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1214/2017 Assignment Print View Award: 15.00 points Northwood Company manufactures basketballs. The company has a ball that sells for $30. At present, the ball is manufactured in a small plant that relies heavily on direct labor workers. Thus, variable expenses are high, totaling $20.00 per ball, of which 67% is direct labor cost. Last year, the company sold 30,000 of these balls, with the following results $ 900,000 600,000 300,000 210,000 $ 90,000 Sales (30,000 balls) Variable expenses Contribution margin 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 year's sales level 2. Due to an increase in labor rates, the company estimates that next year's variable expenses will increase by $3.00 per ball. If this change takes place and the selling price per ball remains constant at S30.00, what will be next year's 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 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 (as computed in requirement 1a), what selling price per ball must it charge next year to cover the increased labor 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 33.33%, 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 balls? 6. Refer to the data in (5) above a. If the new plant is built, how many balls will have to be sold next year to eam the same net operating income, $90,000, as last year? b. 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 Complete this question by entering your answers in the tabs below Req 1 Req 2 Req 3 Req 4 Req 5 Req 6A Req 68 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. (Round "Unit sales to break even" to the nearest whole unit and other answers to 2 decimal places.) CM Ratio Unit sales to break evern Degree of operating leverage 33.00 % balls Req 1 Req 2 Garrison 16e Rechecks 2017-05-02, 2017-08-02, 2017-09-13, 2017-09-19, 2017-09-21 rev: 09 27 2017 0C CS-102710, 10 02 2017 Qc CS-103110, 10 20 2017 QC CS-105195Explanation / Answer
1)
a) Contribution margin ratio = Contribution / sales = $300000 / $900000 = 1/3 = 33.33%
b) Degree of operating leverage =contribution margin / operating income = $300000 / $90000 = 3.33
2)
Revised variable cost per unit = $20 + $3 = $23 per unit
Revised contribution per unit = $30 - $23 = $7 per unit
CM ratio = contribution margin per unit / selling price per unit = $7 / $30 = 23.33%
Break even point = Fixed cost / contribution per unit = $210000 / $7 per balls = 30000 balls
3)
Number of balls to be sold = (fixed cost + target operating income) / contribution per unit = ($210000 + $90000) / $7 per balls = 42857 balls
4)
CM ratio = 1/3
Variable cost = (1-1/3) of sales = 2/3 of sales
Revised Selling price = (3/2) x revised variable cost = (3/2) x $23 = $34.50
5)
Variable cost per unit = (1-1/3) x $20 = $40/3
Fixed cost = $210000 x 2 = $420000
New Contribution per unit = $30 - $40/3 = $50/3
New CM ratio = contribution per unit / selling price per unit = ($50/3) / $30 = 55.56%
Break Even point = Fixed cost / contribution per unit = $420000 / ($50/3 per balls) = 25200 balls
6)
a) Number of balls to be sold = (fixed cost + target operating income) / contribution per unit = ($420000 + $90000) / ($50/3 per ball) = 30600 balls
b)
Degree of operating leverage =contribution margin / operating income = $500000 / $80000 = 6.25
Sales (30000 ballsx $30/ball) $ 9,00,000 Less: Variable expenses (@ $40/3 per ball for 30000 balls) $ 4,00,000 Contribution Margin $ 5,00,000 Fixed costs $ 4,20,000 Net operating income $ 80,000Related Questions
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