Northwood Company manufactures basketballs The company has a

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 $21.00 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) Variable expenses Contribution margin Fixed expenses Net operating income 1,890,000 1,134,000 756,000 630,000 126,000 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 $2.80 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, $126,000, 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?

Solution

Answers

Requirement 1

A

Contribution margin

$                           756,000.00

B

Sales

$                       1,890,000.00

C=(A/B) x 100

CM Ratio

40%

D

Fixed Expenses

$                           630,000.00

E=D/C

Break Even point in dollar sales

$                       1,575,000.00

F = E / $35 sale price

Break Even point in balls

45000

G

Net Operating Income

$                           126,000.00

H = A/G

Degree of Operating Leverage

6

Requirement 2

A

Current Unit Contribution

$                                     14.00

B

Increase in Variable cost

$                                        2.80

C=A-B

Expected estimated unit contribution margin

$                                     11.20

D

Unit Sales price

$                                     35.00

E=(C/D) x 100

Next year\'s CM ratio

32%

F

Fixed expenses

$                           630,000.00

G=F/C

Next Year\'s Break Even in Balls

56250

Requirement 3

A

Target operating income

$                           126,000.00

B

Fixed expenses

$                           630,000.00

C=A+B

Total contribution margin required

$                           756,000.00

D

Expected estimated unit contribution margin

$                                     11.20

E=C/D

No. of balls to be sold

67500

Requirement 4

A

Expected estimated unit contribution margin

$                                     11.20

B

CM Ratio required as current year\'s

40%

C=A/B

Selling price next year should be

$                                     28.00

Requirement 1
A	Contribution margin	$                           756,000.00
B	Sales	$                       1,890,000.00
C=(A/B) x 100	CM Ratio	40%
D	Fixed Expenses	$                           630,000.00
E=D/C	Break Even point in dollar sales	$                       1,575,000.00
F = E / $35 sale price	Break Even point in balls	45000
G	Net Operating Income	$                           126,000.00
H = A/G	Degree of Operating Leverage	6
Requirement 2
A	Current Unit Contribution	$                                     14.00
B	Increase in Variable cost	$                                        2.80
C=A-B	Expected estimated unit contribution margin	$                                     11.20
D	Unit Sales price	$                                     35.00
E=(C/D) x 100	Next year\'s CM ratio	32%
F	Fixed expenses	$                           630,000.00
G=F/C	Next Year\'s Break Even in Balls	56250
Requirement 3
A	Target operating income	$                           126,000.00
B	Fixed expenses	$                           630,000.00
C=A+B	Total contribution margin required	$                           756,000.00
D	Expected estimated unit contribution margin	$                                     11.20
E=C/D	No. of balls to be sold	67500
Requirement 4
A	Expected estimated unit contribution margin	$                                     11.20
B	CM Ratio required as current year\'s	40%
C=A/B	Selling price next year should be	$                                     28.00