e | https/ Help 44 Week 4 Problems Northwood Company manufactures basketbals The
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e | https/ Help 44 Week 4 Problems Northwood Company manufactures basketbals The company has a ball thet sells for $36. At present, the ballis manufactured in a small plant that relies heavey on drect labor workers Thus, variable expenses are high, totaling S2600 per ball, of which 72% sdrea labor cos Last year, the company sold 30,000 of these balls, with the following results Contribution marein Fixed expenses Net operating income Required: 1 Compute (a) last year's CM ratio and the break-even point in balls, and (b) the degree of operating leverage at last years sales level. 2 Due to en increase in labor rates, the company estimates that next year's variable expenses wi·increase by $3 00 per ball lf this change takes place and the selling price per ball remains constant et $36.00, what will be next years 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, $90.000, as last year? 4. Refer again to the dsta in (2) above. The president feels that the company must raise the selling price of its basketballs.I Northwood Company wants to maintain the same CM retio as last year (es computed in requirement laj, what selling price per bal must it charge next year to cover the increased labor costs? 5. Refer to the original data. The compeny is discussing the construction of a new, outomated manufacturing plant The new plant would slash variable expenses per ball by 2778%, but it would cause fed 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? $90,000, as lest year b. Assume the new plant is buit and that next year the company manufactures and sells 30.000 balls (the same number as sold lest year) Prepare a contribution format income statement and Compute the degree of operating leverage o search TOSHIBA 18 456789 0Explanation / Answer
Answer to Part 1.
Contribution Margin Ratio = Contribution Margin / Sales * 100
Contribution Margin Ratio = 300,000 / 1,080,000 * 100
Contribution Margin Ratio = 27.78%
Break Even Point (in Balls) = Fixed Cost / Contribution Margin per Unit
Contribution Margin per Unit = 300,000 / 30,000
Contribution Margin per Unit = $10
Break Even Point (in Balls) = 210,000/ 10
Break Even Point (in Balls) = 21,000 Balls
Degree of Operating Leverage = Contribution Margin / Net Operating Income
Degree of Operating Leverage = 300,000 / 90,000
Degree of Operating Leverage = 3.33
Answer to Part 2.
Current Variable Cost per Unit = 780,000 / 30,000 = $26
Expected Variable Cost per Unit = $26 + $3 = $29
Selling price per Unit = $36
Contribution Margin Ratio = Contribution Margin / Sales * 100
Contribution Margin = $36 - $29 = 7
Contribution Margin Ratio = 7 / 36 * 100
Contribution Margin Ratio = 19.44%
Break Even Point (in Balls) = Fixed Cost / Contribution Margin per Unit
Break Even Point (in Balls) = 210,000 / 7
Break Even Point (in Balls) = 30,000 Balls
Answer to Part 3.
Net Operating Income = Sales – Variable Expense – Fixed Cost
Let the No. of Balls to be sold be “X”
$90,000 = ($36 * X) – ($29 * X)- $210,000
$300,000 = $7X
X = 42,857 Balls
Therefore 42,857 Balls must be sold to achieve a Net Operating Income of $90,000.
Answer to Part 4.
Contribution Margin Ratio = Contribution Margin / Sales * 100
Let the Selling price per Unit be “X”
27.78 = (X - $29) / X * 100
27.78X = 100X - $2900
$2900 = 72.22X
X = 40.16
Therefore, Selling Price per unit should be $40.16 to achieve a Contribution Margin ratio of 27.78%.
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