Northwood Company manufactures basketballs. The company has a ball that sells fo
ID: 2459993 • Letter: N
Question
Northwood Company manufactures basketballs. The company has a ball that sells for $36. At present, the ball is manufactured in a small plant that relies heavily on direct labor workers. Thus, variable expenses are high, totaling $25.20 per ball, of which 70% is direct labor cost.
Last year, the company sold 55,000 of these balls, with the following results:
Compute the CM ratio and the break-even point in balls. (Do not round intermediate calculations. Round up your final break even answers to the nearest whole number.)
Compute the the degree of operating leverage at last year’s sales level. (Round your answer to 2 decimal places.)
Due to an increase in labor rates, the company estimates that variable expenses will increase by $2.16 per ball next year. If this change takes place and the selling price per ball remains constant at $36.00, what will be the new CM ratio and break-even point in balls? (Do not round intermediate calculations. Round up your final break even answers to the nearest whole number.)
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, $54,000, as last year? (Do not round intermediate calculations. Round your answer to the nearest whole unit.)
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, what selling price per ball must it charge next year to cover the increased labor costs? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
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 30%, but it would cause fixed expenses per year to increase by 80%. If the new plant is built, what would be the company’s new CM ratio and new break-even point in balls? (Do not round intermediate calculations. Round up your final break even answers to the nearest whole number.)
Refer to the data in (5) above.
If the new plant is built, how many balls will have to be sold next year to earn the same net operating income, $54,000, as last year? (Do not round intermediate calculations.)
Assume the new plant is built and that next year the company manufactures and sells 55,000 balls (the same number as sold last year). Prepare a contribution format income statement. (Do not round your intermediate calculations.)
Compute the degree of operating leverage. (Do not round intermediate calculations and round your final answer to 2 decimal places.)
Northwood Company manufactures basketballs. The company has a ball that sells for $36. At present, the ball is manufactured in a small plant that relies heavily on direct labor workers. Thus, variable expenses are high, totaling $25.20 per ball, of which 70% is direct labor cost.
Last year, the company sold 55,000 of these balls, with the following results:
Sales (55,000 balls) $ 1,980,000 Variable expenses 1,386,000 Contribution margin 594,000 Fixed expenses 540,000 Net operating income $ 54,000Explanation / Answer
sales 55000 36 1980000 variable cost 55000 25.2 1386000 contribution 10.8 594000 fixed cost 540000 EBIT 54000 1(a) Contribution Margin contribution/ sales 0.3 Break even point fixed cost/ contribution per unit 50000 I b Operating Leverage contribution/EBIT 11 sales 55000 36 1980000 variable cost 55000 27.36 1504800 contribution 8.64 475200 fixed cost 540000 EBIT -64800 Contribution Margin contribution/ sales 0.24 Break even point fixed cost/ contribution per unit 62500 Answer to 3 Break even point to earn a profit of 54000 with the changed price 594000 68750 Answer no 4 selling price to maintain the same level of contribution margin 38.16 as cost is increased by 2.16 so contribution margin decreased by .06 % so to maintain the previous level of contribution margin selling price would be increased by .06% that is 38.16 answer no 5 sales 55000 36 1980000 variable cost 55000 17.64 970200 contribution 18.36 1009800 fixed cost 972000 EBIT 37800 Contribution Margin contribution/ sales 0.51 Break even point fixed cost/ contribution per unit 52941.18 answer no 6 Break even point to earn a profit of 54000 with the changed price 1026000 55882.35 answer to 6 b 1 sales 55000 36 1980000 variable cost 55000 17.64 970200 contribution 18.36 1009800 fixed cost 972000 EBIT 37800 answer to 6 b 2 operating leverage contribution/ebit 26.71429
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