Question

Problem 5-20A Various CVP Questions: Break-Even Point; 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 $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

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 $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? (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, $105,000, 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 20%, but it would cause fixed expenses per year to increase by 66%. 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, $105,000, 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 55,000 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.)

Problem 5-20A Various CVP Questions: Break-Even Point; 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 $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 ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________ 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 $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? (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, $105,000, 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 20%, but it would cause fixed expenses per year to increase by 66%. 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, $105,000, 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 55,000 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			30.00%
	Unit Sales to break even			45000
	Degree of operating leverate			5.50
	CM ratio = contribution /sales
		577,500/1,925,000
		30.00%
	BEP(units) = fixed cost/contribution margin per unit
		472500/10.5
		45000
	Degree of operating leverage = contribution/net income
			577500/105000
			5.50
Req 2	CM Ratio			20.00%
	Unit Sales to break even			67500
	CM ratio = contribution /sales
		(10.5-3.5)/35
		20.00%
	BEP(units) = fixed cost/contribution margin per unit
		472500/7
		67500
Req 3
	Number of balls			82500
	BEP(units) =( fixed cost+ target income)/contribution margin per unit
		(472500+105000)/7
		82500
Req 4	selling price			40.00
	CM ratio = 30%
	selling price per unit be x
	variable cost per unit is 28
	so selling price should be =
	30%              = (x-28)/x
	.30x                  = (x -28)
	x                         =28/.7
	x                         =		40.00
Req 5	Selling price per unit				35
	New variable cost		(24.5*80%)		19.6
	Contribution per unit				15.4
	contribution margin ratio				44.00%
	unit sales to break-even				50932	balls
Req 6A	number of balls				57750	balls
	(784350+105000)/15.4
Req6B	Contribution income statement
	Sales	(55000*35)			1925000
	Variable expenses (55000*19.6))				1078000
	Contribution margin				847000
	Fixed expenses				784,350
	Net operating income				62,650
	Degree of operating leverage					13.52
	(contribution margin/net income)