Northwood Company manufactures basketballs. The company has a ball that sells fo

Question

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 labor cost which 60% is direct Last year, the company sold 38,000 of these balls, with the following results $ 950,e00 in Fixed expenses Net operating income 264 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 $25.00, what will be next years CM ratio and the break-even 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, $116,000, 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 y 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 4000%, but it would cause fixed expenses per year to double. If the new plant is built, what would be the c 6. Refer to the data in (5) above a. if the new plant is builit, how many balls will have to be sold next year to earn the same net operating income, $16,000, as last year? b. Assume the new plant is built and that next year the company manufactures and sells 38,000 balls (the same number as sold last year). Prepare a contribution format income statement and Compute the degree of operating leverage. s new CM ratio and new break-even point in balls? Complete this question by entering your answers in the tabs below Req 1 Req 2 Req 3 Req 4 Req 5 Req 6AReq 6B

Explanation / Answer

Solution 1a:

Last year CM ratio = Contribution margin / Sales = $380,000 / $950,000 = 40%

Contribution margin per unit = $380,000 / 38000 = $10

Breakeven point in balls = Fixed cost / contribution margin per unit = $264,000 / $10 = 26400 units

Solution 1b:

Last year degree of operating leverage = Contribution / Net Operating income = $380,000 / $116,000 = 3.28

Solution 2:

New variable cost per unit for next year = $15 + $3 = $18

New contribution margin per unit = $25 - $18 = $7

New contribution margin ratio = $7/$25 = 28%

Next year breakeven point in balls = $264,000 /$7 = 37714 units

Solution 3:

Target net operating income = $116,000

Target contribution margin for next year = $264,000 + $116,000 = $380,000

Target balls to be sold next year to earn target net operating income = Target contribution margin / contribution margin per unit

= $380,000/ 7 = 54286 units

Solution 4:

Original contribution margin ratio = 40%

Target variable cost ratio = 60%

Therefore selling price for next year to maintain same contribution margin ratio = Variable cost per unit / Variable cost ratio

= $18 / 60% = $30 per unit

Note: I have answered first 4 parts of the question as per chegg policy. Kindly post separate question for answer of remaining parts.

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