Northwood Company manufactures basketballs. The company has a ball that sells fo
ID: 2338122 • Letter: N
Question
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. 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, $168,000, 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, $168,000, as last year? b. Assume the new plant is built and that next year the company manufactures and sells 54,000 balls (the same number as sold last year). Prepare a contribution format income statement and Compute the degree of operating leverage.
Explanation / Answer
Solution 1 Per unit Total for 54000 unit Sale 25 1,350,000 variable cost 15 810,000 Contribution 10 540,000 Fixed expense 372,000 Net Income 168,000 Contribution ratio =10/25 40.00% Break even sale 372000/40% 930,000 Break even Unit 930000/25 37,200 Operating leverage Contribution/Net Income Operating leverage 540000/168000 3.21 Solution 2 Per unit Total for 54000 unit Sale 25 1,350,000 variable cost 18 972,000 Contribution 7 378,000 Fixed expense 372,000 Net Income 6,000 Contribution ratio =7/25 28.00% Break even sale 372000/28% 1,328,571 Break even Unit 1328571/25 53,143 Solution 3 Fixed cost 372,000 Required profit 168,000 Total 540,000 Requried sale price 540000/28% 1,928,571 Requried sale Unit 1928571/25 77,143 Solution 4 Variable cost 18 Required Contribution ratio 40.00% Required Sale price= 18/(1-40%) 30 Required Sale price= 30 Solution 5 Per unit Sale 25 variable cost- (15-40%) 9 Contribution 16 Contribution ratio= 16/25 64.00% Fixed expense - 2*372000 744,000 Break even sale 744000/64% 1,162,500 Break even Unit 1162500/25 46,500 Solution 6 Net Profit req. 168,000 Fixed expense 744,000 Total 912,000 Contribution ratio 64% Sale Price required 912000/64% 1,425,000 Sold units 1425000/25 57,000 Solution 7 Per unit Total for 54000 unit Sale 25 1,350,000 variable cost 9 486,000 Contribution 16 864,000 Fixed expense 744,000 Net Income 120,000 Operating leverage= Contribution/Net Income 864000/120000 7.200
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