Question
In: Accounting
Northwood Company manufactures basketballs. The company has a ball that sells for $25. At present, the...
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 62,000 of these balls, with the following results:
| Sales (62,000 balls) | $ | 1,550,000 |
| Variable expenses | 930,000 | |
| Contribution margin | 620,000 | |
| Fixed expenses | 426,000 | |
| Net operating income | $ | 194,000 |
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.
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?
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, $194,000, 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?
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?
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, $194,000, as last year?
b. Assume the new plant is built and that next year the company manufactures and sells 62,000 balls (the same number as sold last year). Prepare a contribution format income statement and compute the degree of operating leverage.\
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? (Round "CM Ratio" to 2 decimal places and "Unit sales to break even" to the nearest whole unit.)
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Assume the new plant is built and that next year the company manufactures and sells 62,000 balls (the same number as sold last year). Prepare a contribution format income statement and compute the degree of operating leverage. (Round "Degree of operating leverage" to 2 decimal places.)
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| Northwood Company | |||
| Answer 1 | |||
| Contribution margin income statement | |||
| Particulars | Amount $ | Per Unit $ | Note |
| Units | 62,000.00 | E | |
| Sales | 1,550,000.00 | 25.00 | A |
| Variable Expenses | 930,000.00 | 15.00 | B |
| Contribution margin | 620,000.00 | 10.00 | C=A-B |
| Contribution margin % | 40.00% | D=C/A | |
| Fixed Expenses | 426,000.00 | F | |
| Breakeven point | 42,600.00 | G=F/C | |
| Operating Income | 194,000.00 | H | |
| Operating leverage | 3.20 | I=C/H | |
| Answer 2 | |||
| Particulars | Amount $ | ||
| Sales | 25.00 | See A | |
| Variable Expenses | 18.00 | J | |
| Contribution margin | 7.00 | K=A-J | |
| Contribution margin % | 28.00% | L=K/A | |
| Fixed Expenses | 426,000.00 | See F | |
| Breakeven point | 60,857.14 | M=F/K | |
| Answer 3 | |||
| Fixed Expenses | 426,000.00 | See F | |
| Operating Income | 194,000.00 | See H | |
| Target Contribution | 620,000.00 | N=F+H | |
| Contribution margin | 7.00 | See K | |
| Units to be sold | 88,571.43 | O=N/K | |
| Answer 4 | |||
| Contribution margin % of last year | 40.00% | See D | |
| Variable Expenses % of last year | 60.00% | P= 1-D | |
| Variable Expenses of current year | 18.00 | See J | |
| Sell Price should be | 30.00 | Q= J/P | |
| Answer 5 | |||
| Variable Expenses of last year | 15.00 | See B | |
| Decrease by 40% | 6.00 | R= B*32.26% | |
| Revised Variable Expenses | 9.00 | S=B-R | |
| Fixed Expenses of last year | 426,000.00 | See F | |
| Fixed Expenses of current year | 852,000.00 | T= F*2 | |
| Particulars | Amount $ | ||
| Sales | 25.00 | See A | |
| Variable Expenses | 9.00 | See S | |
| Contribution margin | 16.00 | U=A-S | |
| Contribution margin % | 64.00% | V=U/A | |
| Fixed Expenses | 852,000.00 | See T | |
| Breakeven point | 53,250.00 | W=T/U | |
| Answer 6 | |||
| Fixed Expenses | 852,000.00 | See T | |
| Operating Income | 194,000.00 | See H | |
| Target Contribution | 1,046,000.00 | X= T+H | |
| Contribution margin | 16.00 | See U | |
| Units to be sold | 65,375.00 | Y=X/U | |
| Answer 7 | |||
| Contribution margin income statement | |||
| Particulars | Per Unit | Total | |
| Units | 62,000.00 | ||
| Sell Price | 25.00 | 1,550,000.00 | |
| Less- Variable costs | 9.00 | 558,000.00 | |
| Contribution margin | 16.00 | 992,000.00 | Z |
| Less: Total Fixed costs | 852,000.00 | See T | |
| Operating income | 140,000.00 | AA= Z-T | |
| Degree of Operating leverage |
 ekkarill92 answered 1 year agoRelated SolutionsNorthwood Company manufactures basketballs. The company has a ball that sells for $25. At present, the...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 44,000 of these balls, with the
following results:
Sales (44,000 balls)
$
1,100,000
Variable expenses
660,000
Contribution margin
440,000
Fixed expenses
317,000
Net operating income
$
123,000
Required:
1....
Northwood Company Manufactures basketballs. The company has a ball that sells for $25. At present, the...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 labour workers.
Therefore, the variable costs are high, totaling $15 per ball.
Assuming that the new plant is built and the next year the
manufactures and sells 30,000 balls (the same number as sold last
year). The contribution income is: Sales - 750,000, less: variable
expenses - 270,000. Thus, contribution margin is...
Northwood Company manufactures basketballs. The company has a ball that sells for $25. At present, the...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....
Northwood Company manufactures basketballs. The company has a ball that sells for $25. At present, the...
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 62,000 of these balls, with the following results:
Sales (62,000 balls)
$
1,550,000
Variable
expenses
930,000
Contribution
margin
620,000
Fixed
expenses
426,000
Net operating
income
$
194,000
1. Compute...
Northwood Company manufactures basketballs. The company has a ball that sells for $25. At present, the...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 30,000 of these balls, with the
following results:
Sales (30,000 balls)
$
750,000
Variable expenses
450,000
Contribution margin
300,000
Fixed expenses
210,000
Net operating income
$
90,000
Required:
1....
Northwood Company manufactures basketballs. The company has a ball that sells for $25. At present, the...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 54,000 of these balls, with the
following results:
Sales (54,000 balls)
$
1,350,000
Variable expenses
810,000
Contribution margin
540,000
Fixed expenses
372,000
Net operating income
$
168,000
Required:
1....
Northwood Company manufactures basketballs. The company has a ball that sells for $25. At present, the...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 per ball, of which 60% is
direct labor cost.
Last year, the company sold 30,000 of these balls, with the
following results:
Sales (30,000 balls)
$
750,000
Variable expenses
450,000
Contribution margin
300,000
Fixed expenses
210,000
Net operating income
$
90,000
Required:
1....
Northwood Company manufactures basketballs. The company has a ball that sells for $25. At present, the...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 52,000 of these balls, with the
following results:
Sales (52,000 balls)
$
1,300,000
Variable expenses
780,000
Contribution margin
520,000
Fixed expenses
321,000
Net operating income
$
199,000
Required:
1....
Northwood Company manufactures basketballs. The company has a ball that sells for $25. At present, the...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 50,000 of these balls, with the
following results:
Sales (50,000 balls)
$
1,250,000
Variable expenses
750,000
Contribution margin
500,000
Fixed expenses
320,000
Net operating income
$
180,000
Required:
1....
Northwood Company manufactures basketballs. The company has a ball that sells for $25. At present, the...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 36,000 of these balls, with the
following results:
Sales (36,000 balls)
$
900,000
Variable expenses
540,000
Contribution margin
360,000
Fixed expenses
263,000
Net operating income
$
97,000
Required:
1....
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