		480,000
Net operating income	$	120,000
1a: compute last year's CM ratio and break-even point in balls: CM ratio %=? unit sales to break even (balls)= ? 1b: compute 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 $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 break-even point in balls: CM ratio %=? unit sales to break even (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, $120,000, as last year: Number of balls= ? 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? Selling price=? 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 20%, but it would cause fixed expenses per year to increase by 60%. if the new plant is built what would be the company's new CM ratio and new break-even point in balls? CM ratio%=? unit sales to break even (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, $120,000, as last year? number of balls=? b1- assume the new plant is built and that next year the company manufactures and sells 50,000 balls ( the same number as sold last year). Prepare a contributioin format income statement: b2- compute the degree of operating leverage: =?

Answer 1

As per policy only first four questions will be answered

Part 1A

Contribution margin ratio = (selling price per unit - variable expense per unit) / selling price per unit = (30-18) / 30

=12 / 30 = 40%

unit sales to break even (balls)= fixed expenses / contribution margin Per unit = 480000 / (30-18) = 480000/12 = 40,000 balls

Part 1 B

Degree of operating leverage = contribution margin / net income = 600,000 / 120,000 = 5

Part 2

Contribution margin ratio = (selling price per unit - variable expense) / selling price per unit = (30-(18+2.40)) / 30 = (30-20.40)/30 = 32%

Unit sales to break even (balls) = fixed expenses / contribution margin Per unit = 480000 / (30-20.40) = 480000/9.60 = 50000 balls

Part 3

Desired sales (balls) = (fixed cost + desired profit) / (contribution per unit) = (480,000 + 120,000) / 9.60 = 62,500 balls

Part 4

Suppose selling price = X,

contribution = X*40% = 0.40X

contribution = selling price - variable cost

0.40X = X - (18 + 2.40)

0.60X = 20.4

X = 20.4 / 0.60

= $34 per unit to be charged