Problem 2 : Various CVP Questions: Break-Even Point; cost Structure; Target Sale

Question

Problem 2: Various CVP Questions: Break-Even Point; cost Structure; Target Sales. (16 pts)

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 percent is direct labor cost.

Last year, the company sold 30,000 of these balls, with the following results:

Sales………………………………………..

$750,000

Variable expenses………………………….

(450,000)

Contribution margin……………………….

300,000

Fixed expenses…………………………….

(210,000)

Net operating income………………………

$ 90,000

Required:

Compute the CM ratio and the break-even point in quantity of balls. (2 pts)

Compute the degree of operating leverage at last year’s sales level. (1 pts)

Due to an increase in labor rates, the company estimates that variable expenses will increase by $3 per ball next year. If this change takes place and the selling price per ball remains constant at $25, what will be the new CM ratio and break-even point in quantity of balls? (2 pts)

Refer to the data in (3) 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, $90,000, as last year? (1 pts)

Refer again to the data in (3) above. The president feels that the company must raise the selling price of its basketballs. If Northwood Company wants to maintain the same contribution margin ratio as last year, what selling price per ball must it charge next year to cover the increased labor costs? (2 pts)

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%, 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 quantity of balls? (3 pts)

Refer to the data in (6) above.

If the new plant is built, how many balls will have to be sold next year to earn the same net operating income, $90,000, as last year? (2 pts)

Assume the new plant is built and that next year the company manufactures and sells 30,000 balls (the same number as sold last year). Prepare a contribution format income statement and compute the degree of operating leverage. (3 pts)

Sales………………………………………..

$750,000

Variable expenses………………………….

(450,000)

Contribution margin……………………….

300,000

Fixed expenses…………………………….

(210,000)

Net operating income………………………

$ 90,000

Explanation / Answer

(Q1)Compute the CM ratio and the break-even point in quantity of balls. (2 pts) Selling price $                     25 100% Less: variable expenses $                     15 60% Contribution margin $                     10 40% Contribution Margin Ratio =[ (Sales - Variable cost) / Sales] * 100 Contribution Margin Ratio = [(25-15) / 25] * 100 CM Ratio = 40% Sales = Variable expenses + Fixed expenses + Profits $25Q = $15Q + $210,000 + $0 $10Q = $210,000 Q = $210,000 / $10 per ball Q(Break even point) = 21,000 balls Alternative solution: Break-even point in unit sales = Fixed expenses / Contribution per unit Break-even point in unit sales = 210000/10 = 21,000 balls (Q2)Compute the degree of operating leverage at last year’s sales level. (1 pts) The Degree of Operating Leverage = (Sales - Variable cost) / (Sales - Variable cost - Fxed cost) Given sales of last year = 30,000 DOL = (25*30000 - 15*30000) / 25*30000 - 15*30000 - 210000 DOL = 450000 / 429000 DOL = 3.333 (Q3)Due to an increase in labor rates, the company estimates that variable expenses will increase by $3 per ball next year. If this change takes place and the selling price per ball remains constant at $25, what will be the new CM ratio and break-even point in quantity of balls? (2 pts) Selling price $                     25 Less: variable expenses $                     18 Contribution margin $                        7 Contribution Margin Ratio =[ (Sales - Variable cost) / Sales] * 100 Contribution Margin Ratio = [(25-18) / 25] * 100 CM Ratio = 28% Break-even point in unit sales = Fixed expenses / Contribution per unit Break-even point in unit sales = 210000/7 = 30,000 balls (Q4)Refer to the data in (3) 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, $90,000, as last year? (1 pts) Sales = Variable expenses + Fixed expenses + Profits $25Q = $18Q + $210,000 + $90,000 $7Q = $300,000 Q = $300,000 / $7 per ball Q = 42,857 balls (rounded)    Unit sales to obtain the target profit of $90,000 (Q5)Refer again to the data in (3) above. The president feels that the company must raise the selling price of its basketballs. If Northwood Company wants to maintain the same contribution margin ratio as last year, what selling price per ball must it charge next year to cover the increased labor costs? (2 pts) The contribution margin ratio last year was 40%. let P equal the new selling price, then: P = $18 + 0.40P 0.60P = $18 P = $18 / 0.60 P = $30 To verify: Selling price 30 100% Less: variable expenses 18 60% Contribution margin 12 40% Therefore, to maintain a 40% CM ratio, a $3 increase in variable costs would require a $5% increase in Selling price (Q6)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%, 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 quantity of balls? (3 pts) Selling price $                     25 100% Less: variable expenses( $15 - $15*40%) $                        9 60% Contribution margin $                     16 40% Contribution Margin Ratio =[ (Sales - Variable cost) / Sales] * 100 Contribution Margin Ratio = [(25-9) / 25] * 100 CM Ratio = 24% Sales = Variable expenses + Fixed expenses + Profits $25Q = $9Q + $420,000 + $0 $16Q = $420,000 Q = $420,000 / $16 per ball Q(Break even point) = 26,250 balls (Q7)If the new plant is built, how many balls will have to be sold next year to earn the same net operating income, $90,000, as last year? Sales = Variable expenses + Fixed expenses + Profits $25Q = $9Q + $420,000 + $90,000 $16Q = $510,000 Q = $510,000 / $16 per ball Q = 31,875 balls (rounded)    Unit sales to obtain the target profit of $90,000 Assume the new plant is built and that next year the company manufactures and sells 30,000 balls (the same number as sold last year). Prepare a contribution format income statement and compute the degree of operating leverage. (3 pts) contribution format income statement Sales (30,000 units * 25) $750,000 Variable costs (30000 * 9) 270,000 Contribution margin 480,000 Fixed costs 420,000 Income before taxes 60,000 The Degree of Operating Leverage = (Sales - Variable cost) / (Sales - Variable cost - Fxed cost) Given sales of last year = 30,000 DOL = (25*30000 - 9*30000) / 25*30000 - 9*30000 - 420000 DOL = 450000 / 429000 DOL = 8

Related Questions

Navigate

• Browse (All)
• Browse P
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.