Homewor Problems (22 pts) G Help Save & ExitSubn Check my wor Northwood s all pl
ID: 2339294 • Letter: H
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Homewor Problems (22 pts) G Help Save & ExitSubn Check my wor Northwood s all 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 Company manufactures basketballs. The company has a ball that sells for $25. At present, the ball is manufactured in a Last year, the company sold 50,000 of these balls, with the following results: Sales (50,000 balls) Variable expenses Contribution margin Fixed expenses Net operating income s1,250,000 500,000 320,000 $ 180,000 ces Required: 1. Compute (a) last years CM ratio and the break-even point in balls, and (b) the degree of operating leverage at last years 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, $180,000, 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, $180,000, as last year? b. Assume the new plant is built and that next year the company manufactures and sells 50,000 balls (the same number as sold last year). Prepare a contribution format income statement and Compute the degree of operating leverage. Prev of 3 Next> 10 24Explanation / Answer
1-a.
Break even sales = Total fixed expenses / Contribution margin per unit = 320,000/10 = 32,000 Units
Contribution margin per unit = 500,000/50,000 = 10
1-b. Operating leverage = Contribution Margin / Operating income = 500,000/180,000 = 2.78
2.
Contribution margin rato = 50000/1,250000 = 4%
Since the new contribution margin is the same as total fixed expenses, the break even sales is at 50000 balls
3. Expected Net Operating Income = 180,000
+Total fixed expenses = 320,000
Expected Contribution margin 500,000
Expected sales = (Expected CM/ CM Ratio*100%) = 500,000*100%/4% = 2,000,000
Selling price per unit = $25
Number of balls to be sold = 2,000,000/25 = 80000
4.
720000
5.
CM Ratio = 800000/ 1,250,000 = 64%
Break even sales in units = Total fixed expenses / CM per unit = 640,000/16 = 40000
CM Per unit = 640000 / 50,000 = 16.00
6.a Expected Net operating Income = 180000
+Total fixed expenses = 640000
Expected Contribution margin = 820000
CM Ration = 64%
Expected sales = (Expected CM/ CM Ratio*100%) = (820,000*100%/64%) = 524800
Expected sales in uniits = 524800/ 25 = 20992 balls
b.
CM Ratio = Contribution Margin / Sales =500,000/1,250,000 40%Related Questions
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