5. The new plant would slash variable expenses per ball by 40.00%, but it would

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5. The new plant would slash variable expenses per ball by 40.00%, but it would cause fixed expenses per unit to double. If the new plant is built, what would be the company’s new CM ratio and the new break-even point in ball?
Help Save&Exit Subn Check my work Northwood Company manufactures basketballs. The company has a ball that sells for $25. At present, the ball is manufactured in a s a plant that relies heav y on direct labor workers. Thus, variable expenses are high totaling S15.00 per ba ofwhich 60% is diect labor cost Last year, the company sold 32,000 of these balls, with the following results 800,000 Sales (32,00 balla) Variable expensea Contribut ion margin Tixed expenses Set operating income 109,000 Required: 1. Compute (o) last year's CM ratio and the break-even point in balls, and (h) the degree of operating leverage at last year's sales level. will Increase by $3.00 per bat. If this 2. Due to an increase in labor rates, the company estimates that next years variable expenses ball remains constant at $25.00, what will be next year's CM ratio and the break-even If the expected change in variable expenses takes place, how many balls wll have to be sold next atio as last year (as computed in requirement tal, what seling price per bal change takes place and the selling price per point in bals? 3. Refer to the data in (2) above. remains in variable expenses 4. Refer again to the data in (2) above. The president feels that the company must raise the selling price of its basketbals. I Northwood Company wants to maintain the same CM r must it charge next year to cover the increased labor costs? year to earn the same net operating income, $109,000, as last year? 5. Refer to the original data. The company is discussing the construction of a new, automated manufacturing plant. The new plant Prev 1of21# Next > 828 5 3 tion command

Explanation / Answer

1.

Selling price per ball = $25

Variable expenses per ball = $15

Contribution margin per ball = Selling price per ball - Variable expenses per ball

= $25 - $15

= $10

(a) CM ratio = Contribution margin per ball / Selling price per ball

= $10 / $25

= 0.4

Breakeven point in balls = Fixed expenses / Contribution margin per ball

= $211,000 / 10

= 21,100

(b) Degree of operating leverage = Contribution margin / Net operating income

= $320,000 / $109,000

= 2.94

2.

Selling price per ball = $25

Variable expenses per ball = $15 + $3 = $18

Contribution margin per ball = Selling price per ball - Variable expenses per ball

= $25 - $18

= $7

CM ratio = Contribution margin per ball / Selling price per ball

= $7 / $25

= 0.28

Breakeven point in balls = Fixed expenses / Contribution margin per ball

= $211,000 / $7

= 30,143

3.

Balls to be sold = (fixed expesnes + desired operating income) / contribution margin per ball

= ($211,000 + $109,000) / $7

= 45,714 balls

4.

CM ratio last year = 0.4

(selling price per ball - variable expenses per ball) / selling price per ball = 0.4

0.6*selling price per ball = $18

Selling price per ball = $18 / 0.6 = $30

5.

Selling price per ball = $25

Variable expenses per ball = $15 - ($15*40%) = $9

Contribution margin per ball = Selling price per ball - Variable expenses per ball

= $25 - $9

= $16

(a) CM ratio = Contribution margin per ball / Selling price per ball

= $16 / $25

= 0.64

Breakeven point in balls = Fixed expenses / Contribution margin per ball

= $422,000 / 16

= 26,375 balls

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