Northwood Company manufactures basketballs. The company has a ball that sells fo

Question

Northwood Company manufactures basketballs. The company has a ball that sells for $41. At present, the ball is manufactured in a small plant that relies heavily on direct labor workers. Thus, variable expenses are high, totaling $3100 per ball, of which 76% is direct labor cost Last year, the company sold 30,000 of these balls, with the following results Sales (30,000 bal1s) s 1,230,0e0 930,880 Contribution margin Fixed expenses Net operating income 5 90,000 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 $300 per change takes place and the selling price per ball remains constant at $41.00, what will be next years CM ratio and the break-even point in balls? ball .If this References 3. Refer to the data in (2) above If the expected change in variable expenses takes place, how many balls will have to year to earn the same net operating income, $90.000, as last year? 4. Refer Northwood Company wants to maintain the same CM ratio as must it charge next year to cover the increased labor costs? 5. Refer to the original data. The company is discussing the cons would slash variable expenses per ball by 2439% but it would cause fixed expenses again to the data in (2) above. The president feels that the company must raise the selling price of its basketballs. If last year (as computed in requirement 1a), what selling price per ball plant. The new plant tresction of a new, automated manu per year to double. If the new plant is built, what s new CM ratio and new break-even point in balls? 6. Refer to the data in (5) above. balls will have to be sold next year to earn the same net operating income, $90000 as last year? manufactures and sells 30,000 balls (the same number as sold last b. Assume the new plant is built and that next year the company year), Prepare a contribution format income statement and Compute the degree of operating leverage Req 1 Req 2 Reg 3 Req 4 Req 5 Req 6A Req 6B (2). The president feels that the company must raise the seling price of its basketbalis.IT Refer again to the data in Req Northwood Company wants to maintain the same CM ratio as last year (as computed in requir per ball must it charge next year to cover the a), what selling price labor costs? (Round your answer to 2 decimal places.) Prey 1 of 2 Next >

Explanation / Answer

1. CM ratio = contribution margin/sales = 300,000/1,230,000 = 24.39%

Breakeven point = Fixed costs/(sales price per unit – variable costs per unit) = 210,000/(41-31) = 21,000 balls.

Degree of operating leverage = contribution margin/net operating income = 300,000/90,000 = 3.33

2. Scenario for next year:

0.00

Thus CM ratio = 210,000/1,230,000 = 17.07%

Break even point in balls = 210,000/(41-34) = 30,000 balls

3. Let the no. of balls sold be "x". Contribution margin = x*(41-34) = 7x. Thus 7x-210,000 = 90,000 or x = 42,857.14 balls (or rounded off to 42,857 balls)

4. Let the new selling price be "a". Thus (a-34)/a*100 = 24.39

or 100a-3400 = 24.39a

or a = 44.97

Thus the new selling price is 44.97 (or rounded off to 45)

5. Level of new variable expenses per unit = $31*(1-24.39%) = 23.44. New fixed expenses = 210,000*2 = 420,000

CM = (41-23.44)/41 = 42.83%

Break even point = Fixed costs/(sales price per unit – variable costs per unit) = 420,000/(41-23.44) = 23,916.67 balls (or rounded off to 23,917 balls)

6a. Let the no. of balls sold be "y". Total operating income = y*(41-23.44) - 420,000

Thus y*(41-23.44) - 420,000 = 90,000

or, 17.56y = 510,000

or y = 29,041.67 balls (or 29042 balls rounded off)

b. Contribution format income statement:

Degree of operating leverage = contribution margin/net operating income = 526829.27/106829.27 = 4.93

Sales (30,000*41) 1,230,000.00 Variable expenses (30,000*34) 1,020,000.00 Contribution margin 210,000.00 Fixed expenses 210,000.00 Net operating income

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