Please answer all questions (1-5) and show work for better understanding...Thank
ID: 2423998 • Letter: P
Question
Please answer all questions (1-5) and show work for better understanding...Thank you!
Northwood Company manufactures basketballs. The company has a standard ball that sells for $25. At present, the standard ball is manufactured in a small plant that relies heavily on direct labor workers. Thus, variable costs are high, totaling $15 per ball.
Last year, the company sold 30,000 standard balls, with the following results:
Sales (30,000 standard balls) $750,000
Less variable expenses 450,000
Contribution margin 300,000
Less fixed expenses 210,000
Net income $ 90,000
Required 1. Compute (a) the CM ratio and the break-even point in balls, and (b) the degree of operating leverage at last year’s level of sales.
2. Due to an increase in labor rates, the company estimates that variable costs will increase by $3 per ball next year. If this change takes place and the selling price per ball remains constant at $25, what will be the new CM ratio and break-even point in balls?
3. Refer to the data in (2) above. If the expected change in variable costs takes place, how many balls will have to be sold next year to earn the same net income ($90,000) as last year?
4. Refer to the original data. The company is discussing the construction of a new, automated plant to manufacture the standard balls. The new plant would slash variable costs per ball by 40%, but it would cause fixed costs to double in amount per year. If the new plant is built, what would be the company’s new CM ratio and new break-even point in balls?
5. Refer to the data in (4) above.
a. If the new plant is built, how many balls will have to be sold next year to earn the same net 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 income statement and compute the degree of operating leverage.
c. If you were a member of top management, would you
have voted in favor of constructing the new plant? Explain.
Explanation / Answer
Since, there are multiple sub-parts to the question, the first four have been answered.
__________
Part 1)
a)
The contribution margin ratio is calculated with the use of following table:
_______
The break-even in balls in calculated as follows:
Break-even Point = Total Fixed Cost/Contribution Per Ball = 210,000/10 = 21,000 balls
_______
b)
The degree of operating leverage is calculated with the use of following formula:
Degree of Operating Leverage = Total Contribution/Net Income
Here, Total Contribution = 30,000*10 = $300,000
Using this value in the above formula for DOL, we get,
Degree of Operating Leverage = 300,000/90,000 = 3.33
_______
Part 2)
The CM ratio is calculated with the use of following table:
_______
The break-even in balls in calculated as follows:
Break-even Point = Total Fixed Cost/Contribution Per Ball = 210,000/7 = 30,000 balls
_______
Part 3)
The number of balls to be sold can be calculated with the use of following formula:
Sales (Number of Balls) = (Fixed Cost + Desired Income)/Contribution Per Ball
Using the information provided in the question and contribution per ball calculated above, we get,
Sales (Number of Balls) = (210,000 + 90,000)/7 = 42,857 balls
The company will have to sell 42,857 units to earn $90,000 with increase in variable cost by $3.
_______
Part 4)
The CM ratio is calculated with the use of following table:
_______
The break-even in balls in calculated as follows:
Break-even Point = Total Fixed Cost/Contribution Per Ball = (210,000 +210,000)/16 = 26,250 balls
Selling Price (750,000/30,000) 25 Less Variable Expense 15 Contribution 10 Contribution Ratio (Contribution/Selling Price*100) 40%Related Questions
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