xGrades for LAURA MARTINEZ+ Mylab Math W PinacleNetix Homework 6 Saved Help Save
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xGrades for LAURA MARTINEZ+ Mylab Math W PinacleNetix Homework 6 Saved Help Save &ExitSubmit Check my work Northwood Company manufactures basketballs. The company has a ball that sells for $25. At present, the ball is manufactured in a small plant that relies heavily on direct labor workers. Thus, variable expenses are high, totaling $15.00 per ball, of which 60% is direct labor cost. Last year, the company sold 50,000 of these balls, with the following results: Sales (50,000 balls) $ 1,250,000 Contribution margin Fixed expenscs 750,000 320,000 S 180,000Explanation / Answer
1 CM Ratio =Contribution Margin/ Sales =500,000 / 1,250,000 =40% Break even point in balls Contribution per ball = 500,000/50,000 = $10 Break even point in balls = Fixed cost / Contribution Margin per ball = 320,000 / 10 = 32,000 balls Degree of operating leverage = Contribution margin / Net operating income = 500,000 / 180,000 =2.78 2 If labor price increases by $3 Sales $ 1,250,000 Variable Expenses 750,000 Increase in variable expenses 150,000 (50,000*$3) Contribution Margin 350,000 Fixed Cost 320,000 Net Operating Income $ 30,000 Contribution Margin per ball = Contribution margin / Sale in balls = 350,000 / 50,000 = $7 per ball CM Ratio =Contribution Margin/ Sales =350,000 / 1,250,000 =28% Break even point in balls = Fixed cost / Contribution margin per ball = 320,000 / 7 = 45,715 balls 3 No of balls to earn net income of $180,000 = Fixed cost + Net operating Income / Contribution margin per ball = 320,000+180,000 / 7 = 71,429 balls 4 Current Selling price = $25 Current variable expense per ball after increase in labor cost = 900,000/50,000 = $18 CM ratio required 40% So variable cost portion will be 60% Selling price per unit will be = Variable cost per unit / 60% = 18/60% = $30 5 Current variable cost per ball = 750,000 / 50,000 = $15 per ball New variable cost per ball = $15*60% = $9 CM Ratio = Contribution Margin / Sales = $25-$9/$25 =$16/$25 = 64% Break even point in balls = Fixed cost / Contribution margin per unit = 320,000*2 /16 = 40,000 balls 6 a No of balls to earn net income of $180,000 = Fixed cost + Net operating Income / Contribution margin per ball = 320,000+180,000 / 16 = 31,250 balls b Contribution format income statement Sales $ 1,250,000 Variable Expenses (750,000*60%) 450,000 Contribution Margin 800,000 Fixed Cost (320,000*2) 640,000 Net Operating Income 160,000 Degree of operating leverage = Contribution margin / Net operating income = 800,000 / 160,000 =5
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