Homework SourseNorthwood Company manufactures basketballs The company has a
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 42,000 of these balls, with the following results:
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, $154,000, 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, $154,000, as last year?
b. Assume the new plant is built and that next year the company manufactures and sells 42,000 balls (the same number as sold last year). Prepare a contribution format income statement and Compute the degree of operating leverage.
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. (Round \"Unit sales to break even\" to the nearest whole unit and other answers to 2 decimal places.)
1.
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? (Round \"CM Ratio\" to 2 decimal places and \"Unit sales to break even\" to the nearest whole unit.)
3. Refer to the data in Required (2). 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, $154,000, as last year? (Round your answer to the nearest whole unit.)
4. Refer again to the data in Required (2). 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? (Round \"CM Ratio\" to 2 decimal places and \"Unit sales to break even\" to the nearest whole unit.)
6A. If the new plant is built, how many balls will have to be sold next year to earn the same net operating income, $154,000, as last year? (Round your answer to the nearest whole unit.)
6B. Assume the new plant is built and that next year the company manufactures and sells 42,000 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.)
| Sales (42,000 balls) | $ | 1,050,000 |
| Variable expenses | 630,000 | |
| Contribution margin | 420,000 | |
| Fixed expenses | 266,000 | |
| Net operating income | $ | 154,000 |
Solution
Req 1 CM Ratio 40.00% Unit Sales to break even 26600 Degree of operating leverate 2.73 CM ratio = contribution /sales 420,000/1,050,000 40.00% BEP(units) = fixed cost/contribution margin per unit 266,000/(25-15) 26600 Degree of operating leverage = contribution/net income 420,000/154,000 2.73 Req 2 CM Ratio 28.00% Unit Sales to break even 38000 CM ratio = contribution /sales (10-3)/25 28.00% BEP(units) = fixed cost/contribution margin per unit 266,000/7 38000 Req 3 Number of balls 60000 BEP(units) =( fixed cost+ target income)/contribution margin per unit (266,000+154000)/7 60000 Req 4 selling price 30.00 CM ratio = 40% selling price per unit be x variable cost per unit is 18 so selling price should be = 40% = (x-18)/x .40x = (x -18) x =18/.6 x = 30.00 Req 5 Selling price per unit 25 New variable cost (15*60%) 9 Contribution per unit 16 contribution margin ratio 64.00% unit sales to break-even 33250 balls (266000*2)/16 Req 6A number of balls 42875 balls (532000+154000)/16 Req6B Contribution income statement Sales (42000*25) 1050000 Variable expenses (42000*9) 378000 Contribution margin 816000 Fixed expenses 532,000 Net operating income 284,000 Degree of operating leverage 2.87 (contribution margin/net income)
