Northwood Company manufactures basketballs. The company has a
ball that sells for $25. At present, the ball is manufactured in a
small plant that relies heavily on direct labor workers. Thus,
variable expenses are high, totaling $15.00 per ball, of which 60%
is direct labor cost.
Last year, the company sold 60,000 of these balls, with the
following results:
|
|
Sales (60,000 balls) |
$ |
1,500,000 |
Variable expenses |
|
900,000 |
Contribution margin |
|
600,000 |
Fixed expenses |
|
375,000 |
Net operating income |
$ |
225,000 |
|
Required:
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.
|
|
|
CM Ratio |
4.00 |
% |
Unit sales to break even |
|
balls |
Degree of operating leverage |
|
2. Due to an increase in labor rates, the company estimates that
next year's variable expenses will increase by $3.00 per ball. If
this change takes place and the selling price per ball remains
constant at $25.00, what will be next year's CM ratio and the
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, $225,000, 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?
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? (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 40.00%, but it would
cause fixed expenses 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?
|
|
|
|
|
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, $225,000, as
last year?
b. Assume the new plant is built and that next year the company
manufactures and sells 60,000 balls (the same number as sold last
year). Prepare a contribution format income statement and compute
the degree of operating leverage.
|
|
Northwood Company |
Contribution Income Statement |
|
|
|
|
|
0 |
|
|
|
$0 |
|
|
Degree of operating leverage |
|
|