1 through 6 1 through 6 5-20 Various CVP Questions: L05-5, LO5-6, LO5-8 Break-Ev

Question

1 through 6 1 through 6 5-20 Various CVP Questions: L05-5, LO5-6, LO5-8 Break-Even Point: Cost Structure: Target Sales LO5-1, LO5-3, y manufactures basketballs. The company has a ball that sells fo( $25.At hat relies heavily on direct labor workers. Thus. EM Norhwood Company the ball is manufacturedi are high, totalinkS15perballJf which 60% is direct labor cost. company sold 30.000 of these balls, with the following results: $750,000 450,000 300,000 210,000 90,000 Variable expenses .. Contribution margin. Net operating income d: Compute (a) the CM ratio and the break -even point in balls, and (b) the degree of operating leverage at last year's sales level. Due to by $3 per ball next year. If this change takes place and the selling price per ball remains con- stant at $25, what will be the new CM ratio and break-even point in balls? Refer to the data in (2) above. If the expected change in variable expenses takes place, how an increase in labor rates, the company estimates that variable expenses will increase many balls will have to be sold next year to earn the same net operating income, $90,.000, last year? er again to the data in (2) above. The president feels that the company must raise the sell- g 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 4. Ref 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%, but it nses per year to double. If the new plant is built, what would be the would cause fix company's ne CM rati and new break-even point in balls? above. ny balls will have to be sold next year to earn the same If the new plant is buil net operating income $90,000,as last year? b. Assume the new plant I& bunlt 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. It you were a member of top management, would you have been in favor of constructing c. plant? Explain.

Explanation / Answer

As per policy, only four parts of a question is allowed to answer, so answering 1 to 4 :

1) CM ratio contibution/sales 300000/750000 0.4 Break even point (balls) F. Exp/contribution per unit 210000/(25-15) 21000 Degree of operating leverage Contribution / Net Operating income 300000/90000 3.33 2) CM ratio contibution/sales (300000-30000*3)/750000 0.28 Break even point (balls) Fexp/contribution per unit 210000/(25-18) 30000 3) Units to maintain NOI $90000 Fexp+expect NOI/contribution per unit (210000+90000)/(25-18) 42857 4) Selling price to absorb increase in cost (SP - VC)/SP = Expected CM ratio (SP - 18)/SP = 0.40 0.60 SP = 18 SP = 18/0.60 = $30 per unit

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